0001136261-15-000246.txt : 20150806
0001136261-15-000246.hdr.sgml : 20150806
20150806162004
ACCESSION NUMBER: 0001136261-15-000246
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 11
CONFORMED PERIOD OF REPORT: 20150630
FILED AS OF DATE: 20150806
DATE AS OF CHANGE: 20150806
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PERNIX THERAPEUTICS HOLDINGS, INC.
CENTRAL INDEX KEY: 0001024126
STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834]
IRS NUMBER: 330724736
STATE OF INCORPORATION: MD
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-14494
FILM NUMBER: 151033390
BUSINESS ADDRESS:
STREET 1: 10 NORTH PARK PLACE
STREET 2: SUITE 201
CITY: MORRISTOWN
STATE: NJ
ZIP: 07960
BUSINESS PHONE: (862) 260-8457
MAIL ADDRESS:
STREET 1: 10 NORTH PARK PLACE
STREET 2: SUITE 201
CITY: MORRISTOWN
STATE: NJ
ZIP: 07960
FORMER COMPANY:
FORMER CONFORMED NAME: GOLF TRUST OF AMERICA INC
DATE OF NAME CHANGE: 19961002
10-Q
1
body10q.htm
10-Q
Q2 2015 10-Q DOC
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
þ
Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: June 30, 2015
o
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from: _______ to _____________
001-14494 Commission File Number
PERNIX THERAPEUTICS HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Maryland
33-0724736
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
10 North Park Place, Suite 201, Morristown, NJ
07960
(Address of principal executive offices)
(Zip Code)
(800) 793-2145 (Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required to file such report(s)) and (2) has been subject to such filing requirements for the past 90 days.
Yes
þ No o.
Indicate by check mark whether the Registrant has submitted electronically 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, or a smaller reporting company. See definitions of
"large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
þ
Non-accelerated filer
o
Smaller reporting company
o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES
o NO þ
On July 30, 2015, there were 61,037,804 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 Six Months Ended June 30, 2015
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"), including neurology and psychiatry, 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 pain and inflammation, 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. The Company also has
an exclusive license agreement with Osmotica Pharmaceutical Corp. to promote Khedezla, a prescription medication for major depressive disorder.
The accompanying unaudited condensed consolidated financial statements included herein have been prepared by the Company in accordance with the rules and regulations of the United States Securities
and Exchange Commission (SEC). The condensed consolidated financial statements are comprised of the financial statements of the Company. 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 U.S. generally accepted
accounting principles has been condensed or omitted in accordance with rules and regulations of the SEC. Operating results for the three or six months ended June 30, 2015 are not necessarily indicative of the results
that may be expected for any future period or for the year ending December 31, 2015.
These 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, 2014,
included in Pernix Therapeutics' 2014 Annual Report on Form 10-K filed with the SEC.
The preparation of the 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period in conformity with U.S. generally accepted
accounting principles. Significant estimates of the Company include: revenue recognition, sales allowances such as returns on product sales, government program rebates, customer coupon redemptions,
wholesaler/pharmacy discounts, product service fees, rebates and chargebacks, sales commissions, amortization, stock-based compensation, the determination of fair values of assets and liabilities in connection with
business combinations, and deferred income taxes. Actual results could differ from these estimates.
Subsequent Events
The Company has evaluated all events and transactions since June 30, 2015. The Company did not have any material recognized subsequent events but did have the following non-recognized subsequent
event.
6
In July 2015, the Company filed a Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company (the "Certificate of Amendment") with the Secretary of State of the State
of Maryland. The Certificate of Amendment amended the Company's Amended and Restated Certificate of Incorporation by increasing the number of authorized shares of the Company's common stock from
90,000,000 shares to 140,000,000 shares and the attendant increase in capital stock of all classes from 100,000,000 to 150,000,000, consisting of 140,000,000 shares of common stock and 10,000,000 shares of
preferred stock, which shall include 1,000,000 shares of Series B junior participating stock. No change to the authorized number of shares of preferred stock.
Acquisition of Zohydro ER with BeadTek
On April 24, 2015, the Company completed the acquisition of the pharmaceutical product line, Zohydro ER®, including an abuse-deterrent pipeline and all related intellectual property, 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 specified quantity of inventory, and regulatory and commercial milestone payments of up to $283.5 million, including a $12.5 million milestone payment upon approval of ZX007
abuse-deterrent extended-release hydrocodone tablet and up to $271.0 million in potential sales milestones if the Zohydro ER® product line achieve certain agreed-upon net sales targets.
See Note 13, Business Combination for further discussion.
Acquisition of Treximet
On August 20, 2014, the Company, through a wholly owned subsidiary Pernix Ireland Limited, completed the acquisition of the U.S. intellectual property rights to the pharmaceutical product,
Treximet from GlaxoSmithKline plc and certain of its related affiliates (together "GSK").
The total purchase price consisted of an upfront cash payment of $250.0 million paid to GSK upon closing of the transaction, and $17.0 million payable to GSK upon receipt of an updated Written Request for
pediatric exclusivity from the Federal Drug Administration ("FDA"), subject to certain deductions based on delays in supplying the commercial product to the Company. Subsequently, the deductions
resulting from delays in supplying the commercial product reduced the $17.0 million payable amount to approximately $1.95 million, which was paid during the fourth quarter of 2014. The Company funded this
acquisition with $220.0 million in debt, plus approximately $32.0 million from available cash.
The results of operations of the acquired Treximet asset, along with the estimated fair values of the assets acquired in the transaction have been included in the Company's condensed consolidated financial
statements since we acquired Treximet on August 20, 2014.
Reclassifications
Certain comparative figures have been reclassified to conform to the current year presentation.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Pernix's wholly-owned subsidiaries Pernix Therapeutics, LLC, GTA GP, Inc., GTA LP, Inc., Gaine, Inc., Macoven, Pernix
Manufacturing, LLC, ("PML") (closed on sale on April 21, 2014), Respicopea, Inc., Cypress, Cypress' subsidiary, Hawthorn Pharmaceuticals, Inc., Pernix Sleep, Inc., also known as Somaxon
Pharmaceuticals, Inc., or Somaxon, Pernix Ireland Limited and Pernix Ireland Pain Limited. Transactions between and among the Company and its consolidated subsidiaries are eliminated.
7
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 (including our Regions Trust Account, which invests in short-term securities consisting of sweep accounts,
money market accounts and money market mutual funds), notes receivable, and our credit facility. The carrying values of these assets and liabilities approximate their fair value due to their short-term nature.
Significant Customers
The Company's customers consist of drug wholesalers, retail drug stores, mass merchandisers and grocery store pharmacies in the United States. The Company primarily sells its
products directly to large national drug wholesalers, which in turn resell the products to smaller or regional wholesalers, retail pharmacies, chain drug stores, and other third parties. The following tables list
the Company's customers that individually comprised greater than 10% of total gross product sales for the three and six months ended June 30, 2015 and 2014, or 10% of total accounts receivable as of June 30, 2015
and December 31, 2014.
Gross Product Sales:
Three Months Ended
Six Months Ended
June 30,
June 30,
2015
2014
2015
2014
McKesson Corporation
37%
40%
41%
38%
AmerisourceBergen Drug Corporation
29%
25%
24%
30%
Cardinal Health, Inc.
27%
21%
28%
19%
Total
93%
86%
93%
87%
Accounts Receivable:
June 30,
December 31,
2015
2014
McKesson Corporation
41%
29%
AmerisourceBergen Drug Corporation
24%
42%
Cardinal Health, Inc.
28%
18%
Total
93%
89%
Cost of Product Sales
In connection with the acquisitions of Cypress and Somaxon, the Company adjusted the predecessor cost basis, increasing inventory to fair value as required by Accounting Standards Codification
("ASC") 820, Fair Value Measurements and Disclosures. As a result, the Company recorded adjustments to increase the inventory to fair value in the amount of $8.6 million and $695,000 at
the time of acquisition for Cypress and Somaxon, respectively. For the three months ended June 30, 2015 and 2014, $0 and $774,000 of the increase in the basis of the inventory was amortized and included in
cost of product sales. For the six months ended June 30, 2015 and 2014, $97,000 and $2.4 million, of the increase in the basis of the inventory was amortized and included in cost of product sales, as the inventory
was subsequently sold. The balance remaining of the increase in the basis of the inventory acquired was $0 as of June 30, 2015.
8
Note 2. Earnings per Share
Basic net income (loss) per common share is the amount of 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
Six Months Ended
June 30,
June 30,
2015
2014
2015
2014
Numerator:
Net loss
$
(32,235)
$
(6,234)
$
(55,909)
$
(15,776)
Denominator:
Weighted-average common shares, basic
52,399
37,828
45,481
37,551
Dilutive effective of stock options
-
-
-
-
Weighted-average common shares, diluted
52,399
37,828
45,481
37,551
Net loss per share, basic and diluted
$
(0.62)
$
(0.16)
$
(1.23)
$
(0.42)
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
Six Months Ended
June 30,
June 30,
2015
2014
2015
2014
4.25% Convertible Notes
8,594
-
4,383
-
8.00% Convertible Notes
4,365
18,056
11,073
18,056
Stock options and restricted stock
1,524
-
1,804
-
Warrants
136
-
176
-
Total potential dilutive effect
14,619
18,056
17,436
18,056
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
In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company's financial assets that are required to be measured at fair value as of June 30, 2015 and
December 31, 2014 (in thousands):
As of June 30, 2015
Level 1
Level 2
Level 3
Total
Money market fund and trust cash sweep investments (1)
$
45,208
$
-
$
-
$
45,208
Total assets
$
45,208
$
-
$
-
$
45,208
As of December 31, 2014
Level 1
Level 2
Level 3
Total
Money market fund and trust cash sweep investments (1)
$
26,297
$
-
$
-
$
26,297
Total assets
$
26,297
$
-
$
-
$
26,297
(1)
The Company's money market and trust cash sweep investments are included in cash and cash equivalents within the Condensed Consolidated Balance Sheet.
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 June 30, 2015 or December
31, 2014.
10
As of June 30, 2015 and December 31, 2014, the Company did not have any investments in Level 3 securities.
There were no transfers of assets or liabilities between Level 1 and Level 2 during the three or six months ended June 30, 2015 and 2014.
The carrying amounts reflected in the 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
The fair and carrying value of our debt instruments are detailed as follows (in thousands):
As of June 30, 2015
As of December 31, 2014
Fair
Carrying
Fair
Carrying
Value
Value
Value
Value
4.25% Convertible Notes
$
96,736
$
102,136
$
-
$
-
Derivative liability
19,777
19,777
-
-
8.00% Convertible Notes
-
-
129,320
65,000
Contingent consideration
29,327
29,327
-
-
Treximet Notes
182,332
220,000
167,114
220,000
Total
$
328,172
$
371,240
$
296,434
$
285,000
The fair values of the Company's liabilities were estimated using the following methodologies. Within the hierarchy of fair value measurements, these are Level 3 fair
values.
Convertible Notes
The fair values of the Convertible notes were estimated using the (i) terms of the convertible notes; (ii) rights, preferences, privileges, and restrictions of the underlying security; (iii) time until any restriction(s)
are released; (iv) fundamental financial and other characteristics of the Company; (v) trading characteristics of the underlying security (exchange, volume, price, 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" scenario. Under this methodology, valuations are performed on the convertible note 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.
Contingent Consideration
The fair value of contingent consideration is based on two components - The Regulatory milestone and the 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.
11
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 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.
Treximet Notes
The fair values of the Company's Treximet notes were estimated using a discounted cash flow model.
Note 4. Inventory
Inventories are stated at the lower of cost or market. Inventories consist of the following (in thousands):
June 30,
December 31,
2015
2014
Raw materials
$
1,399
$
417
Packaging materials
41
82
Work-in-process
823
-
Finshed goods
9,744
12,200
Inventory, gross
12,007
12,699
Reserve for obsolescence
(2,942)
(2,220)
Inventory, net
$
9,065
$
10,479
An increase in the basis of inventory related to the acquisitions of Cypress and Somaxon are included in the balances above as of June 30, 2015 and December 31, 2014. The
increase included in raw materials was $0 and $97,000 as of June 30, 2015 and December 31, 2014, respectively.
Note 5. Disposal of PML
On March 31, 2014, the Company entered into a definitive agreement to divest its manufacturing operations, PML, to Woodfield Pharmaceutical LLC. Accordingly, during the three months ended
March 31, 2014, the Company adjusted PML's net assets to fair value and, as a result, recorded the assets as held for sale, net of an impairment charge of approximately $6.5 million. The Company
closed on the sale of PML on April 21, 2014. The Company received approximately $1.2 million in proceeds, net of the assumed mortgage and working capital liabilities at closing. The entire
PML operation and the mortgage was assumed by the acquirer. The Company recorded an additional loss on the sale of approximately $202,000 at closing. The Company does not believe
the disposal of PML qualifies as discontinued operations as the manufacturing facility was not a major line of business and was not a significant component of the Company's financial results during our period of
ownership.
12
Note 6. Intangible Assets and Goodwill
Intangible assets consist of the following (in thousands):
As of June 30, 2015
Weighted
Gross Carrying
Accumulated
Net Carrying
Average Life
Amount
Amortization
Amount
Unamortized intangible assets:
Trademark rights
Indefinite
$
400
$
-
$
400
In-process research and development
Indefinite
79,900
-
79,900
Total unamortized intangible assets
80,300
-
80,300
Amortized intangible assets:
Patents
11.0 years
500
(379)
121
Brand
8.0 years
3,887
(2,551)
1,336
Product licenses
11.0 years
17,581
(4,906)
12,675
Non-compete and supplier contracts
5.3 years
5,194
(4,792)
402
Acquired developed technologies
4.3 years
360,226
(73,183)
287,043
Total amortized intangible assets
387,388
(85,811)
301,577
Total intangible assets
$
467,688
$
(85,811)
$
381,877
As of December 31, 2014
Weighted
Gross Carrying
Accumulated
Net Carrying
Average Life
Amount
Amortization
Amount
Unamortized intangible assets:
Trademark rights
Indefinite
$
400
$
-
$
400
In-process research and development
Indefinite
48,300
-
48,300
Total unamortized intangible assets
48,700
-
48,700
Amortized intangible assets:
Patents
11.0 years
500
(355)
145
Brand
8.0 years
3,887
(2,308)
1,579
Product licenses
11.0 years
17,581
(4,058)
13,523
Non-compete and supplier contracts
5.3 years
5,194
(4,342)
852
Acquired developed technologies
4.4 years
269,826
(34,136)
235,690
Total amortized intangible assets
296,988
(45,199)
251,789
Total intangible assets
$
345,688
$
(45,199)
$
300,489
As of June 30, 2015, the weighted average life for our definite-lived intangible assets in total was approximately 4.69 years.
13
Estimated amortization expense related to intangible assets with definite lives for each of the five succeeding years and thereafter is as follows (in thousands):
2015 (July - December)
$
48,343
2016
95,880
2017
94,214
2018
28,585
2019
17,778
Thereafter
16,777
Total
$
301,577
Amortization expense was $22.2 million and $40.6 million for the three and six months ended June 30, 2015, respectively. Amortization expense was $1.9 million and $4.0
million for the three and six months ended June 30, 2014, respectively.
Note 7. Accrued Allowances
Accrued allowances consist of the following (in thousands):
June 30,
December 31,
2015
2014
Accrued returns allowance
$
8,579
$
9,691
Accrued price adjustments
39,030
32,945
Accrued government program rebates
4,589
9,968
Total
$
52,198
$
52,604
Note 8. Debt and Lines of Credit
Debt consists of the following (in thousands):
June 30,
December 31,
2015
2014
Midcap Credit Facility
$
7,941
$
7,345
4.25% Convertible Notes
102,136
-
8.00% Convertible Notes
-
65,000
Treximet Notes
220,000
220,000
Total outstanding debt
330,077
292,345
Less current portion
17,954
7,345
Long term debt outstanding
$
312,123
$
285,000
14
Credit Facility - MidCap Funding V, LLC
On February 21, 2014, in connection with the February 2014 Convertible Notes offering discussed below, the Company entered into Amendment No. 1 to the Amended and Restated Credit Agreement (the
"Amendment" and together with the Amended and Restated Credit Agreement, as amended by the Amendment, the "Amended Credit Agreement") with MidCap Funding IV, LLC, as Agent and
as a lender ("MidCap"), and the other lenders from time to time parties thereto. In addition to allowing for the note issuance, the Amendment provides for the addition of a $20.0 million uncommitted
accordion feature to the lenders' existing $20.0 million revolving loan commitment. Pursuant to the Amendment, MidCap and the other lenders released their liens on certain Company assets. The obligations under
the Amended Credit Agreement are secured by a first priority security interest in the Company's accounts, inventory, deposit accounts, securities accounts, securities entitlements, permits and cash. On April 23, 2014,
the Company entered into Amendment No. 2 to the Amended and Restated Credit Agreement with MidCap to increase the letter of credit sublimit from $0 to $750,000. On August 19, 2014, the Company, MidCap, and
certain subsidiaries of the Company entered into Amendment No. 3 to the Amended and Restated Credit Agreement dated as of May 8, 2013 to permit the Company to consummate the purchase of the Treximet
assets from GSK.
The covenants contained in the Amended Credit Agreement required the Company to maintain a minimum amount of earnings before interest, tax, depreciation and amortization
("EBITDA") and net invoiced revenues unless the Company demonstrated minimum liquidity of at least $30.0 million through June 30, 2014. This was revised and not required with Amendment No. 3.
Beginning with the calendar month ending March 31, 2015, the Company is required to meet a minimum fixed charge coverage ratio ("FCCR"). The FCCR test of 1.0x beginning on the calendar month
ending March 31, 2015 is based on the trailing three months ending March 31, 2015. The Defined Period for the FCCR test of 1.0x will then build monthly until it reaches a trailing twelve-month Defined Period
beginning on December 31, 2015 through maturity. The Amended Credit Agreement also continues to include customary covenants for a secured credit facility, which include, among other things, (a) restrictions on (i)
the incurrence of indebtedness, (ii) the creation of or existence of liens, (iii) the incurrence or existence of contingent obligations, (iv) making certain dividends or other distributions, (v) certain consolidations, mergers or
sales of assets and (vi) purchases of assets, investments and acquisitions; and (b) requirements to deliver financial statements, reports and notices to the agent and the other lenders, provided that, the restrictions
described in (a)(i)-(vi) above are subject to certain exceptions and permissions limited in scope and dollar value. The Amended Credit Agreement also contains customary representations and warranties and event of
default provisions for a secured credit facility.
The loans under this facility bear interest at a rate equal to the sum of the LIBOR (with a floor of 1.5%) plus an applicable margin of 7.50% per annum (9% at June 30, 2015). The expiration date of the
agreement has been extended to February 21, 2017. Amounts outstanding under this agreement are recorded on the balance sheet as current debt as of June 30, 2015 and December 31, 2014.
8.00% Convertible Notes
On April 16, 2015, the Company entered into an agreement (the "Inducement Agreement") with all of the holders of its 8.00% Convertible Senior Notes due 2019 (the "8.00% Convertible
Notes") representing $65 million aggregate principal amount of the 2019 notes, pursuant to which such holders agreed to the removal of substantially all of the material restrictive covenants in the indenture
governing the 2019 notes and to convert their notes in accordance with the provisions of such indenture in exchange for an aggregate of 2,338,129 shares of the Company's common stock (the "Inducement
Shares"). The Company recorded $19.5 million as cost of inducement expense in the three and six months ended June 30, 2015. The issuance of the Inducement Shares was be made pursuant to
an exemption from the registration requirements of the Securities Act contained in Section 4(a)(2). Each of the holders entering into the Inducement Agreement agreed not to sell the shares of our common stock to be
issued to it upon conversion of the 2019 notes for 145 days (the "lock-up period") subject to exceptions, including in connection with settling existing short positions with respect to the 2019 notes and underwritten
public offerings pursuant to existing registration rights with respect to such shares of our common stock. In addition, such holders are permitted to dispose of up to 80 percent of such shares of our common stock
remaining after settling existing short positions prior to the end of the lock-up period in specified intervals.
15
During the three months ended June 30, 2015, the holders of the 8.00% Convertible Notes converted the outstanding notes at a conversion price of $3.60 per share. The Company issued 18.1 million shares
pursuant to this conversion and retired the $65.0 million of the outstanding 8.00% Convertible Notes.
Interest expense was $302,000 and $1.6 million for the three months and six months ended June 30, 2015, respectively and $1.3 million and $1.9 million for the three months and six months ended June 30,
2014, respectively related to the 8.00% Convertible Notes. As of June 30, 2015 and December 31, 2014, the Company had outstanding borrowings of $0 and $65.0 million related to the 8.00% Convertible Notes,
respectively. Accrued interest on the 8.00% Convertible Notes was approximately $0 and $231,000 as of June 30, 2015 and December 31, 2014, respectively. Interest expense of $547,000 that accrued during the
three months ended June 30, 2015 was forfeited and recorded in additional paid-in capital. During the three and six months ended June 30, 2015 the Company recorded the remaining $5.4 million unamortized
deferred financing costs related to the 8.00% Convertible Notes in additional paid-in capital.
4.25% Convertible Notes
On April 22, 2015, the Company issued $130.0 million aggregate principal amount 4.25% Convertible Senior Notes (the "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 underwriting discounts
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 discounted note balance
of $102.1 million is recorded as long-term debt on the balance sheet as of June 30, 2015.
The 4.25% Convertible Notes are governed by the terms of an indenture (the "Indenture"), between the Company and Wilmington Trust, National Association (the "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. The initial conversion rate will be 87.2030 shares of the Company's common stock for each $1,000 principal amount of the 4.25% Convertible Notes, which represents an initial conversion price of
approximately $11.47 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 are
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%.
The Company is required to separate the conversion option in the 4.25% Convertible Notes under ASC 815, Derivatives and Hedging, the Company recorded the bifurcated conversion option valued at
$28.5 million 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 consolidated statement 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. If the Company obtains shareholder approval to remove the contractual limit on
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.
16
In addition to the bifurcated conversion feature, there were 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 to close prior to July 8, 2015, the Company will continue to monitor these features for changes in value.
Interest expense was $1.0 million for the three months and six months ended June 30, 2015, respectively related to the 4.25% Convertible Notes. Accrued interest on the 4.25% Convertible Notes was
approximately $1.0 million and $0 as of June 30, 2015 and December 31, 2014, respectively. As of June 30, 2015 and December 31, 2014, the Company had outstanding borrowings of $130.0 million and $0 related to
the 4.25% Convertible Notes, respectively.
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 Notes") pursuant to an Indenture (the
"August 2014 Indenture") dated as of August 19, 2014 among the Company, certain of its subsidiaries (the "Guarantors") and U.S. Bank National Association (the "August 2014
Trustee"), as trustee and collateral agent. As of June 30, 2015 and December 31, 2014, the Company classified $10.0 million and $0, respectively, of the Treximet Notes as current based on contractual amounts
due as of June 30, 2015 and December 31, 2014.
The Treximet 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 will pay an installment of principal of the Treximet 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 Notes on such Payment Date).
The Treximet Notes are unconditionally guaranteed, jointly and severally, by the Guarantors. The Treximet Notes and the guarantees of the Guarantors are secured by a continuing first-priority security
interest in substantially all of the assets of the Company and the 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 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 is prior to August 1, 2015, the redemption price is equal to the greater of (i) the principal amount of the Treximet Notes being redeemed and (ii) the present value,
discounted at the applicable treasury rate of the principal amount of the Treximet 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 Notes being redeemed assuming the principal balances are amortized at the times and in the assumed amounts set forth on Schedule A to the August 2014 Indenture. If
such redemption occurs (i) on or after August 1, 2015 and prior to August 1, 2016, the redemption price will equal 106% of the outstanding principal amount of August Notes being redeemed plus accrued and unpaid
interest thereon, (ii) on or after August 1, 2016 and prior to August 1, 2017, the redemption price will equal 103% of the outstanding principal amount of the August Notes being redeemed plus accrued and unpaid
interest thereon and (iii) on or after August 1, 2017, the redemption price will equal 100% of the outstanding principal amount of the Treximet Notes being redeemed plus accrued and unpaid interest thereon.
The August 2014 Indenture contains covenants that limit the ability of the Company and the 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
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 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.
17
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 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 Notes; (e) the Company or any 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
Notes; (f) the Company or any 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 Guarantor; (h) a guarantee of the Treximet 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 Guarantor disaffirms its obligations under its guarantee of the Treximet Notes; and (i) certain changes in control of
a Guarantor.
On August 19, 2014, the Company entered into the First Supplemental Indenture to the February 2014 Indenture for the Company's 8.00% Convertible Notes due 2019 (the "First Supplemental
Indenture") to permit the Company to consummate the purchase of the Treximet assets from GSK and to issue the Treximet Notes. On August 19, 2014, the Company also entered into the Second Supplemental
Indenture to the February 2014 Indenture for the Company's 8.00% Convertible Notes due 2019 (the "Second Supplemental Indenture") to add Pernix Ireland Limited, a wholly owned subsidiary of the
Company, as a guarantor.
Interest expense related to the Treximet Notes was $6.6 million and $13.2 million, for the three and six months ended June 30, 2015, respectively, and $0 for the three and six months ended June 30, 2014.
Accrued interest on the Treximet Notes was approximately $11.0 million and $9.8 million as of June 30, 2015 and December 31, 2014, respectively. The Company has debt issuance costs of $6.7 million, which are
being amortized using the effective interest method and are recorded on the balance sheet in Prepaid and Other Current Assets ($1.3 million) and Other Long-Term Assets ($5.4 million).
On April 13, 2015, the Company furnished to the holders of the Treximet 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 Notes to amend the Indenture, dated August 19, 2014 (the "Indenture"), among the Company, certain subsidiaries of the
Company, as guarantors, and U.S. Bank National Association, that governs the 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 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 three and six months ended June 30, 2015.
The following table represents the future maturity schedule of the outstanding debt and line of credit (in thousands):
2015
$
17,954
2016
-
2017
-
2018
-
2019
-
Thereafter
339,987
Total maturities
$
357,941
18
Note 9. Stockholders' Equity
Capital Stock
In April 2015, the Company issued 1,682,086 shares of Common stock for approximately $11.9 million in connection with the acquisition of Zohydro ER, see note 13, Business Combination.
In April 2015, the Company issued 2,338,129 shares of Common stock for approximately $19.5 million for the inducement and 18,055,556 shares for $65.0 million in connection with the conversion of the
outstanding 8.00% Convertible Notes, see note 8, Debt and Lines of Credit.
Warrants
In March 2015, Pozen exercised all 500,000 of their warrants in a cashless exercise for which 315,835 shares were issued. In February 2015, Frontline exercised 222,631 of their 500,000 warrants in a
cashless exercise for which 133,257 shares were issued. There are 277,369 warrants remaining for Frontline. As of June 30, 2015, the Company assumed approximately 464,564 outstanding warrants in connection
with the acquisition of 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 7.0
million. 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.
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 currently uses the Black-Scholes option pricing model to determine the fair value of its stock options. The determination of the fair value of stock-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
Six Months Ended
June 30,
June 30,
2015
2014
2015
2014
Weighted average expected
stock price volatility
73.2
%
75.5
%
73.3
%
74.5
%
Estimated dividend yield
-
%
-
%
-
%
-
%
Risk-free interest rate
1.6
%
2.0
%
1.6
%
1.9
%
Expected life of option (in years)
6.3
6.3
6.3
6.2
Weighted average grant date
fair value per option
$
5.16
$
4.59
$
5.59
$
2.74
19
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.
Stock-based compensation expense was $1.2 million and $3.1 million for the three and six months ended June 30, 2015 and $740,000 and $2.5 million for the three and six months ended June 30, 2014,
respectively. Stock-based compensation expense for the periods presented are included within the selling, general and administrative expenses in the consolidated statements of operations.
Stock Options
As of June 30, 2015, approximately 5.4 million options are outstanding that have been issued to current officers and employees under the Company's 2007 Stock Option Plan and the 2009 Plan. As of June
30, 2015, there was approximately $12.8 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 3.3 years.
The following table shows the option activity, described above, during the six months ended June 30, 2015 (share and intrinsic values in thousands):
Weighted Average
Average
Remaining
Aggregate
Exercise
Contractual Life
Intrinsic
Shares
Price
years
Value
Options Outstanding at December 31, 2014
4,551
$
5.35
Granted
1,088
8.49
Exercised
(39)
3.92
$
211
Cancelled
(208)
8.68
Expired
-
-
Options outstanding at June 30, 2015
5,392
$
5.86
8.9
$
7,227
Options vested and expected to
vest as of June 30, 2015
4,578
5.80
8.8
$
6,293
Options vested and exercisable as of June 30, 2015
1,044
$
4.85
8.0
$
1,910
Restricted Stock
The following table shows the Company's non-vested restricted stock activity during the six months ended June 30, 2015 (share and intrinsic values in thousands):
Weighted Average
Aggregate
Grant Date Fair
Intrinsic
Shares
Value
Value
Non-vested restricted stock outstanding at December 31, 2014
140
$
4.52
Granted
-
-
Vested
(56)
6.09
$
539
Forfeited
(19)
3.16
Non-vested restricted stock outstanding at June 30, 2015
65
$
3.56
20
As of June 30, 2015, there was approximately $0 of total unrecognized compensation cost related to non-vested restricted stock issued to employees and directors of the Company due to the acceleration of
restricted stock expense related to the restructuring during the six months ended June 30, 2015.
Note 10. Income Taxes
The Company's income tax benefit was $3.6 million and $3.7 million for the three months ended June 30, 2015 and 2014, respectively and $8.2 million and $9.6 million for the six months
ended June 30, 2015 and 2014, respectively. The Company's effective tax rate was 12.7% for the six months ended June 30, 2015, compared to an estimated annual effective rate of 18.2%. The difference between
the estimated annual rate and the June 30, 2015 effective tax rate is primarily due to expenses recorded for financial reporting purposes that were treated as nondeductible and discrete for the three months ended
June 30, 2015.
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.
Our deferred tax assets are comprised primarily of US federal net operating losses and accruals. A substantial portion of the deferred tax liability at June 30, 2015 relates to the difference between the financial
statement and tax basis of the intangibles acquired in the Cypress acquisition. The deferred tax liability related to these Cypress intangibles is reduced on an annual basis by the financial statement amortization of
such intangibles.
Income tax returns subject to review by taxing authorities include 2010, 2011, 2012 and 2013.
Note 11. Commitments and Contingencies
Legal Proceedings
The Company is subject to various claims and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such matters will not have a material effect on the
Company's financial position or results of operations.
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 June 30, 2015, remaining payment obligations
owed to Somaxon under these settlement agreements are $2.3 million, payable in equal annual installments of $250,000 through 2019, and equal installments of $500,000 through 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.
In connection with the acquisition of Treximet, the Company is responsible for the payment of royalties to Pozen of 18% of 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.
21
GSK has claimed that the Company owes GSK damages relating to an alleged breach by the Company of a covenant contained in the Asset Purchase and Sale Agreement
dated as of May 13, 2014 by and among GSK and its affiliates and the Company pertaining to a pre-existing customer agreement. The Company and GSK have entered into an
Interim Settlement Agreement under which the Company will continue to make payments to GSK and escrow additional funds and the parties will submit the dispute to binding
arbitration. The Company has paid to GSK approximately $7.4 million through July 31, 2015 and intends to deposit an additional approximately $4.4 million into an escrow account
on account of the settlement of disputed amounts. The amounts paid by the Company to GSK and escrowed represent approximately 57% of the amounts GSK claims are owed to
them as a result of the Company's alleged breach. The amounts paid and to be escrowed by the Company for 2015 GSK claims are consistent with the amounts accrued by the
Company for managed care rebates and fees during the three and six months ended June 30, 2015. While the Company intends to vigorously contest GSK's allegations that its
damages are a result of the Company's breach and that they are compensable under the Asset Purchase and Sale Agreement or otherwise, any material liability resulting from this
claim could negatively impact the Company's financial results.
Note 12. Restructuring
On March 16, 2015, the Company decided to institute an initiative to restructure operations and shut down the Charleston, South Carolina site. This step was done to consolidate operations within the
Company's headquarters located in Morristown, New Jersey.
The restructuring expenses during the three and six months ended June 30, 2015 was a reduction of $108,000 and a charge of $1.2 million, respectively. The charge during the six months ended June 30,
2015 was comprised of $545,000 in severance related cash expenses, and $653,000 for the modification and accelerated vesting of options and awards under existing employee agreements. Associated
severance payments are anticipated to be paid by December 31, 2015.
A summary of accrued restructuring costs, included as a component of accounts payable and accrued expenses on the condensed consolidated balance sheet, is as follows (in thousands):
December 31, 2014
Charges
Cash
Non-cash
June 30, 2015
Restructuring Costs
$
-
$
1,197
$
(28)
$
(653)
$
516
22
Note 13. Business Combination
Consideration paid by the Company for the business it purchased is allocated to the assets and liabilities acquired based upon their estimated fair values as of the date of the 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, 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
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 ZX007 abuse-deterrent extended-release hydrocodone
tablet and up to $271.0 million in potential sales milestones if the Zohydro ER® product line achieve certain agreed-upon net sales targets.
Zohydro ER® is an extended-release form of hydrocodone 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. Zohydro ER® does not contain acetaminophen, unlike many immediate-release hydrocodone products, such as Vicodin and Lortab, reducing the risk for potential liver toxicity due
to overexposure of acetaminophen. The active ingredient, hydrocodone, is the most commonly prescribed opioid in the U.S., with over 114 million prescriptions in 2014. The FDA approved the NDA for Zohydro
ER® in October 2013 and the product was launched in March 2014.
The Zohydro ER® product line acquisition was accounted for as a business combination in accordance with Accounting Standards Codification ("ASC") No. 805 "Business
Combinations" ("ASC 805") which, among other things, requires assets acquired and liabilities assumed to be measured at their acquisition date fair values. The purchase price allocation is
preliminary with respect to taxes and certain accruals and includes the use of estimates based on information that was available to management at the time these unaudited condensed consolidated financial
statements were prepared. The Company believes the estimates used are reasonable and the significant effects of the Zohydro ER® acquisition are properly reflected. However, the estimates are subject to
change as additional information becomes available and is assessed by the Company.
23
The following table summarizes the consideration paid to acquire Zohydro ER® and the estimated values of assets acquired and liabilities assumed in the accompanying unaudited condensed consolidated
balance sheet based on their fair values on April 24, 2015 (in thousands):
Purchase price:
Cash consideration paid to Zogenix
$
70,000
Escrow fund deposited at the time of closing (i)
10,000
Purchased product inventory (ii)
927
Common stock issued (iii)
11,926
Fair value of contingent consideration payable to Zogenix (iv)
29,327
Total purchase price
$
122,180
Estimated fair value of assets acquired:
Intangible assets (v):
Zohydro - Developed technology
$
67,400
IPR&D
54,600
Amount attributable to assets acquired
$
122,000
Goodwill (vi)
$
180
(i)
In accordance with the asset purchase agreement, the Company has deposited $10.0 million in an escrow fund to be held for a period of 12 months from the closing date as a security to pay, or be applied against,
any losses incurred by the Company that are subject to the general representations, warranties and indemnification obligations of Zogenix. The Company is considered to be the legal and tax owner of the fund until
the expiration of the escrow period of 12 months. Accordingly, the amount of $10 million in the escrow fund is recognized as restricted cash and consideration payable to Zogenix. Restricted cash is presented
separately under current assets while the consideration payable is included in current liabilities.
(ii)
Under the asset purchase agreement, the Company purchased a specified quantity of Generation 1 version of Zohydro ER® product line from Zogenix on the closing date for $927,000. Shortly before the
closing date, Generation 2 version of Zohydro ER® with Beadtek was approved by FDA and was announced by the Company to be launced in immediate future. This announcement for launch of Zohydro ER®
with Beadtek made the Generation 1 version of Zohydro ER® obsolete and unsellable in the market. As a result, the fair value of the Generation 1 product inventory acquired from Zogenix has been estimated to be
de-minimis on the closing date.
(iii)
Under the asset purchase agreement, the number of common shares issued to Zogenix equaled $20 million divided by closing price of common stock on a trading day immediately preceding the purchase
agreement date. The closing price of common stock of Pernix on March 9, 2015 (i.e. trading day immediately preceding the purchase agreement date) was $11.89. Accordingly, Pernix issued 1,682,086 shares of
common stock to to Zogenix ($20 million/$11.89 per share).
The common stock issued by the Company is measured at fair value at the closing date (i.e. April 24, 2015) in accordance with the measurement guidance in ASC 805. The closing price of common stock of the
Company on closing date was $7.09 and accordingly the fair value of common stock issued by the Company on the closing date was determined to be $11.9 million. $16,820 representing the par value of 1,682,086
shares at $0.01 per share was recorded in common stock and the remaining amount of $11.9 million was recorded in Additional paid-in-capital.
24
(iv)
Contingent consideration includes (a) $12.5 million milestone payment payable upon approval of ZX007 abuse-deterrent extended-release hydrocodone tablet, and (b) up to $271 million payable if the Zohydro
ER® product line achieves certain agreed-upon net sales targets. Each type of contingent consideration has been recognized as a separate unit of account. In accordance with the provisions of ASC 805-30-25-5,
each unit of contingent consideration is recognized at the acquisition date fair value. The acquisition date fair value of the contingent consideration linked to FDA approval is $10.3 million and the fair value of the
contingent consideration linked to achievement of net sales target is $19.0 million. The total contingent consideration of $29.3 million is classified in other long-term liabilities. Such fair values are determined based on
probabilistic model with weights assigned on likelihood of the Company achieving the sales target in future. Each unit of contingent consideration is classified as a liability in the balance sheet and would be
subsequently measured at fair value on each reporting date. Any change in fair values between the reporting dates would be recognized in the consolidated statement of operations.
(v)
As of the effective time of the acquisition, identifiable intangible assets are required to be measured at fair value and these acquired assets could include assets that are not intended to be used or sold or that are
intended to be used in a manner other than their highest and best use. For purposes of these consolidated financial statements, it is assumed that all assets will be used in a manner that represents the highest and
best of those assets, but it is not assumed that any market synergies will be achieved.
The fair value of identifiable assets is determined primarily using the "income method," which starts with a forecast of all expected future cash flows. Some of the more significant assumptions
inherent in the development of intangible asset values, from the perspective of a market participant, include: the amount and timing of projected future cash flows (including net revenue, cost of product sales, research
and development costs, sales and marketing expenses, income tax expense, capital expenditures and working capital requirements) as well as estimated contributory asset charges; the discount rate selected to
measure the risks inherent in the future cash flows; and the assessment of the asset's life cycle and the competitive trends impacting the asset, among other factors.
The consolidated financial statements include estimated identifiable intangible assets representing core technology intangibles valued at $67.4 million, and in-process research and development
("IPR&D") intangibles valued at $54.6 million. The core technology intangible assets represent developed technology of products approved for sales in the market, which we refer to as marketed
products, and have a finite useful lives. They are amortized on a straight-line basis over a weighted average of 7 years. These estimates will be adjusted accordingly if the final identifiable intangible asset valuation
generates results, including corresponding useful lives and related amortization methods, which differ from the pro forma estimates, or if the above scope of intangible assets is modified. The IPR&D are
considered indefinite-lived intangible assets until the completion of abandonment of the associated research and development efforts. Accordingly, during the development period, these assets are not amortized but
subject to an annual impairment review. The final valuation is expected to be completed within 12 months from the completion of the acquisition.
(vi)
Goodwill is calculated as the difference between the acquisition date fair value of the consideration expected to be transferred and the values assigned to the assets acquired. Goodwill is not amortized but tested
for impairment on an annual basis or when indications for impairment exist.
25
Pro forma Impact of Acquisition
The following pro forma combined results of operations are provided for the three months and six months ended June 30, 2015 and 2014, as though the Zohydro ER® acquisition had been completed
as of January 1, 2014. These supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the
combined company for the periods presented or that may be achieved by the combined company in the future. The pro forma results of operations do not include any cost savings or other synergies that resulted, or
may result, from the Zohydro ER® acquisition or any estimated costs that will be incurred to integrate Zohydro ER® product line. Future results may vary significantly from the
results in this pro forma information because of future events and transactions, as well as other factors (in thousands, except for per share data):
Three Months Ended
Six Months Ended
June 30,
June 30,
2015
2014
2015
2014
(unaudited)
(unaudited)
Revenue
$
50,943
$
19,807
$
89,838
$
39,143
Net loss
$
(35,011)
$
(24,077)
$
(75,571)
$
(53,504)
Pro forma net loss per common share:
Basic
$
(0.67)
$
(0.64)
$
(1.66)
$
(1.42)
Diluted
$
(0.67)
$
(0.64)
$
(1.66)
$
(1.42)
The Company's historical financial information was adjusted to give effect to the pro forma events that were directly attributable to the Zohydro ER® acquisition and factually
supportable. The unaudited pro forma consolidated results include historical revenues and expenses of assets acquired in the acquisition with the following adjustments:
Adjustment to recognize incremental amortization expense based on the fair value of intangibles acquired;
Adjustment to recognize incremental interest expense and amortization of debt issuance costs for debt issued in connection with the acquisition
Eliminate transaction costs and non-recurring charges directly related to the acquisition that were included in the historical results of operations for Pernix
Adjustment to recognize pro forma income tax based on income tax benefit on the amortization of intangible asset at the statutory tax rate of Ireland (12.50%), and the income tax benefit on the interest expense at
the statutory tax rate of the United States (37.21%).
For the three months and six months ended June 30, 2015, the Company has recognized revenue and net loss for Zohydro ER® subsequent to the closing of April 24, 2015 in the amount of $4.0
million and $5.3 million respectively. Non-recurring transaction costs of $3.1 million related to the acquisition for the three months and six months ended June 30, 2015 are included in the condensed consolidated
statement of operations in selling, general and administrative expenses; these non-recurring transaction costs have been excluded from the pro forma results in the above table.
26
Note 14. Supplemental Cash Flow Information
Six Months Ended
June 30,
2015
2014
Supplemental disclosures of Cash Flow Information:
Cash paid for income taxes, net
$
68
$
561
Cash paid for interest
14,228
2,617
Supplemental disclosures of Non-cash Investing and Financing Activities:
Conversion of 8.00% Convertible notes
60,172
-
Issuance of 1,682,086 shares to Zogenix for Zohydro acquisition
11,926
-
Acquisition of license - contract payable
-
2,500
Note 15. Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. 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. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016. Early application is not
permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the effect of the new revenue recognition
guidance.
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, 2014. 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, 2014, "Part II 1A. Risk
Factors" of our Quarterly Report on Form 10-Q for the three months ended March 31, 2015 and "Part II-Item1A. Risk Factors" of this Quarterly Report on Form 10-Q for the three and six months
ended June 30, 2015.
The discussion below contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. 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," "anticipate," "expect" 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: 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
27
marketing strategy, including to continue to successfully recruit and retain sales and marketing personnel in the U.S.; our ability to obtain additional financing; our ability
to maintain regulatory approvals for our products; the accuracy of our estimates regarding expenses, future revenues and capital requirements; our ability to manage our anticipated future growth; the ability of our
products to compete with generic products as well as new products that may be developed by our competitors; our ability and our distribution and marketing partners' ability to comply with regulatory requirements
regarding the sales, marketing and manufacturing of our products; the performance of our manufacturers, over which we have limited control; our ability to obtain and maintain intellectual property protection for our
products; our ability to operate our business without infringing the intellectual property rights of others; the success and timing of our clinical development efforts; the loss of key scientific or management personnel;
regulatory developments in the U.S. and foreign countries; our ability to either acquire or develop and commercialize other product candidates in addition to our current products 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, 2014, "Part II 1A. Risk Factors" of our Quarterly Report on Form 10-Q for the
three months ended March 31, 2015 and "Part II-Item1A. Risk Factors" of this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2015.
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.
Overview
We are a specialty pharmaceutical company focused on improving patients' lives by identifying, developing and commercializing differentiated products that address unmet medical needs. Our strategy is
to continue to create shareholder value by:
Growing sales of the existing products in our portfolio in various ways, including identifying new growth opportunities;
Acquiring additional marketed specialty products or products close to regulatory approval to leverage our existing expertise and infrastructure; and
Pursuing targeted development of a pipeline of post-discovery specialty product candidates.
We target underserved segments, such as central nervous system (CNS) indications, including neurology and psychiatry, as well as other specialty therapeutic areas. We promote our core
branded products to physicians through our sales force and 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, Silenor, a non-controlled substance and approved medication
indicated 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. During the third
quarter of 2014, we engaged a contract sales team to promote Cedax and entered into an agreement with a third party to promote Zutripro, Rezira, and Vituz. The term of these agreements cover the cough and cold
season and terminated on March 31, 2015. We also promote Khedezla, for major depressive disorder through an exclusive license agreement with Osmotica Pharmaceutical Corp. See Part I, Item 1 - Business
included in our Annual Report on Form 10-K for additional information regarding our products and product candidates.
28
Quarterly Update
During March 2015, through our wholly-owned subsidiary Pernix Ireland Pain Limited (f/k/a Ferrimill Limited), we entered into an asset purchase agreement, with Zogenix, Inc. ("Zogenix") pursuant
to which we acquired certain assets related to the product Zohydro ER from Zogenix, including, among other things, the registered patents and trademarks, certain contracts, the new drug application and other
regulatory approvals, documentation, and authorizations, the books and records, marketing materials and product data relating to Zohydro ER (collectively, the "Purchased Assets"). Upon closing of this
transaction on April 24, 2015, we paid Zogenix $70.0 million in cash, deposited $10.0 million in escrow to fund potential indemnification claims for a period of 12 months following the closing and issued approximately
1.7 million shares of our common stock, with an approximate value of $20.0 million, based on the closing price of $11.89 on March 9, 2015, the trading day immediately preceding the execution date of the Asset
Purchase Agreement. See Note 13, Business Combination, for additional information.
On March 16, 2015, the Company decided to institute an initiative to restructure operations and shut down the Charleston, South Carolina site. This step was done to consolidate operations within the Company's
headquarters located in Morristown, New Jersey.
On April 22, 2015 we sold a private offering of $130.0 million aggregate principal amount of our 4.25% Convertible Senior Notes due 2021. The notes are general unsecured obligations. The interest will be paid
on the notes semi-annually at a rate of 4.25% per annum and will mature on April 1, 2021, unless redeemed, repurchased or converted in accordance with their terms prior to such date. The notes have an initial
conversion rate, subject to adjustment, of 87.2030 shares of our common stock per $1,000 principal amount of the notes, representing a conversion price of approximately $11.47 per share of our common stock, based
on the last reported sale price of $8.34 per share of our common stock on April 16, 2015. The gross proceeds from the offering were $130.0 million. We used approximately $80.9 million of the gross proceeds from
the offering to finance the cash consideration portion of the consideration necessary to consummate its previously announced acquisition of the Zohydro ER franchise, and used approximately $8.3 million to pay fees
and expenses related to such acquisition and the offering, $2.2 million to pay the consent fee related to our consent solicitation of our 12.00% Treximet senior secured notes due 2020 and the remainder for working
capital and other general corporate purposes, including to fund possible acquisitions of, or investments in, complementary businesses, products, services and technologies.
Results of Operations
The following table summarizes our results of operations for the three months ended June 30, 2015 and 2014 (in thousands):
Three Months Ended
June 30,
Increase/
2015
2014
(Decrease)
Net revenues
$
46,977
$
17,382
170
%
Cost of product sales
13,794
9,380
47
%
Selling, general and administrative expense
24,857
13,222
88
%
Research and development expense
1,470
345
326
%
Loss on sale of PML (including impairment charge)
-
215
(100)
%
Depreciation and amortization expense
22,326
1,969
1,034
%
Restructuring costs
(108)
-
(1)
n/a
Total other expense, net
(20,476)
(2,234)
817
%
Income tax benefit
(3,603)
(3,749)
(4)
%
(1) Comparison to prior period is not meaningful.
29
Comparison of Three Months Ended June 30, 2015 and 2014
Net Revenues
Net revenues consist of net product sales and revenue from co-promotion and other revenue sharing arrangements, as well as revenue from PML until the manufacturing operations were sold on April 21,
2014. We recognized 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 June 30, 2015 and 2014 (in thousands):
Three Months Ended
June 30,
Increase/
2015
2014
(Decrease)
Treximet
$
25,440
$
-
n/a
Silenor
6,026
3,558
69
%
Zohydro
3,966
-
n/a
Other
11,322
12,957
(13)
%
Net product sales
46,754
16,515
183
%
Manufacturing revenue
-
154
(100)
%
Co-promotion and other revenue
223
713
(69)
%
Total net revenues
$
46,977
$
17,382
170
%
Net revenues increased $29.6 million or 170% during the three months ended June 30, 2015 compared to the three months ended June 30, 2014. Treximet was acquired in August 2014 with the first
sale occurring on September 2, 2014. Zohydro was acquired in April 2015 with the first sale occurring on May 4, 2015.
Per unaudited financial information provided by GSK and Zogenix for proforma purposes, their net product sales of Treximet and Zohydro for the three months ended June 30, 2014 were $15.2 million and
$2.4 million, respectively.
Our net product sales for the three months ended June 30, 2015 were approximately $46.8
million. Silenor net sales increased by $2.5 million, or 69%, during the three months ended June 30, 2015 compared to the three months ended June 30, 2014 due to a volume increase partially offset by
revenue deductions that increased due to the increase in sales revenue. Net product sales - other decreased by $1.6 million, or 13%, during the three months ended June 30, 2015 compared to the three months
ended June 30, 2014. Declining net product sales - other was due to (i) the discontinuation of certain less profitable products, primarily generics, and certain OTC monograph seasonal cough and cold products and (ii)
the termination of certain contracts pursuant to which we marketed and distributed products for others and invoiced those sales. The decrease in net product sales - other was offset by price increases on certain
products. Manufacturing revenue decreased by $154,000 during the three months ended June 30, 2015 compared to the three months ended June 30, 2014, as we sold our manufacturing subsidiary, PML, in April
2014. Co-promotion and other revenue decreased by $490,000 during the three months ended June 30, 2015 compared to the three months ended June 30, 2014. The decrease in co-promotion and other revenue
was primarily attributable to the termination of the co-promotion agreement on Natroba.
30
Cost of Product Sales
Cost of product sales increased by $4.4 million, or 47%, during the three months ended June 30, 2015, compared to the three months ended June 30, 2014. The increase is primarily due to
an increase of $4.4 million in royalty and collaboration expense mainly driven by higher Treximet sales and an increase of $1.5 million in cost of goods sold due to higher volumes partially offset by a decrease of
$774,000 in the acquisition cost basis of Cypress and Somaxon inventory.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $11.6 million, or 88%, during the three months ended June 30, 2015 compared to the three months ended June 30, 2014. The
increase was driven by an increase in marketing and other personnel related costs of $10.0 million, primarily focused on Treximet and Silenor products and the recently acquired Zohydro product. We also realized
increases in legal fees and professional services.
Research and Development Expense
Research and Development expenses increased by $1.1 million during the three months ended June 30, 2015 compared to the three months ended June 30, 2014. The increase was related to the on-going
work for new formulations of Treximet and Zohydro.
Depreciation and Amortization Expense
Depreciation and amortization expense increased by $20.4 million during the three months ended June 30, 2015 compared to the three months ended June 30, 2014. The increase was primarily a result of
$17.5 million of amortization related to the Treximet developed technologies acquired and $2.7 million of amortization related to the Zohydro developed technologies acquired.
Cost of Inducement
In April 2015, we entered into an agreement (the "Inducement Agreement") with all of the holders of our 8.00% Convertible Senior Notes due 2019 (the "8.00% Convertible Notes"),
pursuant to which such holders agreed to the removal of substantially all of the material restrictive covenants in the indenture governing the 2019 notes and to convert their notes in accordance with the provisions of
such indenture in exchange for an aggregate of 2,338,129 shares of our common stock. The Company recorded $19.5 million as cost of inducement expense in the three months ended June 30, 2015.
For further discussion, see Note 8, Debt and Lines of Credit, to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Change in Fair Value of Derivative Liability
The Company is required to separate the conversion option in the 4.25% Convertible Notes under ASC 815, Derivatives and Hedging, the Company recorded the bifurcated conversion option
valued at $28.5 million 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 consolidated statement of operations
for each reporting period. The Company recorded $8.7 million as change in fair value of derivative liability in other expense, net in the three months ended June 30, 2015. For further discussion,
see Note 8, Debt and Lines of Credit, to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Interest Expense
Interest expense increased by $7.6 million, or 325%, during the three months ended June 30, 2015 compared to the three months ended June 30, 2014. The increase was primarily due to the recognition of
interest expense related to our $220.0 million Treximet Notes, issued in August 2014 and $130.0 million 4.25% Convertible Notes, issued in April 2015, of $6.6 million and $1.7 million, respectively. There was also an
increase of $168,000 in associated deferred financing costs due to the two aforementioned notes. The increase was partially offset by the conversion of the outstanding 8.00% Convertible Notes during the three
months ended June 30, 2015 of $1.0 million.
31
Income Tax Provision
During the three months ended June 30, 2015, we recognized an income tax benefit of $3.6 million. Our effective rate during the three months ended June 30, 2015 from continuing operations rate was
approximately 10%. During the three months ended June 30, 2014, we recognized an income tax benefit of $3.7 million. Our effective rate during the three months ended June 30, 2014 was approximately 39%. The
change in the tax rate for the three months ended June 30, 2015 was primarily due to a new mix of jurisdictional earnings resulting from recent merger and acquisition activity through our subsidiary in Ireland.
Comparison of the Six Months Ended June 30, 2015 and 2014
The following table summarizes our results of operations for the six months ended June 30, 2015 and 2014 (in thousands):
Six Months Ended
June 30,
Increase/
2015
2014
(Decrease)
Net revenues
$
80,866
$
36,434
122
%
Cost of product sales
24,870
19,726
26
%
Selling, general and administrative expense
45,843
26,455
73
%
Research and development expense
2,464
1,314
88
%
Loss on sale of PML (including impairment charge)
-
6,672
(100)
%
Depreciation and amortization expense
40,759
4,160
880
%
Restructuring costs
1,197
-
(1)
n/a
Total other expense, net
(29,818)
(3,498)
752
%
Income tax benefit
(8,176)
(9,615)
(15)
%
(1) Comparison to prior period is not meaningful.
Net Revenues
The following table sets forth a summary of our net revenues for the six months ended June 30, 2015 and 2014 (in thousands):
Six Months Ended
June 30,
Increase/
2015
2014
(Decrease)
Treximet
$
46,426
$
-
n/a
Silenor
11,028
5,402
104
%
Zohydro
3,966
-
n/a
Other
18,916
28,644
(34)
%
Net product sales
80,336
34,046
136
%
Manufacturing revenue
-
1,025
(100)
%
Co-promotion and other revenue
530
1,363
(61)
%
Total net revenues
$
80,866
$
36,434
122
%
32
Net revenues increased $44.4 million, or 122%, during the six months ended June 30, 2015 compared to the six months ended June 30, 2014. Treximet was acquired in
August 2014 with the first sale occurring on September 2, 2014. Zohydro was acquired in April 2015 with the first sale occurring on May 4, 2015. Our net product sales for the six months ended June 30, 2015
were approximately $80.3 million. Per unaudited financial information provided by GSK and Zogenix for pro forma purposes, their net product sales of Treximet and Zohydro for
the six months ended June 30, 2014 were $30.3 million and $2.7 million, respectively.
Silenor net sales increased by $5.6 million, or 104%, during the six months ended June 30, 2015 compared to the six months ended June 30, 2014. The price increase contributed 13% and a volume increase due to a new focused
marketing and selling strategy contributed 81% offset by revenue deductions that increased due to the increase in sales revenue. Net product sales - other decreased by $9.7 million, or 34%, during the six months
ended June 30, 2015 compared to the six months ended June 30, 2014. Declining net product sales - other was due to the discontinuation of certain less profitable products, primarily generics, and certain OTC
monograph seasonal cough and cold products and the termination of certain contracts pursuant to which we marketed and distributed products for others and invoiced those sales. Manufacturing revenue decreased
by $1.0 million during the six months ended June 30, 2015 compared to the six months ended June 30, 2014, as we sold our manufacturing subsidiary, PML, in April 2014. Co-promotion and other revenue decreased
by $833,000 during the six months ended June 30, 2015 compared to the six months ended June 30, 2014. The decrease in co-promotion and other revenue was primarily attributable to the termination of
the co-promotion agreement on Natroba.
Cost of Product Sales
Cost of product sales increased by $5.1 million, or 26%, during the six months ended June 30, 2015, compared to the six months ended June 30, 2014. The increase was primarily due to an increase of $8.2
million in royalty and collaboration expense mainly driven by higher Treximet sale and an increase of $2.1 million in cost of goods sold due to higher volumes partially offset by a decrease of $2.3 million in the
acquisition cost basis of Cypress and Somaxon inventory and partially offset by a decrease of $1.6 million in the allowance for obsolete, slow moving inventory.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $19.4 million, or 73%, during the six months ended June 30, 2015 compared to the six months ended June 30, 2014. The increase was driven
by an increase in marketing and other personnel related costs of $17.7 million, primarily focused on our Treximet and Silenor products and the recently acquired Zohydro product. We also realized increases in legal
fees and, professional services partially offset by a decrease in costs related to the employees transferred to the buyer in the sale of our manufacturing facility, PML.
Research and Development Expense
Research and Development expenses increased by $1.2 million, or 88%, during the six months ended June 30, 2015 compared to the six months ended June 30, 2014. The increase was related to the on-
going work for new formulations of Treximet and Zohydro.
Depreciation and Amortization Expense
Depreciation and amortization expense increased by $36.6 million during the six months ended June 30, 2015 compared to the six months ended June 30, 2014. The increase was primarily a result of $33.9
million of amortization related to the Treximet developed technologies acquired and $2.7 million of amortization related to the Zohydro developed technologies acquired.
Restructuring Costs
Restructuring increased by $1.2 million during the six months ended June 30, 2015 compared to the six months ended June 30, 2014. The increase is due to the accrued costs related to the initiative to
restructure operations and shut down the Charleston, South Carolina site.
33
Cost of Inducement
The Company recorded $19.5 million as cost of inducement expense in the six months ended June 30, 2015. For further discussion, see Note 8, Debt and Lines of Credit, to our condensed
consolidated financial statements included in this Quarterly Report on Form 10-Q.
Change in Fair Value of Derivative Liability
The Company recorded $8.7 million as change in fair value of the derivative liability in other expense, net in the six months ended June 30, 2015. For further discussion, see Note 8, Debt and Lines of Credit, to our
condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Interest Expense, net
Interest expense, net, increased by $15.6 million during the six months ended June 30, 2015 compared to the six months ended June 30, 2014. The increase was primarily due to the recognition of interest
expense related to our $220.0 million Treximet Notes, issued in August 2014 and $130.0 million 4.25% Convertible Notes, issued in April 2015, of $13.2 million and $1.7 million, respectively. There was also an
increase of $648,000 in associated deferred financing costs due to the two aforementioned notes. The increase was partially offset by the conversion of the outstanding 8.00% Convertible Notes during the three
months ended June 30, 2015 of $275,000.
Income Tax Provision
During the six months ended June 30, 2015, we recognized an income tax benefit of $8.2 million. Our effective rate during the six months ended June 30, 2015 from continuing operations rate was
approximately 13%. During the six months ended June 30, 2014, we recognized an income tax benefit of $9.6 million. Our effective rate during the six months ended June 30, 2014 was approximately 38%. The
change in the tax rate for the six months ended June 30, 2015 was primarily due to a new mix of jurisdictional earnings resulting from recent merger and acquisition activity through our subsidiary in Ireland.
Non-GAAP Financial Measures
To supplement our financial results determined by U.S. generally accepted accounting principles ("GAAP"), we have also disclosed in the tables below the following non-GAAP information: (a)
adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") and (b) adjusted EBITDA per basic and diluted common share. This financial measure excludes the impact of certain
items and, therefore, has not been calculated in accordance with GAAP. These non-GAAP financial measures exclude depreciation and amortization, net interest, taxes, net revenue adjustments, deal expenses,
share-based compensation expense, amortization of inventory step-up included in cost of product sales, loss on sale of PML (including impairment charge),severance expenses and restructuring costs
(comprehensively "Adjustment Items"). In addition, from time to time in the future there may be other items that we may exclude for the purposes of our non-GAAP financial measures; likewise, we may in
the future cease to exclude items that we have historically excluded for the purpose of our non-GAAP financial measures. We believe that these non-GAAP financial measures provide meaningful supplemental
information regarding our operating results because they exclude 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 these non-GAAP financial measures provides consistency and comparability with past reports of financial results and provides consistency in calculations
by outside analysts reviewing our results. Accordingly, we believe these non-GAAP financial measures are useful to investors in allowing for greater transparency of supplemental information used by
management.
34
We believe that non-GAAP financial measures are helpful in understanding our past financial performance and potential future results, there are limitations associated with the use of these non-GAAP financial
measures. These non-GAAP financial measures are not prepared in accordance with GAAP, do not reflect a comprehensive system of accounting and may not be completely comparable to similarly titled measures of
other companies due to potential differences in the exact method of calculation between companies. Adjustment items that are excluded from our non-GAAP financial measures can have a material impact on net
earnings. As a result, these non-GAAP financial measures have limitations and should not be considered in isolation from, or as a substitute for, net loss, cash flow from operations or other measures of performance
prepared in accordance with GAAP. We compensate for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reconciling the non-GAAP financial
measures to their most comparable GAAP financial measure. Investors are encouraged to review the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measures that are
included elsewhere in this Quarterly Report on Form 10-Q.
Reconciliation of GAAP reported net loss to adjusted EBITDA and the related per share amounts are as follows (in thousands, except per share amounts):
Three Months Ended
Six Months Ended
June 30,
June 30,
2015
2014
2015
2014
GAAP net loss
$
(32,235)
$
(6,234)
$
(55,909)
$
(15,776)
Adjustments:
Interest expense, net
9,679
2,234
19,021
3,498
Cost of inducement
19,500
-
19,500
-
Change in fair value of derivative liability
(8,703)
-
(8,703)
-
Depreciation and amortization
22,326
1,969
40,759
4,160
Income tax benefit
(3,603)
(3,749)
(8,176)
(9,615)
EBITDA
6,964
(5,780)
6,492
(17,733)
Net revenue adjustments (1)
(3,286)
-
(2,983)
-
Cost of product sales adjustments (2)
-
775
97
2,397
Selling, general and administrative adjustments (3)
4,376
836
7,734
2,758
Loss on sale of PML (including impairment charge)
-
215
-
6,672
Restructuring costs (4)
(108)
-
1,197
-
Adjusted EBITDA
$
7,946
$
(3,954)
$
12,537
$
(5,906)
(1)
To include impact of change in estimates related to gross to net accruals of $3.3 million and $0 for the three months ended June 30, 2015 and 2014, respectively. Also, to include impact of
change in estimates related to gross to net accruals of $3.3 million and $0; and to exclude impact on returns from FDA reclass of Hydrocodone products from C3 to C2 classification of $303,000 and $0, for the six
months ended June 30, 2015 and 2014, respectively.
(2)
To exclude amortization of inventory step-up from acquisitions.
35
(3)
To exclude deal costs of $3.2 million and $471,000; stock compensation expense of $1.2 million and $740,000; ParaPro stock compensation expense of $0 and $(1.3 million) and severance expense of $0 and
$743,000 for the three months ended June 30, 2015 and 2014, respectively. Also, to exclude deal costs of $3.9 million and $473,000; stock compensation expense of $2.4 million and $2.5 million; ParaPro stock
compensation expense of $0 and $(1.2 million); severance expense of $0 and $766,000 and litigation settlement expenses of $1.4 million and $0, for the six months ended June 30, 2015 and 2014, respectively.
(4)
To exclude the accrued cost related to the initiative to restructure operations and shut down the Charleston, South Carolina site.
Liquidity and Capital Resources
As of June 30, 2015, we had cash and cash equivalents of $66.8 million, borrowing availability of $11.3 million under our $20.0 million revolving loan and a related $20.0 million uncommitted accordion feature
and long-term debt of $340.0 million.
We have an effective shelf registration statement on Form S-3, 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. This program will provide us with financial flexibility and the ability to
opportunistically access the capital markets.
We currently have no immediate plans to issue securities pursuant to this registration statement.
Our future capital requirements will depend on many factors, including:
the level of product sales of our currently marketed products and any additional products that we may market in the future;
the extent to which we acquire or invest in products, businesses and technologies;
the level of inventory purchase commitments under supply, manufacturing, license and/or co-promotion agreements;
the scope, progress, results and costs of development activities for our current product candidates;
the costs, timing and outcome of regulatory review of our product candidates;
the number of, and development requirements for, additional product candidates that we pursue;
the costs of commercialization activities, including product marketing, sales and distribution;
the costs and timing of establishing manufacturing and supply arrangements for clinical and commercial supplies of our product candidates and products;
the extent to which we choose to establish collaboration, co-promotion, distribution or other similar arrangements for our marketed products and product candidates; and
the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending claims related to intellectual property owned by or licensed to us.
36
On each Payment Date, commencing August 1, 2015, the Company will pay an installment of principal on the Treximet 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 Notes on such Payment Date). Pursuant to the August 2014 Indenture the first principal payment is due on August
1, 2015 and will be 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, 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 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 Notes, or the full
amount of the $220.0 million principal of the notes if the calculation as described does not result in any principal payments during the term of the Treximet Notes, will be due on the maturity date of the Treximet Notes
which is August 1, 2020. Based on the calculation of the principal payments as described, the Company has recorded $210.0 million of Treximet Notes as long-term debt and $10.0 million as short-term
debt as of June 30, 2015.
A significant portion of our planned expenditures for the remainder of 2015 are associated with our acquisition of certain assets related to Zohydro ER. We funded our acquisition of Zohydro ER
with cash of approximately $80.9 million and issued approximately 1.7 million shares of our common stock, with an approximate value of $20.0 million, based on the closing price of $11.89 on March 9, 2015, the
trading day immediately preceding the execution date of the Asset Purchase Agreement. As of June 30, 2015, we believe that our existing cash balance, cash from operations, net proceeds from our the
offering of our $130.0 million Convertible Senior Notes due 2021 and funds remaining available under our Midcap $20.0 million revolving loan and related $20.0 million uncommitted accordion feature will be sufficient to
fund our existing level of operating expenses, current development activities and general capital expenditure requirements through June 30, 2016.
To continue to grow our business over the longer term, we may need to commit substantial resources to one or more of the following: 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. 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.
Cash Flows
The following table provides information regarding our cash flows for the six months ended June 30, 2015, and 2014 (in thousands).
Six Months Ended
June 30,
2015
2014
Cash provided by (used in):
Operating activities
$
(9,923)
$
(10,196)
Investing activities
(81,653)
799
Financing activities
123,552
54,541
Net increase in cash and cash eqivalents
$
31,976
$
45,144
37
Comparison of the Six Months Ended June 30, 2015 and 2014
Net cash used in operating activities
Net cash used in operating activities during the six months ended June 30, 2015 was $9.9 million a decrease of $273,000 from cash used in operating activities during the six months ended June 30, 2014 of
$10.2 million. The cash used in operating activities during the six months ended June 30, 2015 was driven by: net loss of $55.9 million, net changes in operating assets/liabilities of $3.1 million partially
offset by non-cash expenses totaling $49.1 million. The $10.2 million used in operating activities during the six months ended June 30, 2014 was primarily driven by: net loss of $15.8 million which was
partially offset by non-cash expenses totaling $6.9 million.
Net cash provided by (used in) investing activities
Net cash used in investing activities during the six months ended June 30, 2015 was $81.7 million, which represents an increase of $82.5 million from the cash provided by investing activities during the six
months ended June 30, 2014 of $799,000. The increase in cash used in investing activities was due to the acquisition of Zohydro in April 2015.
Net cash provided by financing activities
Net cash provided by financing activities during the six months ended June 30, 2015 was $123.6 million, which represents an increase of $69.0 million from cash provided by financing activities during the six
months ended June 30, 2014 of $54.5 million. The increase in cash provided by financing activities during the six months ended June 30, 2015 is primarily due to the net proceeds of the issuance of the 4.25%
Convertible Notes in April 2015.
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 on our consolidated balance sheets.
We are exposed to market risk related to changes in interest rates on our revolving credit facility. We do not utilize derivative financial instruments or other market risk-sensitive instruments to manage
exposure to interest rate changes. The main objective of our cash investment activities is to preserve principal while maximizing interest income through our trust account.
The interest rate related to borrowings under our revolving credit facility is a variable rate of LIBOR (with a floor of 1.5%) plus an Applicable Margin (7.5%), as defined in the debt agreement (9.0% at June 30,
2015). As of June 30, 2015 we had outstanding borrowings of approximately $7.9 million under our revolving credit facility. We are required to pay minimum interest on 75% of the available revolver
balance of $20.0 million. If interest rates increased by 1.0%, our annual interest expense on our borrowings would increase by approximately $150,000.
See Note 8, Debt and Lines of Credit, to our unaudited condensed consolidated financial statements included within this report for further discussion.
We maintain "disclosure controls and procedures" within the meaning of Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or 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 June 30, 2015, 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 the 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 accomplish their intended
purpose.
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. However,
due to the restructuring and the subsequent consolidation of offices to New Jersey, we are in the process of reviewing all of our internal controls over financial reporting in an effort to maximize the value of existing
internal controls. Additionally, we have hired several new accounting personnel in our New Jersey office that will be responsible for internal controls over financial reporting beginning in the second quarter of 2015.
See Legal Proceedings under Note 11, Commitments and Contingencies, to our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2015
and 2014 contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.
The following risk factors include any and all
material changes to, and should be read in conjunction with, the risk factors contained in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 2, 2015,
and Part II, Item 1A of our Quarterly Report on Form 10-Q for the three months ended March 31, 2015, filed with the SEC on May 1, 2015.
The historical and pro forma financial statements we have filed with the SEC relating to Zohydro ER may not be an indication of our ability to commercialize Zohydro ER.
In April 2015, we completed the acquisition of Zohydro ER from Zogenix. In June 2015, we filed historical financial statements and pro forma financial information relating to the Zohydro ER product line, and
the SEC stated that it would not object to our conclusion that the filing of the historical financial statements relating to the Zohydro ER product line represents substantial compliance with the requirements of Rule 3-05
of Regulation S-X, or Rule 3-05. However, we were advised by Zogenix that the Zohydro ER product line had not been a separate legal entity of Zogenix and was never operated as a stand-alone business, division or
subsidiary. Zogenix also advised us that it had never prepared full stand-alone or full carve-out financial statements for the Zohydro ER business, and that Zogenix has never maintained the distinct and separate
accounts necessary to prepare financial statements that fully comply with the requirements of Rule 3-05. As a result, these historical statements may not be an indication of the performance of Zohydro ER under
Zogenix for the periods indicated. In addition, the assumptions used in preparing the pro forma financial information may not prove to be accurate or relevant to the Zohydro ER product line, in particular
on a go-forward basis, and therefore should not be relied upon as a measure of our ability to commercialize Zohydro ER.
Articles of Amendment to the Articles of Incorporation of Pernix Therapeutics Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the
Commission on July 28, 2015).
Pernix Therapeutics Holdings, Inc. 2015 Omnibus Incentive Plan (incorporated by reference to the Company's Definitive Proxy Statement on Schedule 14A filed with the Commission on May 8,
2015).
31.1*
Certification of the Registrant's Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of the Registrant's Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
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 June 30, 2015 and December 31, 2014;
(ii) Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014;
(iii) Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 and
(iv) Notes to Condensed Consolidated Financial Statements.
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: August 6, 2015
By:
/s/ DOUGLAS L. DRYSDALE
Douglas L. Drysdale
Chairman and Chief Executive Officer and President and Director
(Principal Executive Officer)
1. I have reviewed this Quarterly Report on Form 10-Q of Pernix Therapeutics Holdings, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly 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 quarterly 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,
including any corrective actions with regard to significant deficiencies and material weaknesses; 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.
August 6, 2015
/s/ DOUGLAS L. DRYSDALE
Douglas L. Drysdale
Chairman and Chief Executive Officer and President and Director
(Principal Executive Officer)
1. I have reviewed this Quarterly Report on Form 10-Q of Pernix Therapeutics Holdings, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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, including any corrective actions with regard to significant deficiencies and material weaknesses; 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.
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: August 6, 2015
/s/ DOUGLAS L. DRYSDALE
Douglas L. Drysdale
Chairman and Chief Executive Officer and President and Director
(Principal Executive Officer)
Date: August 6, 2015
/s/ SANJAY S. PATEL
Sanjay S. Patel Chief Financial Officer
(Principal Financial Officer)
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style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Note 1. Company Overview</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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"),
including neurology and psychiatry, 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").</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The Company's branded products include Treximet,
a medication indicated for the acute treatment of migraine pain and inflammation, 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.  The Company also has an exclusive license agreement with Osmotica
Pharmaceutical Corp. to promote Khedezla, a prescription medication for major depressive disorder.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The accompanying unaudited condensed consolidated
financial statements included herein have been prepared by the Company in accordance with the rules and regulations of the United
States Securities and Exchange Commission (SEC). The condensed consolidated financial statements are comprised of the financial
statements of the Company. 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 U.S. generally accepted accounting principles has been condensed or omitted in accordance with rules and
regulations of the SEC. Operating results for the three or six months ended June 30, 2015 are not necessarily indicative of the
results that may be expected for any future period or for the year ending December 31, 2015.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">These 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, 2014, included in Pernix Therapeutics' 2014 Annual Report on Form 10-K filed with the SEC.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The preparation of the 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 condensed consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period in conformity with U.S. generally accepted accounting principles.
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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Subsequent Events</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>The Company has evaluated all events and
transactions since June 30, 2015. The Company did not have any material recognized subsequent events but did have the following
non-recognized subsequent event.</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">In July 2015, the Company filed a Certificate
of Amendment of the Amended and Restated Certificate of Incorporation of the Company (the "Certificate of Amendment")
with the Secretary of State of the State of Maryland. The Certificate of Amendment amended the Company's Amended and Restated Certificate
of Incorporation by increasing the number of authorized shares of the Company's common stock from 90,000,000 shares to 140,000,000
shares and the attendant increase in capital stock of all classes from 100,000,000 to 150,000,000, consisting of 140,000,000 shares
of common stock and 10,000,000 shares of preferred stock, which shall include 1,000,000 shares of Series B junior participating
stock.  No change to the authorized number of shares of preferred stock.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Acquisition of Zohydro ER with BeadTek</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">On April 24, 2015, the Company completed the
acquisition of the pharmaceutical product line, Zohydro ER®, including an abuse-deterrent pipeline and all related intellectual
property, 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 specified quantity of inventory, and regulatory and
commercial milestone payments of up to $283.5 million, including a $12.5 million milestone payment upon approval of ZX007 abuse-deterrent
extended-release hydrocodone tablet and up to $271.0 million in potential sales milestones if the Zohydro ER® product line
achieve certain agreed-upon net sales targets. See Note 13, <i>Business Combination </i>for further discussion<i>.</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Acquisition of Treximet</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">On August 20, 2014, the Company, through a
wholly owned subsidiary Pernix Ireland Limited, completed the acquisition of the U.S. intellectual property rights to the pharmaceutical
product, Treximet from GlaxoSmithKline plc and certain of its related affiliates (together "GSK").</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The total purchase price consisted of an upfront
cash payment of $250.0 million paid to GSK upon closing of the transaction, and $17.0 million payable to GSK upon receipt of an
updated Written Request for pediatric exclusivity from the Federal Drug Administration ("FDA"), subject to certain deductions
based on delays in supplying the commercial product to the Company. Subsequently, the deductions resulting from delays in supplying
the commercial product reduced the $17.0 million payable amount to approximately $1.95 million, which was paid during the fourth
quarter of 2014. The Company funded this acquisition with $220.0 million in debt, plus approximately $32.0 million from available
cash.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The results of operations of the acquired
Treximet asset, along with the estimated fair values of the assets acquired in the transaction have been included in the Company's
condensed consolidated financial statements since we acquired Treximet on August 20, 2014.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Reclassifications</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Certain comparative figures have been reclassified
to conform to the current year presentation.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Principles of Consolidation</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The condensed consolidated financial statements
include the accounts of Pernix's wholly-owned subsidiaries Pernix Therapeutics, LLC, GTA GP, Inc., GTA LP, Inc., Gaine, Inc., Macoven,
Pernix Manufacturing, LLC, ("PML") (closed on sale on April 21, 2014), Respicopea, Inc., Cypress, Cypress' subsidiary,
Hawthorn Pharmaceuticals, Inc., Pernix Sleep, Inc., also known as Somaxon Pharmaceuticals, Inc., or Somaxon, Pernix Ireland Limited
and Pernix Ireland Pain Limited. Transactions between and among the Company and its consolidated subsidiaries are eliminated.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Fair Value of Financial Instruments</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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 (including our Regions Trust Account, which invests in short-term securities consisting of sweep accounts, money market
accounts and money market mutual funds), notes receivable, and our credit facility. The carrying values of these assets and liabilities
approximate their fair value due to their short-term nature.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Significant Customers</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The Company's customers consist of drug wholesalers,
retail drug stores, mass merchandisers and grocery store pharmacies in the United States. The Company primarily sells its products
directly to large national drug wholesalers, which in turn resell the products to smaller or regional wholesalers, retail pharmacies,
chain drug stores, and other third parties.  The following tables list the Company's customers that individually comprised
greater than 10% of total gross product sales for the three and six months ended June 30, 2015 and 2014, or 10% of total accounts
receivable as of June 30, 2015 and December 31, 2014.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Gross Product Sales:</b></p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Three Months Ended</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Six Months Ended</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">McKesson Corporation</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">37%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">40%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">41%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">38%</font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">AmerisourceBergen Drug Corporation</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">29%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">25%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">24%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">30%</font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Cardinal Health, Inc.</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">27%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">21%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">28%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">19%</font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Total</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">93%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">86%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">93%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">87%</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Accounts Receivable:</b></p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>December 31,</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 74%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 11%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 11%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">McKesson Corporation</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">41%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">29%</font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">AmerisourceBergen Drug Corporation</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">24%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">42%</font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Cardinal Health, Inc.</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">28%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">18%</font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Total</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">93%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">89%</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Cost of Product Sales</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">In connection with the acquisitions of Cypress
and Somaxon, the Company adjusted the predecessor cost basis, increasing inventory to fair value as required by Accounting Standards
Codification ("ASC") 820, <i>Fair Value Measurements and Disclosures</i>.  As a result, the Company recorded adjustments
to increase the inventory to fair value in the amount of $8.6 million and $695,000 at the time of acquisition for Cypress and Somaxon,
respectively.  For the three months ended June 30, 2015 and 2014, $0 and $774,000 of the increase in the basis of the inventory
was amortized and included in cost of product sales. For the six months ended June 30, 2015 and 2014, $97,000 and $2.4 million,
of the increase in the basis of the inventory was amortized and included in cost of product sales, as the inventory was subsequently
sold. The balance remaining of the increase in the basis of the inventory acquired was $0 as of June 30, 2015.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"></p><p style="margin: 0pt; font: 8pt Times New Roman, Times, Serif"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Note 2. Earnings per Share</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Basic net income (loss) per common share is
the amount of 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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The following table sets forth the computation
of basic and diluted net loss per share (in thousands except per share data):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Three Months Ended</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Six Months Ended</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Numerator:</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Net loss</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">(32,235)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">(6,234)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">(55,909)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">(15,776)</font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Denominator:</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Weighted-average common shares, basic</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">52,399 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">37,828 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">45,481 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">37,551 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Dilutive effective of stock options</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Weighted-average common shares, diluted</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">52,399 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">37,828 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">45,481 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">37,551 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Net loss per share, basic and diluted</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.62)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.16)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(1.23)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.42)</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Three Months Ended</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Six Months Ended</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">4.25% Convertible Notes</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">8,594 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">4,383 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">8.00% Convertible Notes</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">4,365 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">18,056 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">11,073 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">18,056 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Stock options and restricted stock</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1,524 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1,804 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Warrants</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">136 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">176 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Total potential dilutive effect</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">14,619 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">18,056 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">17,436 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">18,056 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"></p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The following table sets forth the computation
of basic and diluted net loss per share (in thousands except per share data):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Three Months Ended</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Six Months Ended</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Numerator:</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Net loss</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">(32,235)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">(6,234)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">(55,909)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">(15,776)</font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Denominator:</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Weighted-average common shares, basic</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">52,399 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">37,828 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">45,481 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">37,551 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Dilutive effective of stock options</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Weighted-average common shares, diluted</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">52,399 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">37,828 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">45,481 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">37,551 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Net loss per share, basic and diluted</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.62)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.16)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(1.23)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.42)</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Three Months Ended</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Six Months Ended</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">4.25% Convertible Notes</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">8,594 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">4,383 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">8.00% Convertible Notes</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">4,365 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">18,056 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">11,073 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">18,056 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Stock options and restricted stock</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1,524 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1,804 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Warrants</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">136 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">176 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Total potential dilutive effect</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">14,619 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">18,056 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">17,436 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">18,056 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p><p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Note 3. Fair Value Measurement</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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).</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b><i>Summary of Assets Recorded at Fair Value</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">In accordance with the fair value hierarchy
described above, the following table shows the fair value of the Company's financial assets that are required to be measured at
fair value as of June 30, 2015 and December 31, 2014 (in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="10" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>As of June 30, 2015</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Level 1</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Level 2</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Level 3</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Total</b></font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Money market fund and trust cash sweep investments <sup>(1)</sup> </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">45,208 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">45,208 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Total assets</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">45,208 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">45,208 </font></td></tr>
<tr style="vertical-align: bottom">
<td> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="10" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>As of December 31, 2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Level 1</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Level 2</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Level 3</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Total</b></font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Money market fund and trust cash sweep investments <sup>(1)</sup> </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">26,297 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">26,297 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Total assets</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">26,297 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">26,297 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr>
<td style="vertical-align: top; width: 2%; padding: 0.75pt"><font style="font-size: 10pt">(1)</font></td>
<td style="vertical-align: bottom; width: 98%; padding: 0.75pt"><font style="font-size: 10pt">The Company's money market and trust cash sweep investments are included in cash and cash equivalents within the Condensed Consolidated Balance Sheet.</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding: 0.75pt"> </td>
<td style="padding: 0.75pt; font-size: 12pt"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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 June 30, 2015
or December 31, 2014.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">As of June 30, 2015 and December 31, 2014,
the Company did not have any investments in Level 3 securities.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">There were no transfers of assets or liabilities
between Level 1 and Level 2 during the three or six months ended June 30, 2015 and 2014.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The carrying amounts reflected in the 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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b><i>Summary of Liabilities Recorded at Carrying
Value</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The fair and carrying value of our debt instruments
are detailed as follows (in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>As of June 30, 2015</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>As of December 31, 2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Fair</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Carrying</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Fair</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Carrying</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Value</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Value</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Value</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Value</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">4.25% Convertible Notes</font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">96,736 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">102,136 </font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Derivative liability</font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">19,777 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">19,777 </font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">8.00% Convertible Notes</font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">129,320 </font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">65,000 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Contingent consideration</font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">29,327 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">29,327 </font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Treximet Notes</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">182,332 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">220,000 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">167,114 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">220,000 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Total</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">328,172 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">371,240 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">296,434 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">285,000 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The fair values of the Company's liabilities
were estimated using the following methodologies. Within the hierarchy of fair value measurements, these are Level 3 fair
values.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Convertible Notes</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The fair values of the Convertible notes were
estimated using the (i) terms of the convertible notes; (ii) rights, preferences, privileges, and restrictions of the underlying
security; (iii) time until any restriction(s) are released; (iv) fundamental financial and other characteristics of the Company;
(v) trading characteristics of the underlying security (exchange, volume, price, and volatility); (vi) valuation of derivative
liability; and (vii) precedent sale transactions.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Derivative Liability</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The fair value of the derivative liability
was determined using a "with and without" scenario. Under this methodology, valuations are performed on the convertible
note 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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Contingent Consideration</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The fair value of contingent consideration
is based on two components- The Regulatory milestone and the Commercial milestone.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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 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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Treximet Notes</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The fair values of the Company's Treximet
notes were estimated using a discounted cash flow model.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"></p><p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Note 4. Inventory</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Inventories are stated at the lower of cost
or market. Inventories consist of the following (in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="width: 70%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 13%; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 13%; text-align: center"><font style="font-size: 10pt"><b>December 31,</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Raw materials</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">1,399 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">417 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Packaging materials</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">41 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">82 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Work-in-process</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">823 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Finshed goods</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">9,744 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">12,200 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Inventory, gross</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">12,007 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">12,699 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Reserve for obsolescence</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">(2,942)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">(2,220)</font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Inventory, net</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">9,065 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">10,479 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">An increase in the basis of inventory related
to the acquisitions of Cypress and Somaxon are included in the balances above as of June 30, 2015 and December 31, 2014. The increase
included in raw materials was $0 and $97,000 as of June 30, 2015 and December 31, 2014, respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"></p><p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Note 5. Disposal of PML</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">On March 31, 2014, the Company entered into
a definitive agreement to divest its manufacturing operations, PML, to Woodfield Pharmaceutical LLC.  Accordingly, during
the three months ended March 31, 2014, the Company adjusted PML's net assets to fair value and, as a result, recorded the assets
as held for sale, net of an impairment charge of approximately $6.5 million.  The Company closed on the sale of PML on
April 21, 2014.  The Company received approximately $1.2 million in proceeds, net of the assumed mortgage and working
capital liabilities at closing.  The entire PML operation and the mortgage was assumed by the acquirer.  The
Company recorded an additional loss on the sale of approximately $202,000 at closing.  The Company does not believe the
disposal of PML qualifies as discontinued operations as the manufacturing facility was not a major line of business and was not
a significant component of the Company's financial results during our period of ownership.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"></p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Note 6. Intangible Assets and
Goodwill</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Intangible assets consist of the following
(in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="7" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>As of June 30, 2015</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Weighted</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Gross Carrying</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Accumulated</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Net Carrying</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Average Life </b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Amount </b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Amortization </b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Amount </b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Unamortized intangible assets:</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Trademark rights</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">Indefinite </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">400 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">400 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     In-process research and development</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">Indefinite</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">79,900 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">79,900 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Total unamortized intangible assets</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">80,300 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">80,300 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Amortized intangible assets:</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Patents</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">11.0 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">500 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(379)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">121 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Brand</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">8.0 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">3,887 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(2,551)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1,336 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Product licenses</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">11.0 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">17,581 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(4,906)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">12,675 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Non-compete and supplier contracts</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">5.3 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">5,194 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(4,792)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">402 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Acquired developed technologies</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">4.3 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">360,226 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">(73,183)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">287,043 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Total amortized intangible assets</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">387,388 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">(85,811)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">301,577 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Total intangible assets</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">467,688 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">(85,811)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">381,877 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="7" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>As of December 31, 2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Weighted</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Gross Carrying</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Accumulated</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Net Carrying</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Average Life </b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Amount </b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Amortization </b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Amount </b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Unamortized intangible assets:</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Trademark rights</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">Indefinite </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">400 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">400 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     In-process research and development</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">Indefinite</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">48,300 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">48,300 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Total unamortized intangible assets</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">48,700 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">48,700 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Amortized intangible assets:</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Patents</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">11.0 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">500 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(355)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">145 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Brand</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">8.0 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">3,887 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(2,308)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1,579 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Product licenses</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">11.0 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">17,581 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(4,058)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">13,523 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Non-compete and supplier contracts</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">5.3 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">5,194 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(4,342)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">852 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Acquired developed technologies</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">4.4 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">269,826 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">(34,136)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">235,690 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Total amortized intangible assets</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">296,988 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">(45,199)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">251,789 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Total intangible assets</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">345,688 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">(45,199)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">300,489 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">As of June 30, 2015, the weighted average
life for our definite-lived intangible assets in total was approximately 4.69 years.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Estimated amortization expense related to
intangible assets with definite lives for each of the five succeeding years and thereafter is as follows (in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="width: 79%"><font style="font-size: 10pt">2015 (July - December)</font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="width: 10%; text-align: right"><font style="font-size: 10pt">48,343 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">2016</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">95,880 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">2017</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">94,214 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">2018</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">28,585 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">2019</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">17,778 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Thereafter</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">16,777 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Total</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">301,577 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Amortization expense was $22.2 million and
$40.6 million for the three and six months ended June 30, 2015, respectively. Amortization expense was $1.9 million and $4.0 million
for the three and six months ended June 30, 2014, respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p><p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Note 7. Accrued Allowances</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Accrued allowances consist of the following
(in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="width: 70%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 13%; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 13%; text-align: center"><font style="font-size: 10pt"><b>December 31,</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Accrued returns allowance</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">8,579 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">9,691 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Accrued price adjustments</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">39,030 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">32,945 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Accrued government program rebates</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">4,589 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">9,968 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Total</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">52,198 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">52,604 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"></p><p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0"><font style="font: 8pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Note 9. Stockholders' Equity </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Capital Stock</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">In April 2015, the Company issued 1,682,086
shares of Common stock for approximately $11.9 million in connection with the acquisition of Zohydro ER, see note 13, Business
Combination.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">In April 2015, the Company issued 2,338,129
shares of Common stock for approximately $19.5 million for the inducement and 18,055,556 shares for $65.0 million in connection
with the conversion of the outstanding 8.00% Convertible Notes, see note 8, Debt and Lines of Credit.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Warrants </i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">In March 2015, Pozen exercised all 500,000
of their warrants in a cashless exercise for which 315,835 shares were issued. In February 2015, Frontline exercised 222,631 of
their 500,000 warrants in a cashless exercise for which 133,257 shares were issued. There are 277,369 warrants remaining for Frontline.
As of June 30, 2015, the Company assumed approximately 464,564 outstanding warrants in connection with the acquisition of Somaxon
in March 2013.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Stock Option Plans</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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 7.0 million. 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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Stock-Based Compensation</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The Company currently uses the Black-Scholes
option pricing model to determine the fair value of its stock options. The determination of the fair value of stock-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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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:</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Three Months Ended</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Six Months Ended</b></font></td>
<td style="text-align: center"> </td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="text-align: center"> </td></tr>
<tr style="vertical-align: bottom">
<td style="width: 51%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td>
<td style="width: 1%; text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Weighted average expected</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     stock price volatility</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">73.2 </font></td>
<td><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">75.5 </font></td>
<td><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">73.3 </font></td>
<td><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">74.5 </font></td>
<td><font style="font-size: 10pt">%</font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Estimated dividend yield</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td><font style="font-size: 10pt">%</font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Risk-free interest rate</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1.6 </font></td>
<td><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">2.0 </font></td>
<td><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1.6 </font></td>
<td><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1.9 </font></td>
<td><font style="font-size: 10pt">%</font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Expected life of option (in years)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">6.3 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">6.3 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">6.3 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">6.2 </font></td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Weighted average grant date</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     fair value per option</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">5.16 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">4.59 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">5.59 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">2.74 </font></td>
<td style="text-align: right"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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.  </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Stock-based compensation expense was $1.2
million and $3.1 million for the three and six months ended June 30, 2015 and $740,000 and $2.5 million for the three and six months
ended June 30, 2014, respectively. Stock-based compensation expense for the periods presented are included within the selling,
general and administrative expenses in the consolidated statements of operations.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Stock Options</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">As of June 30, 2015, approximately 5.4 million
options are outstanding that have been issued to current officers and employees under the Company's 2007 Stock Option Plan and
the 2009 Plan. As of June 30, 2015, there was approximately $12.8 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 3.3 years.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The following table shows the option activity,
described above, during the six months ended June 30, 2015 (share and intrinsic values in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Weighted Average</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Average</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Remaining</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Aggregate</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Exercise</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Contractual Life</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Intrinsic</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Shares</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Price</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>years</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Value</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Options Outstanding at December 31, 2014</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">4,551 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">5.35 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Granted</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1,088 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">8.49 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Exercised</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(39)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">3.92 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">211 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Cancelled</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(208)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">8.68 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Expired</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Options outstanding at June 30, 2015</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">5,392 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">5.86 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">8.9 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">7,227 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Options vested and expected to </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     vest as of June 30, 2015</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">4,578 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">5.80 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">8.8 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">6,293 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Options vested and exercisable as of June 30, 2015</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1,044 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">4.85 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">8.0 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">1,910 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Restricted Stock</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The following table shows the Company's non-vested
restricted stock activity during the six months ended June 30, 2015 (share and intrinsic values in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Weighted Average</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Aggregate</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Grant Date Fair</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Intrinsic</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 61%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Shares</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Value</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Value</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Non-vested restricted stock outstanding at December 31, 2014</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">140 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">4.52 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Granted</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Vested</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(56)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">6.09 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">539 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Forfeited</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">(19)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">3.16 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Non-vested restricted stock outstanding at June 30, 2015</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">65 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">3.56 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">As of June 30, 2015, there was approximately
$0 of total unrecognized compensation cost related to non-vested restricted stock issued to employees and directors of the Company
due to the acceleration of restricted stock expense related to the restructuring during the six months ended June 30, 2015.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"></p><p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Note 10. Income Taxes</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The Company's income tax benefit was $3.6
million and $3.7 million for the three months ended June 30, 2015 and 2014, respectively and $8.2 million and $9.6 million for
the six months ended June 30, 2015 and 2014, respectively. The Company's effective tax rate was 12.7% for the six months ended
June 30, 2015, compared to an estimated annual effective rate of 18.2%. The difference between the estimated annual rate and the
June 30, 2015 effective tax rate is primarily due to expenses recorded for financial reporting purposes that were treated as nondeductible
and discrete for the three months ended June 30, 2015.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Our deferred tax assets are comprised primarily
of US federal net operating losses and accruals. A substantial portion of the deferred tax liability at June 30, 2015 relates to
the difference between the financial statement and tax basis of the intangibles acquired in the Cypress acquisition. The deferred
tax liability related to these Cypress intangibles is reduced on an annual basis by the financial statement amortization of such
intangibles.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Income tax returns subject to review by taxing
authorities include 2010, 2011, 2012 and 2013.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p><p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0"><font style="font: 8pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Note 11. Commitments and Contingencies</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Legal Proceedings</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The Company is subject to various claims and
litigation arising in the ordinary course of business. In the opinion of management, the outcome of such matters will not have
a material effect on the Company's financial position or results of operations.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Other Commitments and Contingencies </i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">In July 2012 and January 2013, Somaxon settled
two patent litigation claims with parties seeking to market generic equivalents of Silenor.  As of June 30, 2015, remaining
payment obligations owed to Somaxon under these settlement agreements are $2.3 million, payable in equal annual installments of
$250,000 through 2019, and equal installments of $500,000 through 2017.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">In connection with the acquisition of Treximet,
the Company is responsible for the payment of royalties to Pozen of 18% of 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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font: 10pt Times New Roman, Times, Serif">GSK
has claimed that the Company owes GSK damages relating to an alleged breach by the Company of a covenant contained in the Asset
Purchase and Sale Agreement dated as of May 13, 2014 by and among GSK and its affiliates and the Company pertaining to a pre-existing
customer agreement. The Company and GSK have entered into an Interim Settlement Agreement under which the Company will continue
to make payments to GSK and escrow additional funds and the parties will submit the dispute to binding arbitration. The Company
has paid to GSK approximately $7.4 million through July 31, 2015 and intends to deposit an additional approximately $4.4 million
into an escrow account on account of the settlement of disputed amounts. The amounts paid by the Company to GSK and escrowed represent
approximately 57% of the amounts GSK claims are owed to them as a result of the Company's alleged breach. The amounts paid and
to be escrowed by the Company for 2015 GSK claims are consistent with the amounts accrued by the Company for managed care rebates
and fees during the three and six months ended June 30, 2015. While the Company intends to vigorously contest GSK's allegations
that its damages are a result of the Company's breach and that they are compensable under the Asset Purchase and Sale Agreement
or otherwise, any material liability resulting from this claim could negatively impact the Company's financial results.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><font style="font-size: 10pt"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><font style="font-size: 10pt"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"></p><p style="margin: 0pt; font: 8pt Times New Roman, Times, Serif"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Note 12. Restructuring </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">On March 16, 2015, the Company decided to
institute an initiative to restructure operations and shut down the Charleston, South Carolina site. This step was done to consolidate
operations within the Company's headquarters located in Morristown, New Jersey.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The restructuring expenses during the three
and six months ended June 30, 2015 was a reduction of $108,000 and a charge of $1.2 million, respectively. The charge during the
six months ended June 30, 2015 was comprised of $545,000 in severance related cash expenses, and $653,000 for the modification
and accelerated vesting of options and awards under existing employee agreements. Associated severance payments are anticipated
to be paid by December 31, 2015.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">A summary of accrued restructuring costs,
included as a component of accounts payable and accrued expenses on the condensed consolidated balance sheet, is as follows (in
thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="width: 26%; text-align: right"> </td>
<td style="width: 2%; text-align: right"> </td>
<td style="width: 7%; text-align: right"> </td>
<td style="width: 17%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>December 31,</b></font><br />
<font style="font-size: 10pt"><b>2014</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Charges</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Cash</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Non-cash</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font><br />
<font style="font-size: 10pt"><b>2015</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Restructuring Costs</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">1,197 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(28)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(653)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">516 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="margin: 0pt; font: 8pt Times New Roman, Times, Serif"></p>
<p style="margin: 0pt; font: 8pt Times New Roman, Times, Serif"></p><p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Principles of Consolidation</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The condensed consolidated financial statements
include the accounts of Pernix's wholly-owned subsidiaries Pernix Therapeutics, LLC, GTA GP, Inc., GTA LP, Inc., Gaine, Inc., Macoven,
Pernix Manufacturing, LLC, ("PML") (closed on sale on April 21, 2014), Respicopea, Inc., Cypress, Cypress' subsidiary,
Hawthorn Pharmaceuticals, Inc., Pernix Sleep, Inc., also known as Somaxon Pharmaceuticals, Inc., or Somaxon, Pernix Ireland Limited
and Pernix Ireland Pain Limited. Transactions between and among the Company and its consolidated subsidiaries are eliminated.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"></p><p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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 (including our Regions Trust Account, which invests in short-term securities consisting of sweep accounts, money market
accounts and money market mutual funds), notes receivable, and our credit facility. The carrying values of these assets and liabilities
approximate their fair value due to their short-term nature.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"></p><p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The preparation of the 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 condensed consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period in conformity with U.S. generally accepted accounting principles.
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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"></p>
<p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0"> </p><p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The Company's customers consist of drug wholesalers,
retail drug stores, mass merchandisers and grocery store pharmacies in the United States. The Company primarily sells its products
directly to large national drug wholesalers, which in turn resell the products to smaller or regional wholesalers, retail pharmacies,
chain drug stores, and other third parties.  The following tables list the Company's customers that individually comprised
greater than 10% of total gross product sales for the three and six months ended June 30, 2015 and 2014, or 10% of total accounts
receivable as of June 30, 2015 and December 31, 2014.</p>
<p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0"></p>
<p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0"></p><p style="font: 8pt/normal Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">In connection with the acquisitions of Cypress
and Somaxon, the Company adjusted the predecessor cost basis, increasing inventory to fair value as required by Accounting Standards
Codification ("ASC") 820, <i>Fair Value Measurements and Disclosures</i>.  As a result, the Company recorded adjustments
to increase the inventory to fair value in the amount of $8.6 million and $695,000 at the time of acquisition for Cypress and Somaxon,
respectively.  For the three months ended June 30, 2015 and 2014, $0 and $774,000 of the increase in the basis of the inventory
was amortized and included in cost of product sales. For the six months ended June 30, 2015 and 2014, $97,000 and $2.4 million,
of the increase in the basis of the inventory was amortized and included in cost of product sales, as the inventory was subsequently
sold. The balance remaining of the increase in the basis of the inventory acquired was $0 as of June 30, 2015.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"></p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">In accordance with the fair value hierarchy
described above, the following table shows the fair value of the Company's financial assets that are required to be measured at
fair value as of June 30, 2015 and December 31, 2014 (in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="10" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>As of June 30, 2015</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Level 1</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Level 2</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Level 3</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Total</b></font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Money market fund and trust cash sweep investments <sup>(1)</sup> </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">45,208 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">45,208 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Total assets</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">45,208 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">45,208 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="10" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>As of December 31, 2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Level 1</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Level 2</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Level 3</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Total</b></font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Money market fund and trust cash sweep investments <sup>(1)</sup> </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">26,297 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">26,297 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Total assets</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">26,297 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">26,297 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr>
<td style="vertical-align: top; width: 2%; padding: 0.75pt"><font style="font-size: 10pt">(1)</font></td>
<td style="vertical-align: bottom; width: 98%; padding: 0.75pt"><font style="font-size: 10pt">The Company's money market and trust cash sweep investments are included in cash and cash equivalents within the Condensed Consolidated Balance Sheet.</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding: 0.75pt"> </td>
<td style="padding: 0.75pt; font-size: 12pt"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The fair and carrying value of our debt instruments
are detailed as follows (in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>As of June 30, 2015</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>As of December 31, 2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Fair</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Carrying</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Fair</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Carrying</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Value</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Value</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Value</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Value</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">4.25% Convertible Notes</font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">96,736 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">102,136 </font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Derivative liability</font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">19,777 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">19,777 </font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">8.00% Convertible Notes</font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">129,320 </font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">65,000 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Contingent consideration</font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">29,327 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">29,327 </font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Treximet Notes</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">182,332 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">220,000 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">167,114 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">220,000 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Total</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">328,172 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">371,240 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">296,434 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">285,000 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"></p>0.930.870.27.190.410.38.240.300.930.86.370.400.290.250.270.21.41.290.24.420.28.18.93.890000-1.23-0.42-0.62-0.164520800026297000452080002629700000004520800026297000452080002629700000002942000222000012007000126990009744000122000004100082000139900041700009700000038187700030048900012100014500013360001579000126750001352300040200085200040000040000079900000483000002870430002356900008030000030157700048700000251789000-85811000-45199000-379000-355000-2551000-2308000-4906000-4058000-4792000-43420000000-73183000-341360000-858110000-451990004676880003456880005000005000003887000388700017581000175810005194000519400040000040000079900000483000003602260002698260008030000038738800048700000296988000P4Y8M8DP11YP8YP11YP5Y3M18DP4Y3M18DP11YP8YP11YP5Y3M18DP4Y4M24D301577000167770001777800028585000942140009588000048343000406000004000000222000001900000-4589000-9968000-39030000-32945000-8579000-96910003300770002923450007941000734500006500000022000000022000000001021360003121230002850000001795400073450000.7330.7450.7320.7555.592.745.164.59P6Y3M18DP6Y2M12DP6Y3M18DP6Y3M18D0.0160.0190.0160.0200000<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">In July 2012 and January 2013, Somaxon settled
two patent litigation claims with parties seeking to market generic equivalents of Silenor.  As of June 30, 2015, remaining
payment obligations owed to Somaxon under these settlement agreements are $2.3 million, payable in equal annual installments of
$250,000 through 2019, and equal installments of $500,000 through 2017.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font: 10pt Times New Roman, Times, Serif">GSK
has claimed that the Company owes GSK damages relating to an alleged breach by the Company of a covenant contained in the Asset
Purchase and Sale Agreement dated as of May 13, 2014 by and among GSK and its affiliates and the Company pertaining to a pre-existing
customer agreement. The Company and GSK have entered into an Interim Settlement Agreement under which the Company will continue
to make payments to GSK and escrow additional funds and the parties will submit the dispute to binding arbitration. The Company
has paid to GSK approximately $7.4 million through July 31, 2015 and intends to deposit an additional approximately $4.4 million
into an escrow account on account of the settlement of disputed amounts. The amounts paid by the Company to GSK and escrowed represent
approximately 57% of the amounts GSK claims are owed to them as a result of the Company's alleged breach. The amounts paid and
to be escrowed by the Company for 2015 GSK claims are consistent with the amounts accrued by the Company for managed care rebates
and fees during the three and six months ended June 30, 2015. While the Company intends to vigorously contest GSK's allegations
that its damages are a result of the Company's breach and that they are compensable under the Asset Purchase and Sale Agreement
or otherwise, any material liability resulting from this claim could negatively impact the Company's financial results.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font-size: 10pt"> </font></p>4000000516000011970000-1080000-28000-65300030000019200024400010000019321000369000099230002334000940500011755000-406000090000610378045.358.493.928.6805.865.804.85P8Y10M24DP8Y9M18DP8Y629300045510001088000-39000-208000053920004578000104400021100072270001910000140000650000-56000-190004.523.5606.093.165390001795400000003399870003579410000-1530000-129400001177000041000285000194900001500000174360001805600014619000180560008594000180560004383000180560001360000176000015240000180400000043650001107300010002000030470002590000100020000197770000293270000000.010.01100000001000000000008703000087030000-87030000195000000-195000000-19500000021500000809270000<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Note 14. Supplemental Cash Flow Information</b></p>
<table cellspacing="0" cellpadding="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Six Months Ended</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 72%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 12%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 12%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt"><i>Supplemental disclosures of Cash Flow Information:</i></font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Cash paid for income taxes, net</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">68 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">561 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Cash paid for interest</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">14,228 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">2,617 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt"><i>Supplemental disclosures of Non-cash Investing and Financing Activities:</i></font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Conversion of 8.00% Convertible notes</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">60,172 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">- </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Issuance of 1,682,086 shares to Zogenix for Zohydro acquisition</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">11,926 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">- </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Acquisition of license - contract payable</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">- </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">2,500 </font></td></tr>
</table>
<p style="font: 12pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 12pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 12pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 12pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 12pt Times New Roman, Times, Serif; margin: 0"></p><p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Note 13. Business Combination </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Consideration paid by the Company for the
business it purchased is allocated to the assets and liabilities acquired based upon their estimated fair values as of the date
of the acquisition. The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed
is recorded as goodwill.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Zohydro ER® Acquisition</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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,
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 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 ZX007 abuse-deterrent extended-release
hydrocodone tablet and up to $271.0 million in potential sales milestones if the Zohydro ER® product line achieve certain agreed-upon
net sales targets.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Zohydro ER® is an extended-release form
of hydrocodone 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. Zohydro ER® does not contain acetaminophen, unlike many immediate-release
hydrocodone products, such as Vicodin and Lortab, reducing the risk for potential liver toxicity due to overexposure of acetaminophen.
The active ingredient, hydrocodone, is the most commonly prescribed opioid in the U.S., with over 114 million prescriptions in
2014. The FDA approved the NDA for Zohydro ER® in October 2013 and the product was launched in March 2014.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The Zohydro ER® product line acquisition
was accounted for as a business combination in accordance with Accounting Standards Codification ("ASC") No. 805 "Business
Combinations" ("ASC 805") which, among other things, requires assets acquired and liabilities assumed to be measured
at their acquisition date fair values. The purchase price allocation is preliminary with respect to taxes and certain accruals
and includes the use of estimates based on information that was available to management at the time these unaudited condensed consolidated
financial statements were prepared. The Company believes the estimates used are reasonable and the significant effects of the Zohydro
ER® acquisition are properly reflected. However, the estimates are subject to change as additional information becomes available
and is assessed by the Company.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The following table summarizes the consideration
paid to acquire Zohydro ER® and the estimated values of assets acquired and liabilities assumed in the accompanying unaudited
condensed consolidated balance sheet based on their fair values on April 24, 2015 (in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: top">
<td style="width: 87%"><font style="font-size: 10pt"><i>Purchase price:</i></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; text-align: right"> </td></tr>
<tr>
<td style="vertical-align: top"><font style="font-size: 10pt">Cash consideration paid to Zogenix </font></td>
<td style="vertical-align: top; text-align: right"> </td>
<td style="vertical-align: top; text-align: right"> </td>
<td style="vertical-align: bottom; text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">70,000 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Escrow fund deposited at the time of closing <i>(i)</i> </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">10,000 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Purchased product inventory <i>(ii)</i> </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">927 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Common stock issued <i>(iii)</i> </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">11,926 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Fair value of contingent consideration payable to Zogenix <i>(iv)</i> </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">29,327 </font></td></tr>
<tr>
<td style="vertical-align: top"><font style="font-size: 10pt">Total purchase price</font></td>
<td style="vertical-align: top; text-align: right"> </td>
<td style="vertical-align: top; text-align: right"> </td>
<td style="vertical-align: bottom; text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="vertical-align: top; border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">122,180 </font></td></tr>
<tr style="vertical-align: top">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt"><i>Estimated fair value of assets acquired:</i></font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Intangible assets <i>(v)</i>:</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr>
<td style="vertical-align: top"><font style="font-size: 10pt">     Zohydro - Developed technology</font></td>
<td style="vertical-align: top"> </td>
<td style="vertical-align: top"> </td>
<td style="vertical-align: bottom; text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">67,400 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     IPR&D </font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">54,600 </font></td></tr>
<tr>
<td style="vertical-align: top"><font style="font-size: 10pt">Amount attributable to assets acquired</font></td>
<td style="vertical-align: top; text-align: right"> </td>
<td style="vertical-align: top; text-align: right"> </td>
<td style="vertical-align: bottom; text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">122,000 </font></td></tr>
<tr>
<td style="vertical-align: top"><font style="font-size: 10pt">Goodwill <i>(vi)</i> </font></td>
<td style="vertical-align: top; text-align: right"> </td>
<td style="vertical-align: top; text-align: right"> </td>
<td style="vertical-align: bottom; text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">180 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: top">
<td style="width: 1%; padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"><i>(i)</i></font></td>
<td style="width: 99%; padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif">In accordance with the asset
purchase agreement, the Company has deposited $10.0 million in an escrow fund to be held for a period of 12 months from the
closing date as a security to pay, or be applied against, any losses incurred by the Company that are subject to the general
representations, warranties and indemnification obligations of Zogenix. The Company is considered to be the legal and tax
owner of the fund until the expiration of the escrow period of 12 months. Accordingly, the amount of $10 million in the escrow
fund is recognized as restricted cash and consideration payable to Zogenix. Restricted cash is presented separately under
current assets while the consideration payable is included in current liabilities. </font></td></tr>
<tr style="vertical-align: top">
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: top">
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"><i>(ii)</i></font></td>
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif">Under the asset purchase agreement, the
Company purchased a specified quantity of Generation 1 version of Zohydro ER® product line from Zogenix on the closing
date for $927,000. Shortly before the closing date, Generation 2 version of Zohydro ER® with Beadtek was approved by
FDA and was announced by the Company to be launced in immediate future. This announcement for launch of Zohydro ER® with
Beadtek made the Generation 1 version of Zohydro ER® obsolete and unsellable in the market. As a result, the fair value
of the Generation 1 product inventory acquired from Zogenix has been estimated to be de-minimis on the closing date. </font></td></tr>
<tr style="vertical-align: top">
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: top">
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"><i>(iii)</i></font></td>
<td style="padding: 0.75pt"><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font: 10pt Times New Roman, Times, Serif">Under
the asset purchase agreement, the number of common shares issued to Zogenix equaled $20 million
divided by closing price of common stock on a trading day immediately preceding the purchase agreement
date. The closing price of common stock of Pernix on March 9, 2015 (i.e. trading day immediately
preceding the purchase agreement date) was $11.89. Accordingly, Pernix issued 1,682,086 shares
of common stock to to Zogenix ($20 million/$11.89 per share).</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font: 10pt Times New Roman, Times, Serif">The
common stock issued by the Company is measured at fair value at the closing date (i.e. April 24, 2015) in accordance with
the measurement guidance in ASC 805. The closing price of common stock of the Company on closing date was $7.09 and accordingly
the fair value of common stock issued by the Company on the closing date was determined to be $11.9 million. $16,820 representing
the par value of 1,682,086 shares at $0.01 per share was recorded in common stock and the remaining amount of $11.9 million
was recorded in Additional paid-in-capital.</font></p></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: top">
<td style="width: 1%; padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"><i>(iv)</i></font></td>
<td style="width: 99%; padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif">Contingent consideration includes
(a) $12.5 million milestone payment payable upon approval of ZX007 abuse-deterrent extended-release hydrocodone tablet, and
(b) up to $271 million payable if the Zohydro ER® product line achieves certain agreed-upon net sales targets. Each type
of contingent consideration has been recognized as a separate unit of account. In accordance with the provisions of ASC 805-30-25-5,
each unit of contingent consideration is recognized at the acquisition date fair value. The acquisition date fair value of
the contingent consideration linked to FDA approval is $10.3 million and the fair value of the contingent consideration linked
to achievement of net sales target is $19.0 million. The total contingent consideration of $29.3 million is classified in
other long-term liabilities. Such fair values are determined based on probabilistic model with weights assigned on likelihood
of the Company achieving the sales target in future. Each unit of contingent consideration is classified as a liability in
the balance sheet and would be subsequently measured at fair value on each reporting date. Any change in fair values between
the reporting dates would be recognized in the consolidated statement of operations. </font></td></tr>
<tr style="vertical-align: top">
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: top">
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"><i>(v)</i></font></td>
<td style="padding: 0.75pt"><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font: 10pt Times New Roman, Times, Serif">As
of the effective time of the acquisition, identifiable intangible assets are required to be measured
at fair value and these acquired assets could include assets that are not intended to be used
or sold or that are intended to be used in a manner other than their highest and best use. For
purposes of these consolidated financial statements, it is assumed that all assets will be used
in a manner that represents the highest and best of those assets, but it is not assumed that any
market synergies will be achieved.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font: 10pt Times New Roman, Times, Serif">The
fair value of identifiable assets is determined primarily using the "income method," which starts with a forecast
of all expected future cash flows. Some of the more significant assumptions inherent in the development of intangible
asset values, from the perspective of a market participant, include: the amount and timing of projected future cash flows
(including net revenue, cost of product sales, research and development costs, sales and marketing expenses, income tax
expense, capital expenditures and working capital requirements) as well as estimated contributory asset charges; the discount
rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset's life cycle and
the competitive trends impacting the asset, among other factors.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font: 10pt Times New Roman, Times, Serif">The
consolidated financial statements include estimated identifiable intangible assets representing core technology intangibles
valued at $67.4 million, and in-process research and development ("IPR&D") intangibles valued at $54.6 million.
The core technology intangible assets represent developed technology of products approved for sales in the market, which
we refer to as marketed products, and have a finite useful lives. They are amortized on a straight-line basis over a weighted
average of 7 years. These estimates will be adjusted accordingly if the final identifiable intangible asset valuation
generates results, including corresponding useful lives and related amortization methods, which differ from the pro forma
estimates, or if the above scope of intangible assets is modified. The IPR&D are considered indefinite-lived intangible
assets until the completion of abandonment of the associated research and development efforts. Accordingly, during the
development period, these assets are not amortized but subject to an annual impairment review. The final valuation is
expected to be completed within 12 months from the completion of the acquisition.</font></p></td></tr>
<tr style="vertical-align: top">
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: top">
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"><i>(vi)</i></font></td>
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif">Goodwill is calculated as the difference
between the acquisition date fair value of the consideration expected to be transferred and the values assigned to the assets
acquired. Goodwill is not amortized but tested for impairment on an annual basis or when indications for impairment exist.
</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font: 10pt Times New Roman, Times, Serif"><i>Pro
forma Impact of Acquisition</i></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font-size: 10pt">The following
pro forma combined results of operations are provided for the three months and six months ended June 30, 2015 and 2014, as though
the Zohydro ER® acquisition had been completed as of January 1, 2014. These supplemental pro forma results of operations
are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved
by the combined company for the periods presented or that may be achieved by the combined company in the future. The pro forma
results of operations do not include any cost savings or other synergies that resulted, or may result, from the Zohydro ER®
acquisition or any estimated costs that will be incurred to integrate Zohydro ER® product line. Future results may vary significantly
from the results in this pro forma information because of future events and transactions, as well as other factors (in thousands,
except for per share data):</font></p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Three Months Ended</b></font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: center"><font style="font-size: 10pt"> </font></td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Six Months Ended</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: center"><font style="font-size: 10pt"> </font></td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="width: 1%; text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="width: 1%; text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="width: 1%; text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td>
<td style="width: 1%; text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="width: 1%; text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="width: 1%; text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>(unaudited)</b></font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: center"><font style="font-size: 10pt"> </font></td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>(unaudited)</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Revenue</font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">50,943 </font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">19,807 </font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">89,838 </font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">39,143 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Net loss</font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(35,011)</font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(24,077)</font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(75,571)</font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(53,504)</font></td></tr>
<tr style="vertical-align: bottom">
<td colspan="7"><font style="font-size: 10pt">Pro forma net loss per common share:</font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Basic</font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.67)</font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.64)</font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(1.66)</font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(1.42)</font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Diluted</font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.67)</font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.64)</font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(1.66)</font></td>
<td style="text-align: right"><font style="font-size: 10pt"> </font></td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(1.42)</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><font style="font-size: 10pt"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font-size: 10pt">The Company's
historical financial information was adjusted to give effect to the pro forma events that were directly attributable to the Zohydro
ER® acquisition and factually supportable. The unaudited pro forma consolidated results include historical revenues and expenses
of assets acquired in the acquisition with the following adjustments:</font></p>
<ul>
<li style="margin: 0; font-size: 10pt"><font style="font: 10pt Times New Roman, Times, Serif">Adjustment to recognize incremental
amortization expense based on the fair value of intangibles acquired;</font></li>
<li style="margin: 0; font-size: 10pt"><font style="font: 10pt Times New Roman, Times, Serif">Adjustment to recognize incremental
interest expense and amortization of debt issuance costs for debt issued in connection with the acquisition</font></li>
<li style="margin: 0; font-size: 10pt"><font style="font: 10pt Times New Roman, Times, Serif">Eliminate transaction costs and
non-recurring charges directly related to the acquisition that were included in the historical results of operations for Pernix</font></li>
<li style="margin: 0; font-size: 10pt"><font style="font: 10pt Times New Roman, Times, Serif">Adjustment to recognize pro forma
income tax based on income tax benefit on the amortization of intangible asset at the statutory tax rate of Ireland (12.50%),
and the income tax benefit on the interest expense at the statutory tax rate of the United States (37.21%).</font></li>
</ul>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font-size: 10pt">For the three
months and six months ended June 30, 2015, the Company has recognized revenue and net loss for Zohydro ER® subsequent to
the closing of April 24, 2015 in the amount of $4.0 million and $5.3 million respectively. Non-recurring transaction costs of
$3.1 million related to the acquisition for the three months and six months ended June 30, 2015 are included in the condensed
consolidated statement of operations in selling, general and administrative expenses; these non-recurring transaction costs have
been excluded from the pro forma results in the above table.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><font style="font-size: 10pt"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"></p><p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="font-size: 12pt; text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Six Months Ended</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 70%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 13%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 13%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt"><i>Supplemental disclosures of Cash Flow Information:</i></font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Cash paid for income taxes, net</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">68 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">561 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Cash paid for interest</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">14,228 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">2,617 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt"><i>Supplemental disclosures of Non-cash Investing and Financing Activities:</i></font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Conversion of 8.00% Convertible notes</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">60,172 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">- </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Issuance of 1,682,086 shares to Zogenix for Zohydro acquisition</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">11,926 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">- </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Acquisition of license - contract payable</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">- </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">2,500 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"></p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The following table summarizes the consideration
paid to acquire Zohydro ER® and the estimated values of assets acquired and liabilities assumed in the accompanying unaudited
condensed consolidated balance sheet based on their fair values on April 24, 2015 (in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: top">
<td style="width: 87%"><font style="font-size: 10pt"><i>Purchase price:</i></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; text-align: right"> </td></tr>
<tr>
<td style="vertical-align: top"><font style="font-size: 10pt">Cash consideration paid to Zogenix </font></td>
<td style="vertical-align: top; text-align: right"> </td>
<td style="vertical-align: top; text-align: right"> </td>
<td style="vertical-align: bottom; text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">70,000 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Escrow fund deposited at the time of closing <i>(i)</i> </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">10,000 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Purchased product inventory <i>(ii)</i> </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">927 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Common stock issued <i>(iii)</i> </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">11,926 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Fair value of contingent consideration payable to Zogenix <i>(iv)</i> </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">29,327 </font></td></tr>
<tr>
<td style="vertical-align: top"><font style="font-size: 10pt">Total purchase price</font></td>
<td style="vertical-align: top; text-align: right"> </td>
<td style="vertical-align: top; text-align: right"> </td>
<td style="vertical-align: bottom; text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="vertical-align: top; border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">122,180 </font></td></tr>
<tr style="vertical-align: top">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt"><i>Estimated fair value of assets acquired:</i></font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Intangible assets <i>(v)</i>:</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr>
<td style="vertical-align: top"><font style="font-size: 10pt">     Zohydro - Developed technology</font></td>
<td style="vertical-align: top"> </td>
<td style="vertical-align: top"> </td>
<td style="vertical-align: bottom; text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">67,400 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     IPR&D </font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">54,600 </font></td></tr>
<tr>
<td style="vertical-align: top"><font style="font-size: 10pt">Amount attributable to assets acquired</font></td>
<td style="vertical-align: top; text-align: right"> </td>
<td style="vertical-align: top; text-align: right"> </td>
<td style="vertical-align: bottom; text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">122,000 </font></td></tr>
<tr>
<td style="vertical-align: top"><font style="font-size: 10pt">Goodwill <i>(vi)</i> </font></td>
<td style="vertical-align: top; text-align: right"> </td>
<td style="vertical-align: top; text-align: right"> </td>
<td style="vertical-align: bottom; text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">180 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: top">
<td style="width: 1%; padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"><i>(i)</i></font></td>
<td style="width: 99%; padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif">In accordance with the asset
purchase agreement, the Company has deposited $10.0 million in an escrow fund to be held for a period of 12 months from the
closing date as a security to pay, or be applied against, any losses incurred by the Company that are subject to the general
representations, warranties and indemnification obligations of Zogenix. The Company is considered to be the legal and tax
owner of the fund until the expiration of the escrow period of 12 months. Accordingly, the amount of $10 million in the escrow
fund is recognized as restricted cash and consideration payable to Zogenix. Restricted cash is presented separately under
current assets while the consideration payable is included in current liabilities. </font></td></tr>
<tr style="vertical-align: top">
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: top">
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"><i>(ii)</i></font></td>
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif">Under the asset purchase agreement, the
Company purchased a specified quantity of Generation 1 version of Zohydro ER® product line from Zogenix on the closing
date for $927,000. Shortly before the closing date, Generation 2 version of Zohydro ER® with Beadtek was approved by FDA
and was announced by the Company to be launced in immediate future. This announcement for launch of Zohydro ER® with Beadtek
made the Generation 1 version of Zohydro ER® obsolete and unsellable in the market. As a result, the fair value of the
Generation 1 product inventory acquired from Zogenix has been estimated to be de-minimis on the closing date. </font></td></tr>
<tr style="vertical-align: top">
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: top">
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"><i>(iii)</i></font></td>
<td style="padding: 0.75pt"><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font: 10pt Times New Roman, Times, Serif">Under
the asset purchase agreement, the number of common shares issued to Zogenix equaled $20 million
divided by closing price of common stock on a trading day immediately preceding the purchase agreement
date. The closing price of common stock of Pernix on March 9, 2015 (i.e. trading day immediately
preceding the purchase agreement date) was $11.89. Accordingly, Pernix issued 1,682,086 shares
of common stock to to Zogenix ($20 million/$11.89 per share).</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font: 10pt Times New Roman, Times, Serif">The
common stock issued by the Company is measured at fair value at the closing date (i.e. April 24, 2015) in accordance with
the measurement guidance in ASC 805. The closing price of common stock of the Company on closing date was $7.09 and accordingly
the fair value of common stock issued by the Company on the closing date was determined to be $11.9 million. $16,820 representing
the par value of 1,682,086 shares at $0.01 per share was recorded in common stock and the remaining amount of $11.9 million
was recorded in Additional paid-in-capital.</font></p></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: top">
<td style="width: 1%; padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"><i>(iv)</i></font></td>
<td style="width: 99%; padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif">Contingent consideration includes
(a) $12.5 million milestone payment payable upon approval of ZX007 abuse-deterrent extended-release hydrocodone tablet, and
(b) up to $271 million payable if the Zohydro ER® product line achieves certain agreed-upon net sales targets. Each type
of contingent consideration has been recognized as a separate unit of account. In accordance with the provisions of ASC 805-30-25-5,
each unit of contingent consideration is recognized at the acquisition date fair value. The acquisition date fair value of
the contingent consideration linked to FDA approval is $10.3 million and the fair value of the contingent consideration linked
to achievement of net sales target is $19.0 million. The total contingent consideration of $29.3 million is classified in
other long-term liabilities. Such fair values are determined based on probabilistic model with weights assigned on likelihood
of the Company achieving the sales target in future. Each unit of contingent consideration is classified as a liability in
the balance sheet and would be subsequently measured at fair value on each reporting date. Any change in fair values between
the reporting dates would be recognized in the consolidated statement of operations. </font></td></tr>
<tr style="vertical-align: top">
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: top">
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"><i>(v)</i></font></td>
<td style="padding: 0.75pt"><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font: 10pt Times New Roman, Times, Serif">As
of the effective time of the acquisition, identifiable intangible assets are required to be measured
at fair value and these acquired assets could include assets that are not intended to be used
or sold or that are intended to be used in a manner other than their highest and best use. For
purposes of these consolidated financial statements, it is assumed that all assets will be used
in a manner that represents the highest and best of those assets, but it is not assumed that any
market synergies will be achieved.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font: 10pt Times New Roman, Times, Serif">The
fair value of identifiable assets is determined primarily using the "income method," which starts with a forecast
of all expected future cash flows. Some of the more significant assumptions inherent in the development of intangible
asset values, from the perspective of a market participant, include: the amount and timing of projected future cash flows
(including net revenue, cost of product sales, research and development costs, sales and marketing expenses, income tax
expense, capital expenditures and working capital requirements) as well as estimated contributory asset charges; the discount
rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset's life cycle and
the competitive trends impacting the asset, among other factors.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font: 10pt Times New Roman, Times, Serif">The
consolidated financial statements include estimated identifiable intangible assets representing core technology intangibles
valued at $67.4 million, and in-process research and development ("IPR&D") intangibles valued at $54.6 million.
The core technology intangible assets represent developed technology of products approved for sales in the market, which
we refer to as marketed products, and have a finite useful lives. They are amortized on a straight-line basis over a weighted
average of 7 years. These estimates will be adjusted accordingly if the final identifiable intangible asset valuation
generates results, including corresponding useful lives and related amortization methods, which differ from the pro forma
estimates, or if the above scope of intangible assets is modified. The IPR&D are considered indefinite-lived intangible
assets until the completion of abandonment of the associated research and development efforts. Accordingly, during the
development period, these assets are not amortized but subject to an annual impairment review. The final valuation is
expected to be completed within 12 months from the completion of the acquisition.</font></p></td></tr>
<tr style="vertical-align: top">
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: top">
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif"><i>(vi)</i></font></td>
<td style="padding: 0.75pt"><font style="font: 10pt Times New Roman, Times, Serif">Goodwill is calculated as the difference
between the acquisition date fair value of the consideration expected to be transferred and the values assigned to the assets
acquired. Goodwill is not amortized but tested for impairment on an annual basis or when indications for impairment exist.
</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><font style="font-size: 10pt"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><font style="font-size: 10pt"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><font style="font-size: 10pt"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"></p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The following pro forma combined results
of operations are provided for the three months and six months ended June 30, 2015 and 2014, as though the Zohydro ER® acquisition
had been completed as of January 1, 2014. These supplemental pro forma results of operations are provided for illustrative purposes
only and do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods
presented or that may be achieved by the combined company in the future. The pro forma results of operations do not include any
cost savings or other synergies that resulted, or may result, from the Zohydro ER® acquisition or any estimated costs that
will be incurred to integrate Zohydro ER® product line. Future results may vary significantly from the results in this pro
forma information because of future events and transactions, as well as other factors (in thousands, except for per share data):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Three Months Ended</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Six Months Ended</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>(unaudited)</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>(unaudited)</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Revenue</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">50,943 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">19,807 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">89,838 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">39,143 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Net loss</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(35,011)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(24,077)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(75,571)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(53,504)</font></td></tr>
<tr style="vertical-align: bottom">
<td colspan="7"><font style="font-size: 10pt">Pro forma net loss per common share:</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Basic</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.67)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.64)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(1.66)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(1.42)</font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Diluted</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.67)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.64)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(1.66)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(1.42)</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"></p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Gross Product Sales:</b></p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Three Months Ended</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Six Months Ended</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">McKesson Corporation</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">37%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">40%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">41%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">38%</font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">AmerisourceBergen Drug Corporation</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">29%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">25%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">24%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">30%</font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Cardinal Health, Inc.</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">27%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">21%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">28%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">19%</font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Total</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">93%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">86%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">93%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">87%</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Accounts Receivable:</b></p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>December 31,</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 74%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 11%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 11%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">McKesson Corporation</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">41%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">29%</font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">AmerisourceBergen Drug Corporation</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">24%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">42%</font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Cardinal Health, Inc.</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">28%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">18%</font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Total</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">93%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">89%</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"></p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Inventories are stated at the lower of cost
or market. Inventories consist of the following (in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="width: 70%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 13%; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 13%; text-align: center"><font style="font-size: 10pt"><b>December 31,</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Raw materials</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">1,399 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">417 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Packaging materials</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">41 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">82 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Work-in-process</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">823 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Finshed goods</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">9,744 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">12,200 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Inventory, gross</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">12,007 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">12,699 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Reserve for obsolescence</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">(2,942)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">(2,220)</font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Inventory, net</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">9,065 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">10,479 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Intangible assets consist of the following
(in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="7" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>As of June 30, 2015</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Weighted</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Gross Carrying</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Accumulated</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Net Carrying</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Average Life </b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Amount </b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Amortization </b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Amount </b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Unamortized intangible assets:</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Trademark rights</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">Indefinite </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">400 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">400 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     In-process research and development</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">Indefinite</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">79,900 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">79,900 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Total unamortized intangible assets</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">80,300 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">80,300 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Amortized intangible assets:</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Patents</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">11.0 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">500 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(379)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">121 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Brand</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">8.0 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">3,887 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(2,551)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1,336 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Product licenses</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">11.0 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">17,581 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(4,906)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">12,675 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Non-compete and supplier contracts</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">5.3 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">5,194 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(4,792)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">402 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Acquired developed technologies</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">4.3 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">360,226 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">(73,183)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">287,043 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Total amortized intangible assets</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">387,388 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">(85,811)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">301,577 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Total intangible assets</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">467,688 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">(85,811)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">381,877 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="7" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>As of December 31, 2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Weighted</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Gross Carrying</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Accumulated</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Net Carrying</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Average Life </b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Amount </b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Amortization </b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Amount </b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Unamortized intangible assets:</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Trademark rights</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">Indefinite </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">400 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">400 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     In-process research and development</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">Indefinite</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">48,300 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">48,300 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Total unamortized intangible assets</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">48,700 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">48,700 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Amortized intangible assets:</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Patents</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">11.0 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">500 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(355)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">145 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Brand</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">8.0 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">3,887 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(2,308)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1,579 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Product licenses</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">11.0 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">17,581 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(4,058)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">13,523 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Non-compete and supplier contracts</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">5.3 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">5,194 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(4,342)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">852 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Acquired developed technologies</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"><font style="font-size: 10pt">4.4 years</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">269,826 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">(34,136)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">235,690 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Total amortized intangible assets</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">296,988 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">(45,199)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">251,789 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Total intangible assets</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">345,688 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">(45,199)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">300,489 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Estimated amortization expense related to
intangible assets with definite lives for each of the five succeeding years and thereafter is as follows (in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="width: 79%"><font style="font-size: 10pt">2015 (July - December)</font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="width: 10%; text-align: right"><font style="font-size: 10pt">48,343 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">2016</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">95,880 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">2017</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">94,214 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">2018</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">28,585 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">2019</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">17,778 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Thereafter</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">16,777 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Total</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">301,577 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Accrued allowances consist of the following
(in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="width: 70%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 13%; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 13%; text-align: center"><font style="font-size: 10pt"><b>December 31,</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Accrued returns allowance</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">8,579 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">9,691 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Accrued price adjustments</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">39,030 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">32,945 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Accrued government program rebates</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">4,589 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">9,968 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Total</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">52,198 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">52,604 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Debt consists of the following (in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="width: 70%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 13%; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 13%; text-align: center"><font style="font-size: 10pt"><b>December 31,</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Midcap Credit Facility</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">7,941 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">7,345 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">4.25% Convertible Notes</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">102,136 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">8.00% Convertible Notes</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">65,000 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Treximet Notes</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">220,000 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">220,000 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Total outstanding debt</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">330,077 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">292,345 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Less current portion</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">17,954 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">7,345 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Long term debt outstanding</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">312,123 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">285,000 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The following table represents the future
maturity schedule of the outstanding debt and line of credit (in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="width: 85%"><font style="font-size: 10pt">2015</font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="width: 10%; text-align: right"><font style="font-size: 10pt">17,954 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">2016</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">2017</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">2018</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">2019</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Thereafter</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">339,987 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Total maturities</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">357,941 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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:</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Three Months Ended</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="text-align: center"><font style="font-size: 10pt"><b>Six Months Ended</b></font></td>
<td style="text-align: center"> </td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td colspan="4" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="text-align: center"> </td></tr>
<tr style="vertical-align: bottom">
<td style="width: 51%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td>
<td style="width: 1%; text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Weighted average expected</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     stock price volatility</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">73.2 </font></td>
<td><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">75.5 </font></td>
<td><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">73.3 </font></td>
<td><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">74.5 </font></td>
<td><font style="font-size: 10pt">%</font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Estimated dividend yield</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td><font style="font-size: 10pt">%</font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Risk-free interest rate</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1.6 </font></td>
<td><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">2.0 </font></td>
<td><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1.6 </font></td>
<td><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1.9 </font></td>
<td><font style="font-size: 10pt">%</font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Expected life of option (in years)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">6.3 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">6.3 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">6.3 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">6.2 </font></td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Weighted average grant date</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     fair value per option</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">5.16 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">4.59 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">5.59 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">2.74 </font></td>
<td style="text-align: right"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The following table shows the option activity,
described above, during the six months ended June 30, 2015 (share and intrinsic values in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Weighted Average</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Average</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Remaining</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Aggregate</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Exercise</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Contractual Life</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Intrinsic</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Shares</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Price</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>years</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Value</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Options Outstanding at December 31, 2014</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">4,551 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">5.35 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Granted</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1,088 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">8.49 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Exercised</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(39)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">3.92 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">211 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Cancelled</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(208)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">8.68 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Expired</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Options outstanding at June 30, 2015</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">5,392 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">5.86 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">8.9 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">7,227 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Options vested and expected to </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     vest as of June 30, 2015</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">4,578 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">5.80 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">8.8 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">6,293 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Options vested and exercisable as of June 30, 2015</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">1,044 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">4.85 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">8.0 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">1,910 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The following table shows the Company's non-vested
restricted stock activity during the six months ended June 30, 2015 (share and intrinsic values in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Weighted Average</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Aggregate</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Grant Date Fair</b></font></td>
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td style="text-align: center"><font style="font-size: 10pt"><b>Intrinsic</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 61%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Shares</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Value</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Value</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Non-vested restricted stock outstanding at December 31, 2014</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">140 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">4.52 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Granted</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Vested</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">(56)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">6.09 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">539 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Forfeited</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">(19)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">3.16 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Non-vested restricted stock outstanding at June 30, 2015</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">65 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">3.56 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">A summary of accrued restructuring costs,
included as a component of accounts payable and accrued expenses on the condensed consolidated balance sheet, is as follows (in
thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="width: 24%; text-align: right"> </td>
<td style="width: 3%; text-align: right"> </td>
<td style="width: 3%; text-align: right"> </td>
<td style="width: 22%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>December 31,</b></font><br />
<font style="font-size: 10pt"><b>2014</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Charges</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Cash</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Non-cash</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 10%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font><br />
<font style="font-size: 10pt"><b>2015</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Restructuring Costs</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">1,197 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(28)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(653)</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">516 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">In connection with the acquisition of Treximet,
the Company is responsible for the payment of royalties to Pozen of 18% of net sales with quarterly minimum royalty amounts of
$4.0 million for the calendar quarters commencing on January 1, 2015 and ending on March 31, 2018.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>8230000<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Note 8. Debt and Lines of Credit </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Debt consists of the following (in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="width: 70%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 13%; text-align: center"><font style="font-size: 10pt"><b>June 30,</b></font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 13%; text-align: center"><font style="font-size: 10pt"><b>December 31,</b></font></td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2015</b></font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2014</b></font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Midcap Credit Facility</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">7,941 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">7,345 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">4.25% Convertible Notes</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">102,136 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">8.00% Convertible Notes</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">65,000 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Treximet Notes</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">220,000 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">220,000 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">     Total outstanding debt</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">330,077 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">292,345 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Less current portion</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">17,954 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">7,345 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Long term debt outstanding</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">312,123 </font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">285,000 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Credit Facility - MidCap Funding V, LLC</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">On February 21, 2014, in connection with the
February 2014 Convertible Notes offering discussed below, the Company entered into Amendment No. 1 to the Amended and Restated
Credit Agreement (the "Amendment" and together with the Amended and Restated Credit Agreement, as amended by the Amendment,
the "Amended Credit Agreement") with MidCap Funding IV, LLC, as Agent and as a lender ("MidCap"), and the other
lenders from time to time parties thereto. In addition to allowing for the note issuance, the Amendment provides for the addition
of a $20.0 million uncommitted accordion feature to the lenders' existing $20.0 million revolving loan commitment. Pursuant to
the Amendment, MidCap and the other lenders released their liens on certain Company assets. The obligations under the Amended Credit
Agreement are secured by a first priority security interest in the Company's accounts, inventory, deposit accounts, securities
accounts, securities entitlements, permits and cash. On April 23, 2014, the Company entered into Amendment No. 2 to the Amended
and Restated Credit Agreement with MidCap to increase the letter of credit sublimit from $0 to $750,000. On August 19, 2014, the
Company, MidCap, and certain subsidiaries of the Company entered into Amendment No. 3 to the Amended and Restated Credit Agreement
dated as of May 8, 2013 to permit the Company to consummate the purchase of the Treximet assets from GSK.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The covenants contained in the Amended Credit
Agreement required the Company to maintain a minimum amount of earnings before interest, tax, depreciation and amortization ("EBITDA")
and net invoiced revenues unless the Company demonstrated minimum liquidity of at least $30.0 million through June 30, 2014. This
was revised and not required with Amendment No. 3. Beginning with the calendar month ending March 31, 2015, the Company is required
to meet a minimum fixed charge coverage ratio ("FCCR"). The FCCR test of 1.0x beginning on the calendar month ending
March 31, 2015 is based on the trailing three months ending March 31, 2015. The Defined Period for the FCCR test of 1.0x will then
build monthly until it reaches a trailing twelve-month Defined Period beginning on December 31, 2015 through maturity. The Amended
Credit Agreement also continues to include customary covenants for a secured credit facility, which include, among other things,
(a) restrictions on (i) the incurrence of indebtedness, (ii) the creation of or existence of liens, (iii) the incurrence or existence
of contingent obligations, (iv) making certain dividends or other distributions, (v) certain consolidations, mergers or sales of
assets and (vi) purchases of assets, investments and acquisitions; and (b) requirements to deliver financial statements, reports
and notices to the agent and the other lenders, provided that, the restrictions described in (a)(i)-(vi) above are subject to certain
exceptions and permissions limited in scope and dollar value. The Amended Credit Agreement also contains customary representations
and warranties and event of default provisions for a secured credit facility.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The loans under this facility bear interest
at a rate equal to the sum of the LIBOR (with a floor of 1.5%) plus an applicable margin of 7.50% per annum (9% at June 30, 2015).
The expiration date of the agreement has been extended to February 21, 2017. Amounts outstanding under this agreement are recorded
on the balance sheet as current debt as of June 30, 2015 and December 31, 2014.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>8.00% Convertible Notes</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">On April 16, 2015, the Company entered into
an agreement (the "Inducement Agreement") with all of the holders of its 8.00% Convertible Senior Notes due 2019 (the
"8.00% Convertible Notes") representing $65 million aggregate principal amount of the 2019 notes, pursuant to which such
holders agreed to the removal of substantially all of the material restrictive covenants in the indenture governing the 2019 notes
and to convert their notes in accordance with the provisions of such indenture in exchange for an aggregate of 2,338,129 shares
of the Company's common stock (the "Inducement Shares").  The Company recorded $19.5 million as cost of inducement
expense in the three and six months ended June 30, 2015. The issuance of the Inducement Shares was be made pursuant to an exemption
from the registration requirements of the Securities Act contained in Section 4(a)(2). Each of the holders entering into the Inducement
Agreement agreed not to sell the shares of our common stock to be issued to it upon conversion of the 2019 notes for 145 days (the
"lock-up period") subject to exceptions, including in connection with settling existing short positions with respect
to the 2019 notes and underwritten public offerings pursuant to existing registration rights with respect to such shares of our
common stock. In addition, such holders are permitted to dispose of up to 80 percent of such shares of our common stock remaining
after settling existing short positions prior to the end of the lock-up period in specified intervals.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">During the three months ended June 30, 2015,
the holders of the 8.00% Convertible Notes converted the outstanding notes at a conversion price of $3.60 per share. The Company
issued 18.1 million shares pursuant to this conversion and retired the $65.0 million of the outstanding 8.00% Convertible Notes.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Interest expense was $302,000 and $1.6 million
for the three months and six months ended June 30, 2015, respectively and $1.3 million and $1.9 million for the three months and
six months ended June 30, 2014, respectively related to the 8.00% Convertible Notes. As of June 30, 2015 and December 31, 2014,
the Company had outstanding borrowings of $0 and $65.0 million related to the 8.00% Convertible Notes, respectively. Accrued interest
on the 8.00% Convertible Notes was approximately $0 and $231,000 as of June 30, 2015 and December 31, 2014, respectively. Interest
expense of $547,000 that accrued during the three months ended June 30, 2015 was forfeited and recorded in additional paid-in capital.
During the three and six months ended June 30, 2015 the Company recorded the remaining $5.4 million unamortized deferred financing
costs related to the 8.00% Convertible Notes in additional paid-in capital.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>4.25% Convertible Notes</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">On April 22, 2015, the Company issued
$130.0 million aggregate principal amount 4.25% Convertible Senior Notes (the "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 underwriting discounts 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 discounted note balance of $102.1 million is recorded as long-term
debt on the balance sheet as of June 30, 2015.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The 4.25% Convertible Notes are governed by
the terms of an indenture (the "Indenture"), between the Company and Wilmington Trust, National Association (the "Trustee"),
each of which were entered into on April 22, 2015.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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. The
initial conversion rate will be 87.2030 shares of the Company's common stock for each $1,000 principal amount of the 4.25% Convertible
Notes, which represents an initial conversion price of approximately $11.47 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 are 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%.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The Company is required to separate the
conversion option in the 4.25% Convertible Notes under ASC 815, <i>Derivatives and Hedging</i>, the Company recorded the
bifurcated conversion option valued at $28.5 million 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 consolidated statement
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. If the Company obtains shareholder approval to remove the contractual limit on 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, <i>Debt with Conversion and Other Options</i>, is
applicable to the 4.25% Convertible Notes.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">In addition to the bifurcated conversion feature,
there were 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 to close
prior to July 8, 2015, the Company will continue to monitor these features for changes in value.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Interest expense was $1.0 million for the
three months and six months ended June 30, 2015, respectively related to the 4.25% Convertible Notes. Accrued interest on the 4.25%
Convertible Notes was approximately $1.0 million and $0 as of June 30, 2015 and December 31, 2014, respectively. As of June 30,
2015 and December 31, 2014, the Company had outstanding borrowings of $130.0 million and $0 related to the 4.25% Convertible Notes,
respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Treximet Note Offering</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">On August 19, 2014, the Company issued $220.0
million aggregate principal amount of its 12% Senior Secured Notes due 2020 (the "Treximet Notes") pursuant to an Indenture
(the "August 2014 Indenture") dated as of August 19, 2014 among the Company, certain of its subsidiaries (the "Guarantors")
and U.S. Bank National Association (the "August 2014 Trustee"), as trustee and collateral agent. As of June 30, 2015
and December 31, 2014, the Company classified $10.0 million and $0, respectively, of the Treximet Notes as current based on contractual
amounts due as of June 30, 2015 and December 31, 2014.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The Treximet 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 will pay an installment
of principal of the Treximet 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 Notes on such Payment Date).</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The Treximet Notes are unconditionally guaranteed,
jointly and severally, by the Guarantors. The Treximet Notes and the guarantees of the Guarantors are secured by a continuing first-priority
security interest in substantially all of the assets of the Company and the Guarantors related to Treximet other than inventory
and certain inventory related assets, including accounts arising from the sale of the inventory.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The Company may redeem the Treximet 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 is prior to August 1, 2015, the redemption
price is equal to the greater of (i) the principal amount of the Treximet Notes being redeemed and (ii) the present value, discounted
at the applicable treasury rate of the principal amount of the Treximet 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 Notes being redeemed
assuming the principal balances are amortized at the times and in the assumed amounts set forth on Schedule A to the August 2014
Indenture. If such redemption occurs (i) on or after August 1, 2015 and prior to August 1, 2016, the redemption price will equal
106% of the outstanding principal amount of August Notes being redeemed plus accrued and unpaid interest thereon, (ii) on or after
August 1, 2016 and prior to August 1, 2017, the redemption price will equal 103% of the outstanding principal amount of the August
Notes being redeemed plus accrued and unpaid interest thereon and (iii) on or after August 1, 2017, the redemption price will equal
100% of the outstanding principal amount of the Treximet Notes being redeemed plus accrued and unpaid interest thereon.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The August 2014 Indenture contains covenants
that limit the ability of the Company and the 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 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 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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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 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
Notes; (e) the Company or any 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 Notes; (f) the Company or any 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 Guarantor; (h) a guarantee of the Treximet 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 Guarantor disaffirms its obligations under its guarantee
of the Treximet Notes; and (i) certain changes in control of a Guarantor.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">On August 19, 2014, the Company entered into
the First Supplemental Indenture to the February 2014 Indenture for the Company's 8.00% Convertible Notes due 2019 (the "First
Supplemental Indenture") to permit the Company to consummate the purchase of the Treximet assets from GSK and to issue the
Treximet Notes. On August 19, 2014, the Company also entered into the Second Supplemental Indenture to the February 2014 Indenture
for the Company's 8.00% Convertible Notes due 2019 (the "Second Supplemental Indenture") to add Pernix Ireland Limited,
a wholly owned subsidiary of the Company, as a guarantor.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Interest expense related to the Treximet Notes
was $6.6 million and $13.2 million, for the three and six months ended June 30, 2015, respectively, and $0 for the three and six
months ended June 30, 2014. Accrued interest on the Treximet Notes was approximately $11.0 million and $9.8 million as of June
30, 2015 and December 31, 2014, respectively. The Company has debt issuance costs of $6.7 million, which are being amortized using
the effective interest method and are recorded on the balance sheet in Prepaid and Other Current Assets ($1.3 million) and Other
Long-Term Assets ($5.4 million).</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">On April 13, 2015, the Company furnished to
the holders of the Treximet 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 Notes to amend the Indenture,
dated August 19, 2014 (the "Indenture"), among the Company, certain subsidiaries of the Company, as guarantors, and U.S.
Bank National Association, that governs the 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
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 $2.2 million
during the three and six months ended June 30, 2015.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The following table represents the future
maturity schedule of the outstanding debt and line of credit (in thousands):</p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="width: 85%"><font style="font-size: 10pt">2015</font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%; text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="width: 10%; text-align: right"><font style="font-size: 10pt">17,954 </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">2016</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">2017</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">2018</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">2019</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">-  </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">Thereafter</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">339,987 </font></td></tr>
<tr style="vertical-align: top">
<td><font style="font-size: 10pt">     Total maturities</font></td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"> </td>
<td style="text-align: right"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">357,941 </font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"></p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Basic net income (loss) per common share is
the amount of 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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The accompanying unaudited condensed consolidated
financial statements included herein have been prepared by the Company in accordance with the rules and regulations of the United
States Securities and Exchange Commission (SEC). The condensed consolidated financial statements are comprised of the financial
statements of the Company. 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 U.S. generally accepted accounting principles has been condensed or omitted in accordance with rules and
regulations of the SEC. Operating results for the three or six months ended June 30, 2015 are not necessarily indicative of the
results that may be expected for any future period or for the year ending December 31, 2015.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">These 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, 2014, included in Pernix Therapeutics' 2014 Annual Report on Form 10-K filed with the SEC.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Subsequent Events</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>The Company has evaluated all events and
transactions since June 30, 2015. The Company did not have any material recognized subsequent events but did have the following
non-recognized subsequent event.</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">In July 2015, the Company filed a Certificate
of Amendment of the Amended and Restated Certificate of Incorporation of the Company (the "Certificate of Amendment")
with the Secretary of State of the State of Maryland. The Certificate of Amendment amended the Company's Amended and Restated
Certificate of Incorporation by increasing the number of authorized shares of the Company's common stock from 90,000,000 shares
to 140,000,000 shares and the attendant increase in capital stock of all classes from 100,000,000 to 150,000,000, consisting of
140,000,000 shares of common stock and 10,000,000 shares of preferred stock, which shall include 1,000,000 shares of Series B
junior participating stock.  No change to the authorized number of shares of preferred stock.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p><p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><i>Reclassifications</i></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Certain comparative figures have been reclassified
to conform to the current year presentation.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p><p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"><b>Note 15. Recent Accounting Pronouncements
</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">In May 2014, the FASB issued ASU 2014-09,
<i>Revenue from Contracts with Customers.</i> 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. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016. Early application
is not permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the
date of adoption. The Company is currently evaluating the effect of the new revenue recognition guidance.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="margin: 0pt"></p>3281720002964340000129320000182332000167114000096736000019777000029327000371240000285000000065000000220000000220000000010213600001977700002932700060172000011926000089838000391430005094300019807000-75571000-53504000-35011000-24077000-1.66-1.42-0.67-0.64-1.66-1.42-0.67-0.64<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The Company's historical financial information
was adjusted to give effect to the pro forma events that were directly attributable to the Zohydro ER® acquisition and factually
supportable. The unaudited pro forma consolidated results include historical revenues and expenses of assets acquired in the acquisition
with the following adjustments:</p>
<ul>
<li style="margin: 0; font-size: 10pt">Adjustment to recognize incremental amortization expense based on the fair value of intangibles
acquired;</li>
<li style="margin: 0; font-size: 10pt">Adjustment to recognize incremental interest expense and amortization of debt issuance costs
for debt issued in connection with the acquisition</li>
<li style="margin: 0; font-size: 10pt">Eliminate transaction costs and non-recurring charges directly related to the acquisition
that were included in the historical results of operations for Pernix</li>
<li style="margin: 0; font-size: 10pt">Adjustment to recognize pro forma income tax based on income tax benefit on the amortization
of intangible asset at the statutory tax rate of Ireland (12.50%), and the income tax benefit on the interest expense at the statutory
tax rate of the United States (37.21%).</li>
</ul>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">For the three months and six months ended
June 30, 2015, the Company has recognized revenue and net loss for Zohydro ER® subsequent to the closing of April 24, 2015
in the amount of $4.0 million and $5.3 million respectively. Non-recurring transaction costs of $3.1 million related to the acquisition
for the three months and six months ended June 30, 2015 are included in the condensed consolidated statement of operations in selling,
general and administrative expenses; these non-recurring transaction costs have been excluded from the pro forma results in the
above table.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>700000001221800001192600029327000927000100000006740000054600000122000000180000Zohydro ER®<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">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,
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 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 ZX007 abuse-deterrent extended-release
hydrocodone tablet and up to $271.0 million in potential sales milestones if the Zohydro ER® product line achieve certain agreed-upon
net sales targets.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">Zohydro ER® is an extended-release form
of hydrocodone 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. Zohydro ER® does not contain acetaminophen, unlike many immediate-release
hydrocodone products, such as Vicodin and Lortab, reducing the risk for potential liver toxicity due to overexposure of acetaminophen.
The active ingredient, hydrocodone, is the most commonly prescribed opioid in the U.S., with over 114 million prescriptions in
2014. The FDA approved the NDA for Zohydro ER® in October 2013 and the product was launched in March 2014.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0">The Zohydro ER® product line acquisition
was accounted for as a business combination in accordance with Accounting Standards Codification ("ASC") No. 805 "Business
Combinations" ("ASC 805") which, among other things, requires assets acquired and liabilities assumed to be measured
at their acquisition date fair values. The purchase price allocation is preliminary with respect to taxes and certain accruals
and includes the use of estimates based on information that was available to management at the time these unaudited condensed consolidated
financial statements were prepared. The Company believes the estimates used are reasonable and the significant effects of the Zohydro
ER® acquisition are properly reflected. However, the estimates are subject to change as additional information becomes available
and is assessed by the Company.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin-right: 0; margin-left: 0"> </p>454810003755100052399000378280006160000The Company's money market and trust cash sweep investments are included in cash and cash equivalents within the Condensed Consolidated Balance Sheet.In accordance with the asset purchase agreement, the Company has deposited $10.0 million in an escrow fund to be held for a period of 12 months from the closing date as a security to pay, or be applied against, any losses incurred by the Company that are subject to the general representations, warranties and indemnification obligations of Zogenix. The Company is considered to be the legal and tax owner of the fund until the expiration of the escrow period of 12 months. Accordingly, the amount of $10 million in the escrow fund is recognized as restricted cash and consideration payable to Zogenix. Restricted cash is presented separately under current assets while the consideration payable is included in current liabilities.Under the asset purchase agreement, the Company purchased a specified quantity of Generation 1 version of Zohydro ER product line from Zogenix on the closing date for $927,000. Shortly before the closing date, Generation 2 version of Zohydro ER with Beadtek was approved by FDA and was announced by the Company to be launced in immediate future. This announcement for launch of Zohydro ER with Beadtek made the Generation 1 version of Zohydro ER obsolete and unsellable in the market. As a result, the fair value of the Generation 1 product inventory acquired from Zogenix has been estimated to be de-minimis on the closing date.Under the asset purchase agreement, the number of common shares issued to Zogenix equaled $20 million divided by closing price of common stock on a trading day immediately preceding the purchase agreement date. The closing price of common stock of Pernix on March 9, 2015 (i.e. trading day immediately preceding the purchase agreement date) was $11.89. Accordingly, Pernix issued 1,682,086 shares of common stock to to Zogenix ($20 million/$11.89 per share). The common stock issued by the Company is measured at fair value at the closing date (i.e. April 24, 2015) in accordance with the measurement guidance in ASC 805. The closing price of common stock of the Company on closing date was $7.09 and accordingly the fair value of common stock issued by the Company on the closing date was determined to be $11.9 million. $16,820 representing the par value of 1,682,086 shares at $0.01 per share was recorded in common stock and the remaining amount of $11.9 million was recorded in Additional paid-in-capital.Contingent consideration includes (a) $12.5 million milestone payment payable upon approval of ZX007 abuse-deterrent extended-release hydrocodone tablet, and (b) up to $271 million payable if the Zohydro ER product line achieves certain agreed-upon net sales targets. Each type of contingent consideration has been recognized as a separate unit of account. In accordance with the provisions of ASC 805-30-25-5, each unit of contingent consideration is recognized at the acquisition date fair value. The acquisition date fair value of the contingent consideration linked to FDA approval is $10.3 million and the fair value of the contingent consideration linked to achievement of net sales target is $19.0 million. The total contingent consideration of $29.3 million is classified in other long-term liabilities. Such fair values are determined based on probabilistic model with weights assigned on likelihood of the Company achieving the sales target in future. Each unit of contingent consideration is classified as a liability in the balance sheet and would be subsequently measured at fair value on each reporting date. Any change in fair values between the reporting dates would be recognized in the consolidated statement of operations.As of the effective time of the acquisition, identifiable intangible assets are required to be measured at fair value and these acquired assets could include assets that are not intended to be used or sold or that are intended to be used in a manner other than their highest and best use. For purposes of these consolidated financial statements, it is assumed that all assets will be used in a manner that represents the highest and best of those assets, but it is not assumed that any market synergies will be achieved. The fair value of identifiable assets is determined primarily using the "income method," which starts with a forecast of all expected future cash flows. Some of the more significant assumptions inherent in the development of intangible asset values, from the perspective of a market participant, include: the amount and timing of projected future cash flows (including net revenue, cost of product sales, research and development costs, sales and marketing expenses, income tax expense, capital expenditures and working capital requirements) as well as estimated contributory asset charges; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset's life cycle and the competitive trends impacting the asset, among other factors. The consolidated financial statements include estimated identifiable intangible assets representing core technology intangibles valued at $67.4 million, and in-process research and development ("IPR&D") intangibles valued at $54.6 million. The core technology intangible assets represent developed technology of products approved for sales in the market, which we refer to as marketed products, and have a finite useful lives. They are amortized on a straight-line basis over a weighted average of 7 years. These estimates will be adjusted accordingly if the final identifiable intangible asset valuation generates results, including corresponding useful lives and related amortization methods, which differ from the pro forma estimates, or if the above scope of intangible assets is modified. The IPR&D are considered indefinite-lived intangible assets until the completion of abandonment of the associated research and development efforts. Accordingly, during the development period, these assets are not amortized but subject to an annual impairment review. The final valuation is expected to be completed within 12 months from the completion of the acquisition.Goodwill is calculated as the difference between the acquisition date fair value of the consideration expected to be transferred and the values assigned to the assets acquired. Goodwill is not amortized but tested for impairment on an annual basis or when indications for impairment exist.EX-101.SCH
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Cardinal Health IncConcentration Risk Benchmark [Axis]McKesson CorporationAmerisource Bergen Drug CorporationLevel 1 MemberFair Value, Hierarchy [Axis]Level 2 MemberLevel 3 MemberPatents MemberFiniteLivedIntangibleAssetsByMajorClass [Axis]Brand MemberProduct Licenses MemberNoncompete And Supplier Contracts MemberTrademark rights MemberIn Process Research And Development MemberAcquired Developed Technology MemberTotal Indefinite LivedTotal Definite LivedAmounts outstanding under the Credit Facility - MidCap Funding V, LLC [Member]Long-term Debt, Type [Axis]8.00% Convertible NotesTreximet NotesSomaxon [Member]Litigation Status [Axis]Texas Medicaid Fraud Prevention ActGSKRestricted sharesAward Type [Axis]4.25% Convertible NotesAntidilutive Securities [Axis]8% Convertible NotesWarrantsStock Options and Restricted Stock4.25% Convertible NotesDerivative LiabilityContingent ConsiderationDocument Information [Line Items]Entity Registrant NameEntity Central Index KeyDocument TypeDocument Period End DateAmendment FlagCurrent Fiscal Year End DateIs Entity a Well-known Seasoned Issuer?Is Entity a Voluntary Filer?Is Entity's Reporting Status Current?Entity Filer CategoryEntity Common Stock, Shares OutstandingDocument Fiscal Period FocusDocument Fiscal Year FocusStatement of Financial Position [Abstract]ASSETSCurrent assets:Cash and cash equivalentsRestricted cashAccounts receivable, netInventory, netPrepaid expenses and other current assetsIncome tax receivableNote receivable, net of unamortized discount of $32 and $127, respectivelyDeferred income tax assets - currentTotal current assetsProperty and equipment, netGoodwillIntangible assets, netOtherTotal assetsLIABILITIESCurrent liabilities:Accounts payable and accrued expensesAccrued allowancesInterest payableDebt - currentSenior secured notes - Treximet - currentRestricted cash payableTotal current liabilitiesConvertible notes - long-termDerivative liabilityContingent considerationSenior secured notes - Treximet - long-termDeferred income tax liability - long-termOther liabilitiesTotal liabilitiesCommitments and contingencies (notes 1, 3, 7, 8, 11 and 12)STOCKHOLDERS' EQUITYPreferred stock, $0.01 par value, authorized 10,000,000 shares; no shares issued and outstandingCommon stock, $.01 par value, 90,000,000 shares authorized, 63,357,332 and 40,805,659 issued and 60,791,180 and 38,341,352 outstanding at June 30, 2015 and December 31, 2014, respectivelyTreasury stock, at cost, 2,566,152 and 2,464,307 shares held at June 30, 2015 and December 31, 2014, respectivelyAdditional paid-in capitalAccumulated deficitTotal stockholders' equityTotal liabilities and stockholders' equityNote receivable, unamortized discount, CurrentStockholders EquityPreferred stock, par valuePreferred stock, shares authorizedPreferred stock, shares issuedPreferred stock, shares outstandingCommon stock par valueCommon stock shares authorizedCommon stock shares issuedCommon stock shares outstandingTreasury Stock held, at costUnamortized discount, CurrentUnamortized discount, NoncurrentAsset Impairment ChargesIncome Statement [Abstract]Net revenuesCosts and operating expenses:Cost of product salesSelling, general and administrative expenseResearch and development expenseLoss on sale of PML (including impairment charge)Depreciation and amortization expenseRestructuring costsTotal costs and operating expensesLoss from operationsOther income (expense):Interest incomeCost of inducementChange in fair value of derivative liabilityInterest expenseTotal other expense, netLoss before income tax benefitIncome tax benefitNet lossNet loss per share, basicNet loss per share, dilutedWeighted-average common shares, basicWeighted-average common shares, dilutedStatement of Cash Flows [Abstract]Cash flows used in operating activities:Net lossAdjustments to reconcile net loss to net cash used in operating activities:DepreciationAmortization of intangibles and interest accretion of contingent considerationAmortization of deferred financing costsInterest accretion of notes receivableDeferred income tax benefitLoss on disposal of equipmentStock compensation expenseFair market value change in derivative liabilityAccretion of debt discountIssuance of stock for inducementExpense from stock options issued in exchange for servicesLoss on sale of PML (including impairment charge)Cancellation of ParaPRO stock options in connection with termination of contract(Increase) decrease in operating assetsAccounts receivableIncome taxesInventoryPrepaid expenses and other assetsIncrease (decrease) in operating liabilitiesAccounts payable and accrued expensesAccrued allowancesInterest payableOther liabilitiesNet cash used in operating activitiesCash flows from investing activities:Proceeds from sale of PMLAcquisition of Zohydro ERProceeds from sale of property and equipmentPurchase of equipmentNet cash (used in) provided by investing activitiesCash flows from financing activities:Net proceeds from issuance of Convertible NotesNet drawdowns (payments) on revolving credit facilityPayments for financing costsPayment of consent feePayments on mortgages and capital leasesPayments on contracts payableProceeds from issuance of common stock, net of taxStock issuance costsTax benefit on stock-based awardsShares withheld for the payment of taxesNet cash provided by financing activitiesNet increase in cash and cash equivalentsCash and cash equivalents, beginning of periodCash and cash equivalents, end of periodOrganization, Consolidation and Presentation of Financial Statements [Abstract]1. Company OverviewEarnings Per Share [Abstract]2. Earnings per ShareFair Value Disclosures [Abstract]3. Fair Value MeasurementInventory Disclosure [Abstract]InventoryDisposal Of PmlDisposal of PMLGoodwill and Intangible Assets Disclosure [Abstract]Intangible Assets and GoodwillAccrued Liabilities [Abstract]Accrued AllowancesDebt Disclosure [Abstract]Debt and Lines of CreditStockholders' Equity Attributable to Parent [Abstract]Stockholders' EquityIncome Tax Disclosure [Abstract]Income TaxesCommitments and Contingencies Disclosure [Abstract]Commitments and ContingenciesRestructuring and Related Activities [Abstract]12. RestructuringBusiness Combinations [Abstract]13. Business CombinationSupplemental Cash Flow Elements [Abstract]14. Supplemental Cash Flow InformationAccounting Changes and Error Corrections [Abstract]15. Recent Accounting PronouncementsAccounting Policies [Abstract]Interim Financial StatementsManagement's Estimates and AssumptionsSubsequent EventsReclassificationsPrinciples of ConsolidationFair Value of Financial InstrumentsSignificant CustomersCost of Product SalesRevenue RecognitionProduct ReturnsResearch and Development CostsSegment InformationIncome TaxesEarnings per ShareInvestments in Marketable Securities and Other Comprehensive IncomeRecent Accounting PronouncementsSignificant CustomersEarnings per ShareAntidilutive securititesCompany's fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring and nonrecurring basisSchedule of InventoryIntangible assetsIntangible Assets Estimated Amortization ExpensesChanges in the carrying amount of goodwillAccrued allowancesDebt consistsFuture maturity schedule of the outstanding debt and line of creditStockholders Equity TablesStock option assumptionsStock option activityRestricted stock activityAccrued restructuring costsSchedule of business acquisitionsBusiness acquisition, pro forma informationSchedule Of Cash Flow Supplemental Disclosures TablesSchedule of cash flow, supplemental disclosuresStatement [Table]Statement [Line Items]Company's customers that individually comprised greater than 10% of total gross product salesPercentage of gross product salesCompany Overview Details 1Accounts ReceivableMcKesson CorporationAmerisourceBergen Drug CorporationCardinal Health, Inc.TotalComputation of basic and diluted net income per shareNumerator:Denominator:Weighted-average common shares, basicDilutive effect of stock optionsNet loss per share, basic and dilutedAnti-dilutive sharesAssetsMoney market fund and trust cash sweep investments (1)Total AssetsLiabilitiesContingent consideration(1)Total LiabilitiesDebt instruments, fair valueDebt instruments, carrying valueRaw materialsPackaging materialsWork-in-processFinished goodsInventory grossReserve for obsolescenceInventory, netIncrease in raw materialsIncrease in finished goodsFinite-Lived Intangible Assets by Major Class [Axis]Intangible assets consist of the followingWeighted Average LifeGross Carrying AmountAccumulated AmortizationNet Carrying AmountEstimated amortization expense related to intangible assets2015 (July - December)2016201720182019ThereafterTotalAmortization expenseAccrued Allowances DetailsAccrued allowances consist of the followingAccrued returns allowanceAccrued price adjustmentsAccrued government program rebatesTotalTotal debtDebt - currentDebt - long termDebt And Lines Of Credit Details 120152016201720182019ThereafterTotal maturitiesEmployee Benefits and Share-based Compensation [Abstract]Weighted average of the assumptions used to value stock options on the date of grantWeighted average expected stock price volatilityEstimated dividend yieldRisk-free interest rateExpected life of option (in years)Weighted average fair value per shareOption SharesSharesOutstanding at December 31, 2014GrantedExercisedCancelledExpiredOutstanding at June 30, 2015Vested and expected to vest, end of periodVested and exercisable, end of periodAverage Exercise PriceOutstanding at December 31, 2014GrantedExercisedCancelledExpiredOutstanding at June 30, 2015Vested and expected to vest, end of periodVested and exercisable, end of periodWeighted Average Remaining Contractual Life YearsOptions outstanding at June 30, 2015Options vested and expected to vest, end of periodOptions vested and exercisable, end of periodAggregate Intrinsic ValueExercisedOptions outstanding at June 30, 2015Options vested and expected to vest as of June 30, 2015Options vested and exercisable, end of periodNon-vested restricted stock outstanding at December 31, 2014GrantedVestedForfeitedNon-vested restricted stock outstanding at June 30, 2015Weighted Average Grant Date Fair ValueGrantedVestedForfeitedWeighted Average Grant Date Fair ValueAggregate Intrinsic Value, VestedSettlement descriptionMinimum quarterly royalty paymentsAmount agreed to pay to State of TexasInitial payment made for the settlementUnrecognized stock compensation cost related to unvested stock options issued to ParaProRoyalty descriptionRestructuring DetailsAccrued restructuring costsRestructuring chargesRestructuring cashRestructuring noncashBusiness Combination DetailsPurchase price componentsCash consideration paid to ZogenixEscrow fund deposited at the time of closing (i)Purchased product inventory (ii)Common stock issued (iii)Fair value of contingent consideration payable to Zogenix (iv)Total purchase priceEstimated fair value of assets acquired:Intangible assets (v):Zohydro - Developed technologyIPR&DAmount attributable to assets acquiredGoodwill (vi)Business Acquisition, Name of Acquired EntityBusiness Combination, Assets and Liabilities, DescriptionBusiness Combinations Pro Forma Financial Information With Narrative DetailsRevenueNet lossBusiness Acquisition, Pro Forma Earnings Per Share, BasicBusiness Acquisition, Pro Forma Earnings Per Share, DilutedBusiness Acquisition, Pro Forma Information, DescriptionSupplemental Cash Flow Information DetailsSupplemental disclosures of Cash Flow Information:Cash paid for income taxes, netCash paid for interestSupplemental disclosures of Non-cash Investing and Financing Activities:Conversion of 8.00% Convertible notesIssuance of 1,682,086 shares to Zogenix for Zohydro acquisitionAcquisition of license - contract payableCustom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Interest accretion on notes receivable.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.Custom Element.ConvertibleSeniorNotes4.25MemberAssets, CurrentAssets [Default Label]Liabilities, CurrentLiabilities [Default Label]Treasury Stock, ValueStockholders' Equity Attributable to ParentLiabilities and EquityCosts and ExpensesOperating Income (Loss)Investment Income, Investment ExpenseOther Nonoperating Income (Expense)Gain (Loss) on Disposition of Property Plant Equipment, Excluding Oil and Gas Property and Timber PropertyLossOnSaleOfPmlIncrease (Decrease) in Accounts ReceivableIncrease (Decrease) in Income Taxes ReceivableIncrease (Decrease) in InventoriesIncrease (Decrease) in Prepaid ExpenseIncrease (Decrease) in Accounts PayableIncrease (Decrease) in Other Accounts Payable and Accrued LiabilitiesIncrease (Decrease) in Interest Payable, NetIncrease (Decrease) in Other Current LiabilitiesPayments to Acquire Businesses, Net of Cash AcquiredPayments to Acquire Property, Plant, and EquipmentNet Cash Provided by (Used in) Investing ActivitiesPayments of Financing CostsPayments of Debt Extinguishment CostsRepayments of Debt and Capital Lease ObligationsPaymentOnContractsPayablePayments of Stock Issuance CostsEmployee Service Share-based Compensation, Tax Benefit from Compensation ExpenseNet Cash Provided by (Used in) Financing ActivitiesCash and Cash Equivalents, Period Increase (Decrease)Income Tax, Policy [Policy Text Block]Schedule of Revenue by Major Customers by Reporting Segments [Table Text Block]Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]ScheduleOfAccruedAllowancesMckessonCorporationWeighted Average Number of Shares Issued, BasicInventory, GrossInventory Valuation ReservesFinite-Lived Intangible Assets, NetAccruedReturnsAllowanceAccruedPriceAdjustmentsAccruedGovernmentProgramRebatesLong-term Debt, Current MaturitiesLong-term Debt, Maturities, Repayments of Principal in Year TwoLong-term Debt, Maturities, Repayments of Principal in Year ThreeLong-term Debt, Maturities, Repayments of Principal in Year FourLong-term Debt, Maturities, Repayments of Principal in Year FiveLong-term Debt, Maturities, Repayments of Principal after Year FiveLong-term DebtShare-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, NumberShare-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding, NumberShare-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, NumberShare-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise PriceShare-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise PriceShare-based Compensation Arrangements by Share-based Payment Award, Options, Exercises in Period, Weighted Average Exercise PriceShare-based Compensation Arrangements by Share-based Payment Award, Options, Forfeitures in Period, Weighted Average Exercise PriceShare-based Compensation Arrangements by Share-based Payment Award, Options, Expirations in Period, Weighted Average Exercise PriceOutstandingAtSeptember2014Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding, Weighted Average Exercise PriceShare-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Exercisable, Weighted Average Exercise PriceShare-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period, Intrinsic ValueShare-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Intrinsic ValueShare-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding, Aggregate Intrinsic ValueShare-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Intrinsic ValueShare-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, NumberShare-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in PeriodShare-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Weighted Average Grant Date Fair ValueShare-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period, Weighted Average Grant Date Fair ValueShare-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested in Period, Weighted Average Grant Date Fair ValueShare-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Forfeitures, Weighted Average Grant Date Fair ValueRestructuring ReserveBusiness Combination, Consideration TransferredBusiness Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, AssetsBusiness Acquisition, Pro Forma Net Income (Loss)EX-101.PRE
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Gross amount, as of the balance sheet date, of merchandise, goods, commodities, or supplies held for future sale or to be used in manufacturing, servicing or production process.
Amount before valuation and LIFO reserves of merchandise or goods in the production process expected to be completed within one year or operating cycle, if longer.
The amount of cash paid during the current period to foreign, federal, state, and local authorities as taxes on income, net of any cash received during the current period as refunds for the overpayment of taxes.
The value of the noncash (or part noncash) consideration given (for example, liability, equity) in a transaction. Noncash is defined as transactions during a period that do not result in cash receipts or cash payments in the period. "Part noncash" refers to that portion of a transaction not resulting in cash receipts or cash payments in the period.
The number of shares into which fully or partially vested stock options outstanding as of the balance sheet date can be currently converted under the option plan.
Amount of accumulated difference between fair value of underlying shares on dates of exercise and exercise price on options exercised (or share units converted) into shares.
The number of shares under options that were cancelled during the reporting period as a result of occurrence of a terminating event specified in contractual agreements pertaining to the stock option plan.
As of the balance sheet date, the weighted-average exercise price (at which grantees can acquire the shares reserved for issuance) for exercisable stock options that are fully vested or expected to vest.
As of the balance sheet date, the number of shares into which fully vested and expected to vest stock options outstanding can be converted under the option plan.
Amount of difference between fair value of the underlying shares reserved for issuance and exercise price of vested portions of options outstanding and currently exercisable.
Weighted average remaining contractual term for fully vested and expected to vest options outstanding, in 'PnYnMnDTnHnMnS' format, for example, 'P1Y5M13D' represents the reported fact of one year, five months, and thirteen days.
