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
      1934for
      the quarterly period ended:March 31,
      2010o
            Transition report pursuant to
      section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the transition period from: _____________ to
  _____________




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


Maryland
            
            001-14494
            
            33-0724736(State
      or other jurisdiction
              of
      incorporation or organization)
            
            Commission
              File
      Number
            
            (I.R.S.
      Employer
              Identification
      Number)




33219 Forest
      West Street, Magnolia, TX     77354(Address
      of principal executive offices)     (Zip
      Code)





(832) 934-1825(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  ̈.




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  ̈  No  ̈.




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  ̈
            
            Accelerated
      filer                   ̈Non-accelerated
      filer    ̈
            
            Smaller
      reporting company þ(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  ̈ No þ




On May
12, 2010, there were 24,558,594 shares outstanding of the Registrant’s common
stock.





PERNIX
THERAPEUTICS HOLDINGS, INC.


Quarterly
Report on Form 10-Q


For
the Three Months Ended March 31, 2010




INDEX




PART I. FINANCIAL
      INFORMATIONItem
      1.
            Financial
      Statements
            
            
            1Combined and Consolidated
      Balance Sheetsas of  March 31, 2010 (unaudited) andDecember
      31, 2009
            
            
            1Combined and Consolidated
      Statements of Operations(unaudited) for the Three MonthsEnded
      March 31, 2010 and 2009
            
            
            2Combined and Consolidated
      Statements of Cash Flows(unaudited) for the Three MonthsEnded
      March 31, 2010 and 2009
            
            
            3Combined and Consolidated
      Statements of Stockholders' Equity as of March 31, 2010 (unaudited)and December 31,
      2009
            
            
            4Notes
      to Combined and Consolidated Financial Statements
            
            
            5Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            
            19Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk 27
            
            
            28Item
      4.
            Controls and
      Procedures
            
            
            28PART II. OTHER INFORMATIONItem
      1.
            Legal
      Proceedings
            
            
            29Item
      1A.
            Risk
      Factors
            
            
            29Item
      2.
            Unregistered
      Sales of Equity Securities and Use of proceeds
            
            
            50Item
      3.
            Defaults
      upon Senior Securities
            
            
            50Item
      4.
            Removed and
      Reserved
            
            
            50Item
      5.
            Other
      Information
            
            
            50Item
      6.
            Exhibits
            
            
            50Signatures
            
            
            
            52





i





Cautionary
Statement Regarding Forward-Looking Statements




The
Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
forward-looking statements to encourage companies to provide prospective
information, so long as those statements are identified as forward-looking and
are accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those
discussed in the statement. The Registrant desires to take advantage of these
“safe harbor” provisions with regard to the forward-looking statements in this
Form 10-Q and in the documents that are incorporated herein by reference. These
forward-looking statements reflect our current views with respect to future
events and financial performance. Specifically, forward-looking statements may
include:





●
            projections
      of revenues, expenses, income, income per share, net interest margins,
      asset growth, loan production, asset quality, deposit growth and other
      performance measures;





●
            statements
      regarding expansion of operations, including entrance into new markets and
      development of products; and





●
            statements
      preceded by, followed by or that include the words “estimate,” “plan,”
      “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,”
      “seek,” “target” or similar
expressions.





These
forward-looking statements express our best judgment based on currently
available information and we believe that the expectations reflected in our
forward-looking statements are reasonable.





By their
nature, however, forward-looking statements often involve assumptions about the
future. Such assumptions are subject to risks and uncertainties that could cause
actual results to differ materially from those described in the forward-looking
statements. As such, we cannot guarantee you that the expectations reflected in
our forward-looking statements actually will be achieved. Actual results may
differ materially from those in the forward-looking statements due to, among
other things, the following factors:





●
            changes
      in general business, economic and market
  conditions;





●
            volatility
      in the securities markets generally or in the market price of the
      Registrant’s stock specifically;
and





●
            the
      risks outlined below in the section entitled “Risk
    Factors.”





We
caution you not to place undue reliance on any forward-looking statements, which
speak only as of the date of this Form 10-Q. Except as required by law, the
Registrant does not undertake any obligation to publicly update or release any
revisions to these forward-looking statements to reflect any events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.


ii


PART
I.   FINANCIAL INFORMATION




ITEM
1.     FINANCIAL STATEMENTS




PERNIX
THERAPEUTICS HOLDINGS, INC.


COMBINED
AND CONSOLIDATED BALANCE SHEETS







March
      31,
              2010
            
            
            December 31,
              2009(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            12,670,940
            
            
            $
            4,578,476Accounts
      receivable, net
            
            
            5,865,758
            
            
            
            4,133,357Inventory,
      net
            
            
            1,108,304
            
            
            
            1,081,970Prepaid
      expenses and other current assets
            
            
            1,895,164
            
            
            
            1,625,719Deferred
      tax assets – current
            
            
            1,961,000
            
            
            
            61,000Total
      current assets
            
            
            23,501,166
            
            
            
            11,480,522Property
      and equipment, net
            
            
            1,178,779
            
            
            
            139,456Other
      assets:Intangible
      assets, net of amortization
            
            
            6,647,551
            
            
            
            1,409,337Deferred
      tax assets – long term
            
            
            657,000
            
            
            
            —Other
      long-term assets
            
            
            300,000
            
            
            
            383,333Total
      assets
            
            $
            32,284,496
            
            
            $
            13,412,648LIABILITIESCurrent
      liabilities:Accounts
      payable
            
            $
            335,298
            
            
            $
            436,663Accrued
      personnel expense
            
            
            959,174
            
            
            
            560,657Accrued
      allowances
            
            
            6,645,533
            
            
            
            6,795,542Income
      taxes payable
            
            
            1,698,753
            
            
            
            100,000Other
      accrued expenses
            
            
            396,063
            
            
            
            143,578Contract
      payable
            
            
            4,600,000
            
            
            
            —Total
      current liabilities
            
            
            14,634,821
            
            
            
            8,036,440Commitments
      and contingencies
            
            
            —
            
            
            
            —STOCKHOLDERS’
      EQUITYCommon
      stock, $.01 par value, 90,000,000 shares authorized, 24,558,594 and
      20,900,000 outstanding at March 31, 2010 and December 31, 2009,
      respectively
            
            
            245,586
            
            
            
            209,000Additional
      paid-in capital
            
            
            7,875,974
            
            
            
            788,979Retained
      earnings
            
            
            9,454,714
            
            
            
            4,308,491Total
      stockholders’ equity
            
            
            17,576,274
            
            
            
            5,306,470Non-controlling
      interest
            
            
            73,401
            
            
            
            69,738Total
      equity
            
            
            17,649,675
            
            
            
            5,376,208Total
      liabilities and stockholders’ equity
            
            $
            32,284,496
            
            
            $
            13,412,648





1




PERNIX
THERAPEUTICS HOLDINGS, INC.


COMBINED
AND CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





Three Months
              Ended
              March
      31, 2010
            
            
            Three Months
              Ended
              March
      31, 2009Net
      sales
            
            $
            8,873,309
            
            
            $
            7,234,664Costs
      and expenses:Cost
      of product sales
            
            
            1,191,973
            
            
            
            1,425,227Selling
      expenses
            
            
            1,456,073
            
            
            
            1,464,937General
      and administrative expenses
            
            
            1,634,464
            
            
            
            1,562,143Research
      and development expense
            
            
            271,251
            
            
            
            143,443Depreciation
      and amortization expense
            
            
            68,773
            
            
            
            55,297Total
      costs and expenses
            
            
            4,622,534
            
            
            
            4,651,047Income
      from operations
            
            
            4,250,775
            
            
            
            2,583,617Other
      income (expense):Interest
      income, net
            
            
            2,948
            
            
            
            4,044Income
      before income taxes and non-controlling interest
            
            
            4,253,723
            
            
            
            2,587,661Income
      tax benefit
            
            
            (1,018,103
            )
            
            
            (60,000
            )Net
      income before non-controlling interest
            
            
            5,271,826
            
            
            
            2,647,661Net
      income (loss) attributable to non-controlling interest
            
            
            3,663
            
            
            
            (34,610
            )Net
      income attributable to controlling interest
            
            $
            5,268,163
            
            
            $
            2,682,271Basic
      earnings per share
            
            $
            0.24
            
            
            $
            0.13Diluted
      earnings per share
            
            $
            0.24
            
            
            $
            0.13Weighted
      average number of shares—basic
            
            
            21,834,971
            
            
            
            20,900,000Weighted
      average number of shares—diluted
            
            
            21,867,257
            
            
            
            20,900,000




2





PERNIX
THERAPEUTICS HOLDINGS, INC.


COMBINED
AND CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





For
      the three months ended
              March
      31,2010
            
            
            2009Cash
      flows from operating activities:Net
      income
            
            $
            5,271,826
            
            
            $
            2,647,661Adjustments
      to reconcile net income tonet
      cash provided by operating activities:Depreciation
      and amortization
            
            
            68,773
            
            
            
            55,297Provision
      for allowance for returns
            
            
            255,000
            
            
            
            506,289Provision
      for deferred income tax benefit
            
            
            (2,557,000
            )
            
            
            —Non-cash
      interest
            
            
            (1,053
            )
            
            
            —Stock
      compensation expense
            
            
            13,084
            
            
            
            681,000Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (1,732,400
            )
            
            
            (1,222,289
            )Inventory
            
            
            692,075
            
            
            
            615,151Prepaid
      expenses and other assets
            
            
            (21,840
            )
            
            
            (371,222
            )Other
      assets – long term
            
            
            83,333
            
            
            
            —Accounts
      payable
            
            
            (101,367
            )
            
            
            166,366Increase
      in income taxes payable
            
            
            1,598,753
            
            
            
            —Accrued
      expenses
            
            
            180,125
            
            
            
            (30,874
            )Net
      cash provided by operating activities
            
            
            3,749,309
            
            
            
            3,047,379Cash
      flows from investing activities:Acquisition
      of CEDAX – initial payment
            
            
            (1,500,000
            )
            
            
            —Purchase
      of intangible assets
            
            
            —
            
            
            
            (100,000
            )Purchase
      of equipment
            
            
            (434
            )
            
            
            —Net
      cash used in investing activities
            
            
            (1,500,434
            )
            
            
            (100,000
            )Cash
      flows from financing activities:Cash
      acquired in connection with the merger, net of costs paid
            
            
            5,965,529
            
            
            
            —Distributions
      to stockholders
            
            
            (121,940
            )
            
            
            (3,107,600
            )Net
      cash provided by (used in) financing activities
            
            
            5,843,599
            
            
            
            (3,107,600
            )Net
      increase (decrease) in cash and cash equivalents
            
            
            8,092,464
            
            
            
            (160,221
            )Cash
      and cash equivalents, beginning of period
            
            
            4,578,476
            
            
            
            4,874,296Cash
      and cash equivalents, end of period
            
            $
            12,670,940
            
            
            $
            4,714,075




3





PERNIX
THERAPEUTICS HOLDINGS, INC.


COMBINED
AND CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY











Common
              Stock
            
            
            Additional
              Paid-In
              Capital
            
            
            Retained
              Earnings
            
            
            Non-
              Controlling
              Interest
            
            
            TotalBalance
      at December 31, 2008
            
            $
            —
            
            
            $
            —
            
            
            $
            6,331,210
            
            
            $
            110,492
            
            
            $
            6,441,702Retroactive
      adjustment for issuance of shares in reverse merger with
    GTA
            
            
            209,000
            
            
            
            (209,000
            )
            
            
            —
            
            
            
            —
            
            
            
            —Distributions
      to stockholders:Transfer
      of land and buildings to affiliate
            
            
            —
            
            
            
            316,979
            
            
            
            (1,310,000
            )
            
            
            —
            
            
            
            (993,021
            )Deconsolidation
      ofMacoven
            
            
            —
            
            
            
            —
            
            
            
            (496,823
            )
            
            
            —
            
            
            
            (496,823
            )Distributions
            
            
            —
            
            
            
            —
            
            
            
            (9,455,600
            )
            
            
            —
            
            
            
            (9,455,600
            )Stock
      compensation expense
            
            
            —
            
            
            
            681,000
            
            
            
            —
            
            
            
            —
            
            
            
            681,000Net
      income (loss)
            
            
            —
            
            
            
            —
            
            
            
            9,239,704
            
            
            
            (40,754
            )
            
            
            9,198,950Balance
      at December 31, 2009
            
            
            209,000
            
            
            
            788,979
            
            
            
            4,308,491
            
            
            
            69,738
            
            
            
            5,376,208Distributions
      to stockholders
            
            
            —
            
            
            
            —
            
            
            
            (121,940
            )
            
            
            —
            
            
            
            (121,940
            )Transfer
      of equity in reverse merger with GTA
            
            
            36,586
            
            
            
            7,073,911
            
            
            
            —
            
            
            
            —
            
            
            
            7,110,497Stock-based
      compensation
            
            
            —
            
            
            
            13,084
            
            
            
            —
            
            
            
            —
            
            
            
            13,084Net
      income
            
            
            —
            
            
            
            —
            
            
            
            5,268,163
            
            
            
            3,663
            
            
            
            5,271,826Balance
      at March 31, 2010
            
            $
            245,586
            
            
            $
            7,875,974
            
            
            $
            9,454,714
            
            
            $
            73,401
            
            
            $
            17,649,675






4


PERNIX
THERAPEUTICS HOLDINGS, INC.


NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


(Unaudited)




Note
      1.
            Organization
      and Merger





Pernix
Therapeutics Holdings, Inc. (“Pernix” or the “Company”) is a specialty
pharmaceutical company focused on developing and commercializing branded
pharmaceutical products to meet unmet medical needs primarily in pediatrics.
Pernix’s sales force promotes products in approximately 30 states.





On
October 6, 2009, Pernix Therapeutics, Inc. (“PTI”) entered into an
Agreement and Plan of Merger with Golf Trust of America, Inc. (“GTA”). At the
closing of the merger on March 9, 2010, PTI merged with and into a wholly owned
subsidiary of GTA and GTA issued 20,900,000 shares of its common stock to PTI’s
stockholders, representing approximately 84% of the combined company’s
outstanding common stock on a fully diluted basis.  As a result of the
merger, (i) PTI became a wholly owned subsidiary of GTA, (ii) the President of
PTI was appointed President and Chief Executive Officer of the combined company
and (iii) the combined company’s Board was reconstituted, with three Board
members selected by PTI and two directors of GTA
retained.  Immediately following the closing of the merger, the
Company changed its name from Golf Trust of America, Inc. to Pernix Therapeutics
Holdings, Inc.  PTI was deemed to be the acquiring company for
accounting purposes and the transaction was accounted for as a reverse
acquisition in accordance with accounting principles generally accepted in the
United States (“GAAP”).  Accordingly the Company’s financial
statements for periods prior to the merger reflect the historical results of PTI
and  not GTA. The Company’s financial statements for all subsequent
periods reflect the results of the combined company.  Stockholders’
equity has been retroactively restated to reflect the number of shares of common
stock received by former PTI stockholders in the merger, after giving effect to
the difference between the par value of the common stock of PTI and GTA, with
the offset to additional paid-in capital.  In addition, the pre-merger
financial information has been restated to reflect the 2-to1 reverse split of
GTA’s common stock that became effective immediately prior to the closing of the
merger.




Unless
specifically noted otherwise, as used throughout these combined and consolidated
financial statements, the term “Company” or “Pernix” refers to the combined
company after the merger and the business of PTI before the
merger.  The terms PTI and GTA refer to such entities’ standalone
businesses prior to the merger.




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





Interim
Financial Statements




The
accompanying unaudited combined and consolidated financial statements include
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of these financial statements. The combined and consolidated
balance sheet at December 31, 2009 has been derived from PTI’s audited
consolidated financial statements included in the Company’s Current Report on
Form 8-K dated March 15, 2010.




Certain
information and footnote disclosure normally included in financial statements
prepared in accordance with GAAP have been omitted. These combined and
consolidated financial statements should be read in conjunction with the
combined and consolidated financial statements and notes thereto included in the
Company’s Current Report on Form 8-K dated March 15, 2010 and Annual Report on
Form 10-K for the year ended December 31, 2009.






Operating
results for the three month period ended March 31, 2010 are not necessarily
indicative of the results for the full year.





Principles
of Consolidation and Combination





The
combined and consolidated financial statements have been prepared in accordance
with GAAP and include the accounts of (i) Pernix’s wholly owned subsidiaries
Pernix Thereapeutics, LLC, GTA GP, Inc. and GTA LP, Inc., (ii) Gaine, Inc.
(“Gaine”) which is a patent and license holding company that is owned 50% by
Pernix and is considered a controlled entity and (iii) Pernix’s 60%-owned
subsidiary as of March 31, 2009, Macoven Pharmaceuticals, LLC
(“Macoven”).  From January 2009 through July 2009, the financial
statements of Pernix included the operations of Macoven; however, operations for
this subsidiary were not material.  As of July 13, 2009, Macoven
is no longer consolidated because it became owned 60% by the former stockholders
of PTI (in proportion to their ownership of PTI), 20% by the Company’s Executive
Vice President of Operations and 20% by an officer of Macoven.





5





Transactions
between and among the Company and its consolidated subsidiaries and combined
affiliates are eliminated.





Under the
consolidation method, an affiliated company’s results of operations are
reflected within the combined and consolidated statement of operations. Earnings
or losses attributable to other stockholders of a consolidated company are
recognized as non-controlling interest in the Company’s combined and
consolidated statement of operations.





Management’s
Estimates and Assumptions





The
preparation of combined and consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the combined and consolidated financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates. The Company reviews all
significant estimates affecting the combined and consolidated financial
statements on a recurring basis and records the effect of any necessary
adjustments prior to their issuance. Significant estimates of the Company
include: contracted vendor discounts, returns on product sales, sales
commissions, Medicaid rebates, allocation of CEDAX assets, amortization and
depreciation.





Financial
Instruments, Credit Risk Concentrations and Economic Dependency





The
financial instruments that potentially subject the Company to concentrations of
credit risk are cash, cash equivalents and accounts receivable and notes
receivable. The Company’s cash and cash equivalents are maintained with banks
with federally insured deposits, and balances exceed federally insured
limits.





The
Company relies on certain materials used in its development and manufacturing
processes, some of which are procured from a single source. Pernix partners with
third parties to manufacture all of its products and product candidates. Most of
Pernix’s manufacturing arrangements are not subject to long-term agreements and
generally may be terminated by either party without penalty at any time. Changes
in the price of raw materials and manufacturing costs could adversely affect
Pernix’s gross margins on the sale of its products. Changes in Pernix’s mix of
products sold could also affect its costs of product sales.





Trade
accounts receivable are unsecured and are due primarily from wholesalers and
distributors that sell to individual pharmacies. The Company continually
evaluates the collectability of accounts receivable and maintains allowances for
potential losses when necessary. The Company primarily sells to three major
customers.





Cash
and Cash Equivalents




The
Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents. The Company
maintains cash deposits with a federally insured bank that may at times exceed
federally insured limits. Certain funds in excess of the federally insured
limits are held in sweep investment accounts collateralized by the securities in
which the funds are invested. The Company is exposed to credit risk in the event
of a default by the financial institution holding its cash deposits to the
extent such deposits exceed federally insured limits. The Company has not
experienced any losses due to such concentration of credit risk.





Property,
Equipment and Depreciation





Property
and equipment are stated at cost. Depreciation is computed over the estimated
useful lives of the assets using the straight-line method. Generally, the
Company assigns the following estimated useful lives to these
categories:





Service
      LifeBuildings
            39
      yearsEquipment
            5-7
      yearsFurniture
      and fixtures
            5-7
      yearsComputer
      software and website
            3
      years








Maintenance
and repairs are charged against earnings when incurred. Additions and
improvements that extend the economic useful life of the asset are capitalized.
The cost and accumulated depreciation of assets sold or retired are removed from
the respective accounts, and any resulting gain or loss is reflected in current
earnings.





6





The
Company reviews long-lived assets, such as property and equipment, and purchased
intangible assets subject to amortization, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Fair value is determined through various valuation techniques
including discounted cash flow models, quoted market values and third-party
independent appraisals, as considered necessary. This analysis is highly
subjective.  If property and equipment are considered to be impaired,
the impairment to be recognized equals the amount by which the carrying value of
the asset exceeds its fair market value.





Intangible
Assets





Intangible
assets, such as patents, product licenses and product rights that are considered
to have a definite useful life, are amortized on a straight-line basis over the
shorter of their economic or legal useful life which ranges from three to
fifteen years.





Accounts
Receivable





Accounts
receivable result primarily from sales of pharmaceutical products. Credit is
extended based on the customer’s financial condition, and generally collateral
is not required. The Company ages its accounts receivable using the
corresponding sale date of the transaction and considers accounts past due based
on terms agreed upon in the transaction, which is generally 30 days. Current
earnings are charged with an allowance for doubtful accounts based on experience
and evaluation of the individual accounts. Write-offs of doubtful accounts are
charged against this allowance once the amount is determined to be uncollectible
by management. Recoveries of trade receivables previously written off are
recorded when recovered. At March 31, 2010 and December 31, 2009,
management evaluated the need for an allowance and determined no allowance was
necessary.





Product
Returns





Consistent
with industry practice, the Company offers contractual return rights that allow
customers to return products. On average, product returns occur approximately
eighteen months following the sale. The Company adjusts its estimate of product
returns when it becomes aware of other factors that it believes could
significantly impact its expected returns. These factors include the shelf life
of the product shipped, actual and historical return rates for expired lots, the
remaining time to expiration of the product and the forecast of future sales of
the product, as well as competitive issues such as new product entrants and
other known changes in sales trends. The Company evaluates this reserve on a
quarterly basis, assessing each of the factors described above, and adjusts the
reserve accordingly.





Revenue
Recognition





The
Company records revenue from product sales when the goods are shipped and the
customer takes ownership and assumes risk of loss (free-on-board destination),
collection of the relevant receivable is probable, persuasive evidence of an
arrangement exists and the sales price is fixed and determinable. At the time of
sale, estimates for a variety of sales deductions, such as sales rebates,
discounts and incentives, Medicaid rebates and product returns are recorded.
Costs associated with sales revenues are recognized when the related revenues
are recognized. Gross product sales are subject to a variety of deductions that
are generally estimated and recorded in the same period that the revenues are
recognized. The Company records provisions for Medicaid and contract rebates
based upon its actual experience ratio of rebates paid and actual prescriptions
filled during prior periods.





Three
      months ended
              March
      31,2010
            
            
            Three
      months ended
              March
      31,
              2009Gross
      product sales
            
            $
            10,832,552
            
            
            $
            9,864,573Collaboration
      revenue
            
            
            524,256
            
            
            
            —Sales
      discounts
            
            
            (921,586
            )
            
            
            (683,576
            )Sales
      returns allowance
            
            
            (255,171
            )
            
            
            (748,000
            )Medicaid
      rebates
            
            
            (1,306,742
            )
            
            
            (1,198,333
            )Net
      sales
            
            $
            8,873,309
            
            
            $
            7,234,664




Inventories





Inventory
is valued at the lower of cost or market, with cost determined by using the
specific identification method. Allowances for slow-moving, obsolete, and/or
declines in the value of inventory are determined based on management’s
assessments.





7





Economic
Dependency





The
Company purchases  its entire merchandise inventory from outside
manufacturers. In 2009, the Company expanded its available
suppliers.  For the year ended December 31, 2009, approximately 85% of
the inventory received was from three primary suppliers, allocated 22%, 29% and
34% among these three suppliers. For the three months ended March 31, 2010,
approximately 91% of the inventory received was from two primary suppliers,
allocated 68% and 23% among these two suppliers.  The Company believes
that it has good relationships with its current suppliers, and could secure the
services of alternative suppliers if necessary or required.





Research and Development
Costs





Research
and development costs are expensed as incurred in connection with the Company’s
internal programs for the development of products. Pernix either expenses
research and development costs as incurred or will pay manufacturers a prepaid
research and development fee which is amortized over the term of the related
agreement. The costs incurred for the three months ended March 31, 2010
primarily reflect the amortization of the $1.5 million development fee that the
Company paid to Macoven in July 2009 which is being amortized over the 18-month
term of the agreement.  Other research and development costs are
related to the testing of current products’ durability. The Company periodically
reviews its research and development agreements for impairment. Costs incurred
in connection with these programs for the three months ended March 31, 2010 and
2009 were approximately $271,000 and $143,000, respectively.





Segment
Reporting





The
Company is engaged solely in the business of marketing and selling
pharmaceutical products. Accordingly, the Company’s business is classified in a
single reportable segment, the sale and marketing of prescription products. Our
prescription products include a variety of branded pharmaceuticals primarily in
pediatrics.





Income
Taxes





Pernix
elected to be taxed as an S Corporation effective January 1, 2002. As such,
taxable earnings and losses after that date were included in the personal income
tax returns of the Company’s stockholders. Accordingly, Pernix was subject to
certain “built-in” gains tax for the difference between the fair value and tax
reporting bases of assets at the date of conversion to an S Corporation, if the
assets were sold (and a gain was recognized) within ten years following the date
of conversion. Pernix’s exposure to built-in gains was limited. Effective
January 1, 2010, Pernix made an election to terminate its S Corporation
status.  As a result of this election, income taxes are accounted for
using the asset and liability method pursuant to Accounting Standards
Codification (“ASC”) Topic 740-Income Taxes. Deferred taxes
are recognized for the tax consequences of “temporary differences” by applying
enacted statutory tax rates applicable to future years to the difference between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes for a change in tax rates is
recognized in income in the period that includes the enactment date. Pernix will
recognize future tax benefits to the extent that realization of such benefits is
more likely than not.




Gaine is
taxed as a corporation for income tax purposes. Accordingly, income taxes for
this subsidiary are accounted for using the asset and liability method pursuant
to ASC Topic 740, “Accounting for Income Taxes”.





Earnings
per Share




Earnings
per common share are presented under two formats: basic earnings per common
share and diluted earnings per common share. Earnings per share are computed by
dividing net income attributable to common shareholders by the weighted average
number of common shares outstanding during the period. Diluted earnings per
common share are computed by dividing net income by the weighted average number
of common shares outstanding during the period, plus the impact of restricted
stock and common stock equivalents (i.e., stock options) that are dilutive.
For the three months ended March 31, 2010 and 2009, the earnings per share was
the same for basic and diluted as the effect of the restricted stock and stock
equivalents were insignificant.




Reclassifications





Certain
reclassifications have been made to prior period amounts to conform with the
current period presentation.





8





Recent
Accounting Pronouncements





In June
2009, the Financial Account Standards Board (“FASB”) established the FASB
Accounting Standards Codification (“ASC” or the “Codification”) as the single
source of authoritative GAAP.  The FASB ASC superseded all then existing
non-SEC accounting and reporting standards.  The issuance of this statement
did not change U.S. GAAP, but has changed the applicable citations and naming
conventions used when referencing U.S. GAAP within these combined and
consolidated financial statements.









There
were no other recent accounting pronouncements that have not yet been adopted by
the Company that are expected to have a material impact on the Company’s
combined and consolidated financial statements.





Note
      3.
            Fair
      Value Measurement




Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. The fair value hierarchy prescribed by the
accounting literature contains three levels as follows:





Level
      1—
            Quoted
      prices in active markets for identical assets or
    liabilities.





Level
      2—
            Observable
      inputs other than Level 1 prices such as quoted prices for similar assets
      or liabilities; quoted prices in markets that are not active; or other
      inputs that are observable or can be corroborated by observable market
      data for substantially the full term of the assets or
      liabilities.





Level
      3—
            Unobservable
      inputs that are supported by little or no market activity and that are
      significant to the fair value of the assets or liabilities. Level 3 assets
      and liabilities include financial instruments whose value is determined
      using pricing models, discounted cash flow methodologies, or similar
      techniques, as well as instruments for which the determination of fair
      value requires significant management judgment or
    estimation.





In
addition, ASC 820 requires the Company to disclose the fair value for financial
assets on both a recurring and non-recurring basis.




The
carrying value of cash and cash equivalents, accounts receivable, other assets
and trade accounts payable approximate fair value due to the short-term nature
of these instruments. As of  March 31, 2010 and December 31,
2009, the Company had approximately $9,980,000 and $4,236,000, respectively,
invested in an overnight repurchase account which is classified as Level
2.




The
Company has a note receivable with a balance at March 31, 2010 of approximately
$191,000 which is measured at fair value on a nonrecurring basis.




The
Company reviews intangible assets for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be
recoverable.  These assets are classified as Level 3.




Note
      4.
            Business
      Combination




On March
24, 2010, the Company completed the acquisition of substantially all of the
assets and rights relating to CEDAX, a prescription antibiotic used to treat
mild to moderate infections of the throat, ear and respiratory tract, for an
aggregate purchase price of $6.1 million to be paid in three installments as
follows (i) $1.5 million which was paid at closing, (ii) $1.5 million to be paid
on the 60th day following
the closing, or May 23, 2010 and (iii) $3.1 million to be paid on the 270th day following the closing, or
December 19, 2010.  The aggregate remaining amount due is included as
a contract payable in the combined and consolidated balance sheet. The
acquisition was consummated pursuant to the terms of that certain Asset Purchase
Agreement dated January 8, 2010.  Pernix expects to fund the acquisition
using existing cash and cash equivalents and cash flows provided by existing
operations.




9





The
following summarizes the preliminary estimated fair values of the acquired
assets at the date of acquisition. The Company is in the process of finalizing
its appraisal of these fair value estimates and, accordingly, these estimates
are subject to change.





Inventories
            
            $
            718,000Equipment
            
            
            88,000Intangible
      assets – trademark rights and non-exclusive sublicense of US Patent to
      manufacture and sell the product
            
            
            5,294,000Total
      purchase price
            
            $
            6,100,000




Note
      5.
            Collaborations




The
Company often enters into collaborative arrangements to develop and
commercialize drug candidates. Collaborative activities might include research
and development, marketing and selling (including promotional activities and
physician detailing), manufacturing, and distribution. These collaborations
often require royalty or profit share payments, contingent upon the occurrence
of certain future events linked to the success of the product, as well as
expense reimbursements or payments to the third party. Revenues related to
products sold by the Company pursuant to these arrangements are included in net
product sales, while other sources of revenue (e.g., royalties and profit share
payments) are included in collaboration and other revenue. Operating expenses
for costs incurred pursuant to these arrangements are reported in their
respective expense line item, net of any payments made to or reimbursements
received from our collaboration partners.





Macoven
Pharmaceuticals, LLC





On
July 27, 2009, the Company and Macoven entered into an agreement whereby
the Company granted Macoven a non-exclusive license to develop, market and sell
generic products based on the Company’s branded products. The initial term of
the agreement is 18 months, and is automatically renewable for successive twelve
month terms unless terminated by either party. Pursuant to the terms of the
agreement, the Company paid Macoven a one-time development fee of $1,500,000.
This fee is being amortized over the 18-month term of the agreement. The
unamortized balance of the fee of $833,331 is included in current assets. The
Company has the exclusive rights to 100% of the net proceeds from sales of
generic equivalents of the Company’s branded products. Additionally, Pernix is
entitled to 10% of Macoven’s net proceeds, including operating costs, from sales
of generics that are not based on Pernix products to the extent Macoven retains
Pernix to administer, distribute and/or market any such products.  As
of March 31, 2010, Macoven has launched three Pernix-based generic products
Pyril DM, Pyril D and TRIP-PSE.  Collaboration revenue from these
products is approximately $413,000 for the three months ended March 31,
2010.





Co-promotion
agreements




The
Company seeks to enter into co-promotion agreements to enhance its promotional
efforts and sales of its products. The Company may enter into co-promotion
agreements whereby it obtains rights to market other parties’ products in return
for certain commissions or percentages of revenue on the sales Pernix
generates. Alternatively, Pernix may enter into co-promotion agreements with
respect to its products that are not aligned with its product focus or when
Pernix lacks sufficient sales force representation in a particular geographic
area. As of March 31, 2010, Pernix had entered into three co-promotion
agreements to market other parties’ products. The total revenue from these
agreements of approximately $111,000 for the three months ended March 31, 2010
is recorded as collaboration revenue included in net sales.




Note
      6.
            Accounts
      Receivable




Accounts
receivable consist of the following:




March
      31,
              2010
            
            
            December
      31,
                2009Trade
      accounts receivable
            
            $
            5,293,187
            
            
            $
            3,963,852Collaboration
      agreement receivables
            
            
            712,167
            
            
            
            297,078Less
      allowance for discounts
            
            
            (139,596
            )
            
            
            (127,573
            )Accounts
      receivable, net
            
            $
            5,865,758
            
            
            $
            4,133,357





10





The
Company typically requires customers to remit payments within 30 days. The
Company offers wholesale distributors a prompt payment discount as an incentive
to remit payment within the first 30 days after the invoice date. This discount
is generally between 2% and 7%. Because the Company’s wholesale distributors
typically take the prompt payment discount, the Company accrues 100% of the
prompt payment discounts, based on the gross amount of each invoice, at the time
of the sale, and the Company applies earned discounts at the time of payment.
The Company adjusts the accrual periodically to reflect actual experience.
Accounts receivable is stated net of estimated discounts. The terms of
collaboration receivables are pursuant to the respective agreements; however,
typically payments are to be remitted 45-60 days following each quarter
end.  The Company’s management evaluates accounts receivable to
determine if a provision for an allowance for doubtful accounts is appropriate.
As of March 31, 2010 and December 31, 2009, no receivables were outstanding
for longer than 90 days. As of March 31, 2010 and December 31, 2009, the
net amount of accounts receivable was considered collectible and no allowance
for doubtful accounts has been recorded.   The Company estimates
an allowance for returns on outstanding customer invoices that considers product
that was ordered but subsequently returned, primarily due to shipping damage,
prior to payment of the invoice.




Note
      7.
            Inventory




Inventories
consist of the following:




March
      31,
              2010
            
            
            December
      31,
              2009Purchased
      finished goods
            
            $
            1,108,304
            
            
            $
            1,081,970Purchased
      samples
            
            
            578,178
            
            
            
            591,8801,686,482
            
            
            
            1,673,850Less
      allowance for samples inventory
            
            
            (578,178
            )
            
            
            (591,880
            )$
            1,108,304
            
            
            $
            1,081,970





Note
      8.
            Property,
      Plant & Equipment




Property
and equipment consists of the following:




March
      31,
              2010
            
            
            December
      31,
              2009Land
            
            $
            952,342
            
            
            $
            —Equipment
            
            
            270,619
            
            
            
            182,185Furniture
      and fixtures
            
            
            43,516
            
            
            
            24,596Computer
      software and website
            
            
            88,500
            
            
            
            88,5001,354,977
            
            
            
            295,281Less
      accumulated depreciation
            
            
            (176,198
            )
            
            
            (155,825
            )$
            1,178,779
            
            
            $
            139,456





11





Depreciation
expense amounted to approximately $13,000 and $10,000 for the three months ended
March 31, 2010 and 2009, respectively.




In
July 2009, Pernix distributed all of the real property that it owned, at
that time, consisting of a 5,000 square-foot office facility and a 7,200
square-foot warehouse facility in Magnolia, TX and a 1,000 square-foot office
facility and a 2,500 square-foot warehouse facility in Gonzalez, LA to its
stockholders. At the time of the distribution the aggregate estimated value of
the two properties was approximately $1,310,000. Each stockholder of Pernix
contributed his or her interests in these two properties to a limited liability
company wholly-owned by the stockholders of Pernix (in proportion to their
respective ownership interests in Pernix) that, in turn, leased both properties
back to Pernix. The term of each lease is month to month and may be terminated
by either party without penalty.  Pursuant to these leases, Pernix
pays rent of $2,500 and $1,500 per month for the Texas and Louisiana facilities,
respectively. The Company believes these amounts reflect market rates that are
as favorable to Pernix as could be obtained with unrelated third parties, and
expects that its current facilities are sufficient to meet its needs into the
foreseeable future.   In March 2010, the Company acquired land
and furniture and fixtures valued at approximately $952,000 and $19,000, net of
accumulated depreciation of approximately $7,000, in the merger with GTA,
respectively.




Note
      9.
            Prepaid
      Expenses and Other Current Assets




Prepaid
expenses and other current assets consist of the following:




March
      31,
              2010
            
            
            December
      31,
              2009Prepaid
      expenses
            
            $
            349,707
            
            
            $
            119,123Deposits
      on inventory
            
            
            521,042
            
            
            
            506,596Note
      receivable
            
            
            191,084
            
            
            
            —Current
      unamortized research and development fees related to Macoven
      contract
            
            
            833,331
            
            
            
            1,000,000Total
            
            $
            1,895,164
            
            
            $
            1,625,719





The note
receivable of approximately $191,000 represents the estimated net present value
of a note receivable acquired from GTA in the merger.   Of the
remaining outstanding balance of  $199,666 (less net present value
discount of $8,582), $66,333 was received on May 1, 2010 and the balance of
$133,000 is due January 1, 2011.




Note
      10.
            Employee
      Compensation and Benefits




The
Company participates in a 401(k) plan (the “Plan”), which covers substantially
all full-time employees. The Plan is funded by employee contributions and
discretionary matching contributions determined by management. At the Company’s
discretion, it may match up to 100 percent of each employee’s contribution,
but not greater than the first 6 percent of the employee’s individual
salary. There is a six-month waiting period from date of hire to participate in
the Plan. Employees are 100 percent vested in employee and employer
contributions. Contribution expense for the three months ended March 31, 2010
and 2009 was approximately $49,000 and $73,000, respectively.




Stock
Options




The
Company currently uses the Black-Scholes-Merton 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.




12





There
were 100,000 stock options granted to non-employee board members and no options
were exercised during the three months ended March 31, 2010.




The
following table shows the assumptions used to value stock options on the date of
grant, as follows:


Three
      Months EndedMarch
      31,2010Estimated
      dividend yield
            
            
            0
            .0%Expected
      stock price volatility
            
            
            
            69%Risk-free
      interest rate
            
            
            2
            .77%Expected
      life of option (in years)
            
            
            6
            .0Weighted-average
      fair value per share
            
            $
            2
            .53





The
Company has not paid and does not anticipate paying cash dividends; therefore,
the expected dividend rate is assumed to be 0%. The expected stock price
volatility for the stock options is based on historical volatility of a
representative peer group of comparable companies selected using publicly
available industry and market capitalization data. The risk-free ratewas 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.




As
of March 31, 2010, the aggregate intrinsic value of options outstanding and
exercisable was approximately $243,000.




As
of March 31, 2010, there was approximately $248,000 of total unrecognized
compensation cost related to unvested stock options, which is expected to be
recognized over a weighted-average period of 2.94 years.




Restricted
Stock




During
the three months ended March 31, 2010, 100,000 shares of restricted stock
were issued to non-employee board members. As of March 31, 2010, there were
100,000 restricted common shares outstanding and approximately $390,000 of total
unrecognized compensation cost related to unvested restricted stock, which is
expected to be recognized over a weighted-average period of
2.94 years.




Stock-Based
Compensation Expense




The
following table shows the approximate amount of total stock-based compensation
expense recognized for employees and non-employees:


Three
      Months EndedMarch
      31,2010
            
            
            2009Employee
            
            $
            —
            
            
            $
            681,000Non-employees/Directors
            
            
            13,084
            
            
            
            —Total
            
            $
            13,084
            
            
            $
            681,000







13





The stock
compensation in the three months ended March 31, 2009 of $681,000 is related to
a stock transaction in January 2009, at a discount to fair value, between
one outside stockholder and certain officers of Pernix.




Note
      11.
            Major
      Customers




The
Company’s customers primarily consist of drug wholesalers, retail drug stores,
mass merchandiser and grocery store pharmacies in the United States. The Company
primarily sells products directly to drug wholesalers, which in turn, distribute
the products to retail drug stores, mass merchandisers and grocery store
pharmacies. The following tables list all of the Company’s customers that
individually comprise greater than 10% of total gross product sales and their
aggregate percentage of the Company’s total gross product sales for the
three months ended March 31, 2010 and 2009, and all customers that comprise more
than 10% of total accounts receivable and such customers’
aggregate percentage of the Company’s total accounts receivable as of March
31, 2010 and December 31, 2009:




Gross
      Product Sales
            
            For
      the three months ended
              March 31,2010
            
            
            2009Cardinal
      Health, Inc.
            
            
            45
            %
            
            
            33
            %McKesson
      Corporation
            
            
            37
            %
            
            
            27
            %Morris
      & Dickson
            
            
            8
            %
            
            
            16
            %Total
            
            
            90
            %
            
            
            76
            %





Accounts
      ReceivableMarch
      31,
              2010
            
            
            December
      31,
              2009Cardinal
      Health, Inc.
            
            
            53
            %
            
            
            37
            %McKesson
      Corporation
            
            
            37
            %
            
            
            22
            %Morris
      & Dickson
            
            
            4
            %
            
            
            26
            %Total
            
            
            94
            %
            
            
            85
            %





Note
      12.
            Intangible
      Assets




Intangible
assets consist of the following:




Life
            
            March
      31,
              2010
            
            
            December
      31, 2
              009Patent
            12
      years
            
            $
            500,000
            
            
            $
            500,000Product
      licenses and rights – Kiel technology
            15
      years
            
            
            700,000
            
            
            
            700,000Non-compete
      – Ubiquinone
            2
      years
            
            
            250,000
            
            
            
            250,000Trademark
      rights – BROVEX
            Infinite
            
            
            238,758
            
            
            
            238,758Trademark
      rights and non-exclusive sublicense of US Patent to manufacture and sell
      the product – CEDAX
            TBD
            
            
            5,293,591
            
            
            
            —6,982,349
            
            
            
            1,688,758Accumulated
      amortization
            
            
            
            (334,798
            )
            
            
            (279,421
            )$
            6,647,551
            
            
            $
            1,409,337





14





Patents




Gaine
entered into a patent assignment with the original owners of a U.S. patent for
an active pharmaceutical ingredient that the Company expects to use in four of
its product candidates. Gaine paid $500,000 for the ownership of this
patent.




Product
Licenses




The
Company acquired rights to certain products incorporating a patented drug
delivery technology owned by Kiel pursuant to a development agreement dated
November 2006. Pursuant to the 2006 development agreement, Kiel agreed to
develop certain products using the Kiel technology, including ALDEX AN and
PEDIATEX TD, and granted Gaine an exclusive, worldwide license to manufacture
and market these products at its expense. Gaine, in turn, licensed these
products to Pernix.




The term
of this license is 15 years. As consideration for the license and development of
these products, Gaine paid Kiel an aggregate fee of $800,000.




On
October 27, 2009, the Company executed a cancellation and settlement
agreement related to a license agreement for the Company’s QUINZYME line.
Pursuant to the agreement, the Company paid a one-time settlement fee of
$250,000. In consideration for this amount, the licensor agreed not to sell,
develop or cause to be developed any ubiquinone products (the active ingredient
in Pernix’s QUINZYME line) for a period of two years. No further payments will
be due under the former agreement.




On June
1, 2009, the Company completed an acquisition of all rights to the BROVEX
product lines including related trademarks and inventory for $450,000 in cash
paid at closing.  The purchase price was allocated $211,000 to
inventory and $239,000 to the trade name based on their estimated fair
values.




See Note
4 for discussion regarding the acquisition of the CEDAX trademark and sublicense
rights.  The Company has not recorded any amortization of these
intangible assets as of March 31, 2010 subject to completion of the appraisal of
the fair value estimates.




Amortization
expense amounts to approximately $55,000 and $45,000 for the three months ending
March 31, 2010 and 2009, respectively.




Estimated
amortization expense related to intangible assets, excluding CEDAX, for each of
the five succeeding years and thereafter is as follows:




Year
      ending December 31,
            
            Amount2010
      (April through December)
            
            $
            164,0002011
            
            
            198,0002012
            
            
            94,0002013
            
            
            94,0002014
            
            
            94,000Thereafter
            
            
            471,000$
            1,115,000




Note
      13.
            Accrued
      Allowances





The
Company’s customers may return products due to product expiration and product
replacement. On average, products are returned approximately 18 months following
purchase. Returns allowance is estimated based on historical
experience.




Certain
vendors have negotiated contracted discounts that are based on sales volumes.
These discounts are paid quarterly.










March
      31,
              2010
            
            
            December
      31,
              2009Accrued
      returns allowance
            
            $
            3,834,000
            
            
            $
            3,975,000Accrued
      contracted vendor discounts
            
            
            566,533
            
            
            
            519,542Accrued
      Medicaid rebates
            
            
            2,245,000
            
            
            
            2,301,000Total
            
            $
            6,645,533
            
            
            $
            6,795,542




15




Note
      14.
            Commitments
      and Contingencies




Licenses
and Patents




On
January 30, 2009, Pernix and Kiel memorialized their then existing oral
licensing arrangement pursuant to which Kiel granted the Company an exclusive
license without geographic limitation to use Kiel’s patented drug delivery
technology and related intellectual property, or “Kiel technology,” to
manufacture and market the ALDEX CT, ALDEX D, ALDEX DM and Z-COF-8DM products in
exchange for royalty fees. The agreement may be terminated by either party at
any time after January 30, 2011 without cause upon 30 days written notice
to the other party.




The
patents covering the Kiel technology expire in 2026 and 2027.




For a
description of the Company’s other patent and license agreements, see Note
12.




Consulting
Agreements




The Company receives certain
legislative consulting services pursuant to a six-month contract that expires on
August 5, 2010 for a total fee of $50,000.




Service
Agreements




The
Company receives data packages on a monthly basis from a third party provider.
The Company is obligated to pay for these services in advance on a quarterly
basis. Pernix amended this agreement in January and again in March
2010.  Pernix is contracted to pay approximately $60,000 quarterly for
these services until January 31, 2011.  For the period February 2011
until the contract expires in December 2011, the quarterly fee will be
approximately $30,000 unless additional data services that expire on January 31,
2011 are renewed.




The
Company enters in to other service agreements from time to time in the ordinary
course of business.




Purchase
Commitments




As of March 31, 2010, the Company has
open purchase orders, net of deposits, of approximately $1,077,000.




Uninsured
Liabilities




The
Company is exposed to various risks of losses related to torts: theft of, damage
to, and destruction of assets; errors and omissions; injuries to employees; and
natural disasters for which the Company maintains a general liability insurance
with limits and deductibles that management believes prudent in light of the
exposure of the Company to loss and the cost of the insurance.




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 combined and consolidated financial
position or results of operations of the Company.




Note
      15.
            Income
      Taxes




The
income tax provision consisted of the income tax expenses (benefits) for the
three months ended March 31, 2010 and 2009, as presented in the table
below.  The tax benefit for the period ended March 31, 2010 is not
representative of the anticipated effective rate for the succeeding quarters or
the year as it includes one-time benefits associated with the termination of the
S election and the recognition of net operating loss carryforwards associated
with the reverse merger with GTA. For the three months ended March 31, 2009, the
components of the income tax benefit related primarily to the operations of
Gaine and state income taxes relating to Pernix.




For
      the three months ended
              March
      31,2010
            
            
            2009Current:Federal
            
            $
            1,297,688
            
            
            $
            (54,000
            )State
            
            
            241,209
            
            
            
            (6,000
            )1,538,897
            
            
            
            —Deferred
      Provision:Federal
            
            
            (282,000
            )
            
            
            —State
            
            
            (2,275,000
            )
            
            
            —(2,557,000
            )
            
            
            —$
            (1,018,103
            )
            
            $
            (60,000
            )





The
effective income tax expense differs from that which would be determined by
applying statutory income tax rates to the earnings before taxes of Gaine due to
the impact of state income taxes and non-deductible expenses.




The
following is a  reconciliation from the federal statutory rate to the
effective tax rate for the three months ended March 31, 2010 and
2009:




16




2010
            
            
            2009Expected
      taxes at statutory rates
            
            
            34.0
            %
            
            
            (34.0
            %)State
      taxes
            
            
            3.8
            %
            
            
            (4.0
            %)Permanent
      differences
            
            
            0.6
            %
            
            
            (48.9
            %)Establishment
      of deferred tax asset due to tax status change
            
            
            (44.5
            %)
            
            
            —Other
            
            
            0.2
            %
            
            
            —(5.9
            %)
            
            
            (86.9
            %)Change
      in valuation allowance
            
            
            (18.5
            %)
            
            
            —Total
            
            
            (24.4
            %)
            
            
            (86.9
            %)





For the
three months ended March 31, 2009, the rate reconciliation reflects only the
operations of Gaine as PTI was an S-Corporation (See Note 2 above) until January
1, 2010.  For the three months ended March 31, 2009, Gaine’s net loss
was approximately $69,000.




PTI
terminated its S corporation status effective January 1,
2010.  Accordingly, it was required to record deferred taxes on its
temporary differences at the date of termination.  The resulting
deferred tax asset recorded as a tax benefit was approximately
$1,858,000.




In
connection with the merger, a portion of the valuation allowance on net
operating loss carryovers was released in an amount equal to the losses that are
projected to be utilized in the five tax years following the
acquisition.  The resulting release of the valuation allowance that
was recorded as a tax benefit was approximately $770,000.






Note
16.  Net Income Per Share




Basic
net income per share is computed by dividing net income by the weighted-average
number of common shares outstanding during each period. Diluted net income per
share is computed by dividing net income by the sum of the weighted-average
number of common shares and dilutive common share equivalents outstanding during
the period. Dilutive common share equivalents consist of the incremental common
shares issuable upon the exercise of stock options and the impact of non-vested
restricted stock grants.




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


Three
      Months Ended March 31,2010
            
            
            2009Numerator:Net
      income
            
            $
            5,268,163
            
            
            $
            2,682,271Denominator:Weighted-average
      common shares, basic
            
            
            21,834,971
            
            
            
            20,900,000Dilutive
      effect of stock options, warrants and restricted stock
            
            
            32,286
            
            
            
            —Weighted-average
      common shares, diluted
            
            
            21,867,257
            
            
            
            20,900,000Net
      income per share, basic
            
            $
            .24
            
            
            $
            .13Net
      income per share, diluted
            
            $
            .24
            
            
            $
            .13Anti-dilutive
      weighted-average shares
            
            
            2,556
            
            
            
            —




17







Note
      17.
            Subsequent
      Events





Agreements




Effective
April 1, 2010, the Company entered in to a co-promotion agreement with WraSer
Pharmaceuticals, LLC to exclusively market the CEDAX capsule as this form is not
designated for the pediatric market which is currently the Company’s core
business. WraSer will receive 70% of the net sales proceeds pursuant to this
agreement.  The Company will promote the CEDAX suspension products in
the pediatric market.




On April
13, 2010, the Company entered in to consulting agreement with Kiel Laboratories,
Inc. for the provision of certain research and development services related to
the filing of a new drug application for one of the Company’s antitussive
product candidates covered by Gaine’s patent.  The aggregate
consulting fee for these services is $200,000 and was paid concurrent with the
signing of the agreement.  This fee is being amortized over the term
of this agreement which expires on April 13, 2011.





Letter
of Credit




In
connection with a certain manufacturing vendor, the Company was required to
provide a letter of credit agreement as security for its performance of payment
in the amount of $500,000.  The letter of credit expires on April 30,
2011.




Stock
Repurchase Authorization




On May
12, 2010, the Company’s Board of Directors authorized the repurchase of up to
$5,000,000 in shares of the Company's common stock. Stock repurchases under this
authorization may be made through open market and privately negotiated
transactions at times and in such amounts as management deems appropriate. The
timing and actual number of shares repurchased will depend on a variety of
factors, including price, cash balances, general business and market conditions,
the dilutive effects of share-based incentive plans, alternative investment
opportunities and working capital needs. The stock repurchase authorization does
not have an expiration date and may be limited or terminated by the Board of
Directors at any time without prior notice. The purchases will be funded from
available cash balances and repurchased shares will be designated as treasury
shares.  Each individual stock repurchase will be subject to Board
approval.  As of May 14, 2010, no shares have been repurchased
pertaining to this authorization.




Employee
Stock Options and Awards




On May
12, 2010, 540,000 option shares, in the aggregate, were granted from the 2009
Stock Incentive Plan.  This included 150,000 stock options to the
Company’s Executive Vice President of Operations and 75,000 stock options to the
Company’s CFO.  Certain other employees of the Company received option
awards based on seniority.  The exercise price is $3.73, the most
recent closing price of our common stock on NYSE Amex price prior to the grant
date, as specified by the Compensation Committee.   These options
will vest ratably over three years and expire ten years from the date of the
grant.





18




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






You
should read the following discussion and analysis of Pernix’s combined and
consolidated financial condition and results of operations together with
financial statements and accompanying notes included in this Form 10-Q. In
addition to historical information, the following discussion contains
forward-looking statements that involve risks, uncertainties and assumptions.
Pernix’s actual results may differ materially from those anticipated in these
forward-looking statements as a result of many important factors, including, but
not limited to, those set forth in “Item 1A – Risk Factors” of Part II of this
Form 10-Q.




Overview




Pernix
Therapeutics, Inc. is a growing and profitable specialty pharmaceutical company
focused on developing and commercializing branded pharmaceutical products to
meet unmet medical needs primarily in pediatrics. Our goal is to build a broad
portfolio of products through a combination of internal development, acquisition
and in-licensing activities, and to utilize our sales force to promote our
products in our target markets.
  We
utilize unique formulations and drug delivery technologies for existing drug
compounds to improve patient care by increasing patient compliance and reducing
adverse side effects relative to existing therapies. Additionally, we focus our
product development strategy on placing solid intellectual property around our
products to protect our investment. We have acquired substantially all of the
intellectual property associated with our products through license agreements
and acquisitions.


Since our
inception in 1999, we have assembled a product portfolio that currently includes
seven marketed product lines consisting of 15 products. Our ALDEX product line
currently includes ALDEX AN, ALDEX CT, ALDEX D and ALDEX DM, which are oral
antihistamine/decongestant/antitussive (cough suppressant) combinations
indicated for the treatment of allergies and symptoms of the common cold.
PEDIATEX TD is also an oral antihistamine/decongestant combination indicated for
the treatment of respiratory allergies. Z-COF 8DM is an oral
decongestant/expectorant/ cough suppressant indicated for the treatment of
allergies and symptoms of the common cold. The BROVEX line currently includes
BROVEX PEB, BROVEX PEB DM, BROVEX PSB, BROVEX PSB DM, BROVEX PSE and BROVEX PSE
DM, which are oral antihistamine/decongestant/antitussive (cough suppressant)
combinations indicated for the treatment of allergies and symptoms of the common
cold. In February 2009, we introduced our first medical food product,
REZYST IM. REZYST IM is a chewable tablet probiotic indicated to replace active
cultures that are destroyed by diet and antibiotics and to reduce symptoms
associated with irritable bowel syndrome and various gastrointestinal issues.
Our second medical food product, QUINZYME, was launched in July 2009.
QUINZYME is a 90 mg ubiquinone smooth dissolve tablet for patients with depleted
ubiquinone levels and for patients on statin therapy. The most recent addition
to our product portfolio is CEDAX which is a prescription antibiotic used to
treat mild to moderate infections of the throat, ear and respiratory tract that
we acquired on March 24, 2010 from Shionogi Pharma, Inc. (formerly Sciele
Pharma, Inc.).




In
addition to our own product portfolio, we have entered into co-promotion
agreements to enhance the promotional efforts and sales of our
products.  We may enter into co-promotion agreements whereby we obtain
rights to market other parties’ products in return for certain commissions or
percentages of revenue on the sales we generate.  Alternatively, we
may enter into co-promotion agreements with respect to our products that are not
aligned with our product focus or when we lack sufficient sales force
representation in a particular geographic area.  As of March 31, 2010,
we had entered into three co-promotion agreements to market other parties’
products.  Effective April 1, 2010, we entered into a co-promotion
agreement with WraSer Pharmaceuticals, LLC to exclusively market the CEDAX
capsule as this form is not designated for the pediatric market which is
currently the Company’s core business.  The Company will promote the
CEDAX suspension products which are indicated for the pediatric
market.  See further discussion below under the caption “Net
Sales.”




Some of
our products are marketed without a Federal Drug Administration (“FDA”) approved
marketing application because we consider them to be identical, related or
similar to products that have existed in the market without an FDA-approved
marketing application, and which were thought not to require pre-market
approval, or which were approved only on the basis of safety, at the time they
entered the marketplace, subject to FDA enforcement policies established with
the FDA’s Drug Efficacy Study Implementation, or DESI, program. For a more
complete discussion regarding FDA drug approval requirements, please see Item
1A-“Risks Factors-Some of Pernix’s specialty pharmaceutical products are now
being marketed without FDA approvals” of Part II of this Form 10-Q.




19


Our sales
force, which consists of 32 full-time sales representatives, 3 regional sales
directors and 2 national sales directors as of May 12, 2010, promotes our
products in approximately 30 states in the U.S. Our sales force is supported by
six senior managers and five administrative staff. Our sales management team
consists of pharmaceutical industry veterans experienced in management, business
development, and sales and marketing, and has an average of nine years of sales
management experience.


For the
three months ended March 31, 2010 and 2009, our net sales were approximately
$8,873,000 and $7,235,000 and our income before income taxes and non-controlling
interest was approximately $4,254,000 and $2,588,000, respectively. Our net cash
provided by operating activities for the three months ended March 31, 2010 and
2009 was approximately $3,749,000 and
$3,047,000,  respectively.


On
January 8, 2010, Pernix entered into an asset purchase agreement with Shionogi
Pharma, Inc. (“Shionogi”) (formerly Sciele Pharma, Inc.)  to acquire
substantially all of Shionogi’s assets and rights relating to CEDAX, a
prescription antibiotic used to treat mild to moderate infections of the throat,
ear and respiratory tract, for an aggregate purchase price of $6.1 million to be
paid in three installments as follows (i) $1.5 million which was paid at closing
on March 24, 2010, (ii) $1.5 million to be paid on the 60th day following the closing, or
May 23, 2010 and (iii) $3.1 million to be paid on the 270th day following the closing, or
December 19, 2010.  We expect to make these payments from existing
cash and cash equivalents and cash flows from operations.  For
additional information on our acquisition of CEDAX, see Note 4 to Pernix’s
Combined and Consolidated Financial Statements for the three months ended March
31, 2010 and 2009 contained in Part I, Item I of this Form 10-Q.





On
October 6, 2009, Pernix Therapeutics, Inc. (“PTI”) entered into an
Agreement and Plan of Merger with Golf Trust of America, Inc. (“GTA”). At the
closing of the merger on March 9, 2010, PTI merged with and into a wholly owned
subsidiary of GTA and GTA issued 20,900,000 shares of its common stock to PTI’s
stockholders, representing approximately 84% of the combined company’s
outstanding common stock on a fully diluted basis.  As a result of the
merger, (i) PTI became a wholly owned subsidiary of GTA, (ii) the President of
PTI was appointed President and Chief Executive Officer of the combined company
and (iii) the combined company’s Board was reconstituted, with three Board
members selected by PTI and two directors of GTA
retained.  Immediately following the closing of the merger, the
Company changed its name from Golf Trust of America, Inc. to Pernix Therapeutics
Holdings, Inc.  PTI was deemed to be the acquiring company for
accounting purposes and the transaction was accounted for as a reverse
acquisition in accordance with accounting principles generally accepted in the
United States (“GAAP”). For additional information on the merger, see Note 1 to
Pernix’s Combined and Consolidated Financial Statements for the three months
ended March 31, 2010 and 2009 contained in Part I, Item I of this Form
10-Q.





Financial
Operations Overview




The discussion in this section
describes our combined and consolidated income statement
categories.  For a discussion of our combined and consolidated results
of operations, see “Results of Operations” below.




Net
Sales




Pernix’s
net sales consist of net product sales and collaboration revenue from
co-promotion and other revenue sharing agreements. Pernix recognizes product
sales net of estimated allowances for product returns, discounts and Medicaid
rebates. The primary factors that determine Pernix’s net product sales are the
level of demand for Pernix’s products, unit sales prices and the amount of sales
adjustments that Pernix recognizes. In addition to our own product portfolio, we
have entered into co-promotion agreements and other revenue sharing arrangements
with various parties to market certain of their products in return for
commissions or percentages of revenue on the sales we generate or on the
sales they generate on generic products based on our brand products. As of March
31, 2010, we marketed three products under co-promotion agreements in addition
to our collaboration agreement with Macoven (see Notes 5 and 17 to Pernix’s
Combined and Consolidated Financial Statements for the three months ended March
31, 2010 and 2009 contained in Part I, Item I of this Form 10-Q).  The
total revenue from these co-promotion agreements was approximately $111,000 for
the three months ended March 31, 2010.




As of
March 31, 2010, Macoven has launched three Pernix-based generic products Pyril
DM, Pyril D and TRIP-PSE.  Pursuant to our development agreement with
Macoven, we are entitled to 100% of the net sales proceeds of these
products.  Net sales proceeds from these products was approximately
$413,000 for the three months ended March 31, 2010.




20





The
following table sets forth a summary of Pernix’s net sales for the three months
ended March 31, 2010 and 2009 ( in thousands).




Three
      months ended
              March 31,2010
            
            
            2009Gross
      Product SalesUpper
      respiratory products
            
            $
            10,700
            
            
            $
            9,834Medical
      food products
            
            
            132
            
            
            
            30Collaboration
      Revenue
            
            
            524
            
            
            
            —Gross
      Sales
            
            
            11,356
            
            
            
            9,864Discounts
            
            
            (921
            )
            
            
            (683
            )Allowance
      for Returns
            
            
            (255
            )
            
            
            (748
            )Medicaid
      Rebate Expense
            
            
            (1,307
            )
            
            
            (1,198
            )Net
      Sales Revenues
            
            $
            8,873
            
            
            $
            7,235





Cost
of Product Sales




Pernix’s
cost of sales is primarily comprised of the costs of manufacturing and
distributing Pernix’s pharmaceutical products and samples. In particular, cost
of sales includes third-party manufacturing and distribution costs and the cost
of active pharmaceutical ingredients. Pernix partners with third parties to
manufacture all of its products and product candidates.




Most of
our manufacturing arrangements are not subject to long-term agreements and
generally may be terminated by either party without penalty at any time. Changes
in the price of raw materials and manufacturing costs could adversely affect
Pernix’s gross margins on the sale of its products. Changes in Pernix’s mix of
products sold also affect its cost of sales.




Selling
Expenses




Pernix’s
selling expenses consist of salaries, commission and incentive expenses for our
sales force; all overhead costs of our sales force; and freight, advertising and
promotion costs. The most significant component of Pernix’s sales and marketing
expenses is salaries, commissions and incentive expenses for our sales force.
Sales commissions are based on when our customers sell Pernix products to retail
customers not when we sell Pernix products to our customers. Therefore, there
may be a lag between the time of Pernix’s sale to its customer and when the
commission is ultimately earned on that sale.




Pernix
expects that its sales and marketing expenses will increase as it expands its
sales and marketing infrastructure to support additional products.




Royalty
Expenses




Royalty
expenses include the contractual amounts Pernix is required to pay the licensors
from which it has acquired the rights to certain of its marketed
products.  Product mix affects Pernix’s royalties. For a description
of the agreements that currently require royalty fees see  Pernix’s
license and co-promotion agreements, see Note 14 to Pernix’s Combined and
Consolidated Financial Statements for the three months ended March 31, 2010 and
2009 contained in Part I, Item I of this Form 10-Q.





General
and Administrative Expenses




General
and administrative expenses primarily include salaries and benefits of
management and administrative personnel; professional fees; consulting fees;
management and administrative personnel overhead expenses; and
insurance.   Pernix expects that its general and administrative
expenses will increase significantly due to the public company costs including,
but not limited to, accounting and legal professional fees, exchange listing
fees, Public Company Accounting Oversight Board fees, and printing and reporting
fees.




Research
and Development Expenses




Research
and development expenses consist of costs incurred in identifying, developing
and testing products and product candidates. Pernix either expenses research and
development costs as incurred or will pay manufacturers a prepaid research and
development fee. Pernix believes that significant investment in research and
development is important to its competitive position and plans to increase its
expenditures for research and development to realize the potential of the
product candidates that it is developing or may develop.   For
discussion of the certain research and development expenses see Note 5 to
Pernix’s Combined and Consolidated Financial Statements for the three months
ended March 31, 2010 and 2009 contained in Part I, Item I of this Form
10-Q.





21




Other
Income and Expenses




Depreciation
Expense




Depreciation
expense is recognized for Pernix’s property and equipment, which it depreciates
over the estimated useful lives of the assets using the straight-line
method.




Income
Taxes




Pernix
elected to be taxed as an S Corporation effective January 1, 2002. As such,
taxable earnings and losses after that date were included in the personal income
tax returns of the Company’s stockholders. Accordingly, Pernix was subject to
certain “built-in” gains tax for the difference between the fair value and tax
reporting bases of assets at the date of conversion to an S Corporation, if the
assets were sold (and a gain was recognized) within ten years following the date
of conversion. Pernix’s exposure to built-in gains was limited. Effective
January 1, 2010, Pernix terminated its S corporation status.  As a
result of this election, income taxes are accounted for using the asset and
liability method pursuant to Accounting Standards Codification (“ASC”) Topic
740-Income Taxes.
Deferred taxes are recognized for the tax consequences of “temporary
differences” by applying enacted statutory tax rates applicable to future years
to the difference between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The effect on deferred taxes for a
change in tax rates is recognized in income in the period that includes the
enactment date. The resulting deferred tax asset recorded as a tax benefit was
$1,858,000. Pernix will recognize future tax benefits to the extent that
realization of such benefits is more likely than not. The tax benefit for the
period ended March 31, 2010 is not representative of the anticipated effective
rate for the succeeding quarters or the year as it includes one-time benefits
associated with the termination of the S election and the recognition of net
operating loss carryforwards associated with the reverse merger with
GTA.





Pernix
terminated is S corporation status effective January 1,
2010.  Accordingly, we were required to record deferred taxes on its
temporary differences at the date of termination.  The resulting
deferred tax asset recorded as a tax benefit was $1,858,000.





In
connection with the merger, a portion of the valuation allowance on operating
loss carryovers was released in an amount equal to the losses that are projected
to be utilized in the five tax years following the acquisition.  The
resulting release of the valuation allowance that was recorded as a tax benefit
was $770,000.







Gaine is
also taxed as a corporation for income tax purposes. Accordingly, income taxes
for this subsidiary are accounted for using the asset and liability method
pursuant to Accounting Standards Codification (“ASC”) Topic 740-Income Taxes. Deferred income
taxes were not material as of  March 31, 2010
and  2009.




Non-controlling
interest




The
non-controlling interest represents the 50% outside ownership of Gaine. See Note
1 to Pernix’s Combined and Consolidated Financial Statements for the three
months ended March 31, 2010 and 2009.




Critical
Accounting Estimates




Management’s
discussion and analysis of Pernix’s financial condition and results of
operations are based on Pernix’s combined and consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of Pernix’s combined and
consolidated financial statements requires Pernix’s management to make estimates
and assumptions that affect Pernix’s reported assets and liabilities, revenues
and expenses and other financial information. Reported results could differ
significantly under different estimates and assumptions. In addition, Pernix’s
reported financial condition and results of operations could vary due to a
change in the application of a particular accounting standard.




Pernix
regards an accounting estimate or assumption underlying its financial statements
as a “critical accounting estimate” where:




●
            the
      nature of the estimate or assumption is material due to the level of
      subjectivity and judgment necessary to account for highly uncertain
      matters or the susceptibility of such matters to change;
    and




●
            the
      impact of the estimates and assumptions on its financial condition or
      operating performance is material.




Pernix’s
significant accounting policies are described in in the notes to Pernix’s
combined and consolidated financial statements in Part I of this Form 10-Q. Not
all of these significant accounting policies, however, fit the definition of
“critical accounting estimates.” Pernix believes that its estimates relating to
revenue recognition, inventory and accrued expenses described below fit the
definition of “critical accounting estimates.”




22





Revenue
Recognition




Pernix
recognizes revenue from its product sales when the goods are shipped and the
customer takes ownership and assumes risk of loss (free-on-board destination),
collection of the relevant receivable is probable, persuasive evidence of an
arrangement exists and the sales price is fixed and determinable. Pernix sells
its products primarily to pharmaceutical wholesalers, distributors and
pharmacies, which have the right to return the products they purchase, as
described below. Pernix recognizes product sales net of estimated allowances for
discounts, product returns and Medicaid rebates.




Consistent
with industry practice, Pernix offers customers the ability to return products
in the six months prior to, and the twelve months after, the products expire.
Pernix adjusts its estimate of product returns if it becomes aware of other
factors that it believes could significantly impact its expected returns. These
factors include its estimate of inventory levels of its products in the
distribution channel, the shelf life of the product shipped, competitive issues
such as new product entrants and other known changes in sales trends or
historical return experience.




Segment
Reporting




The
Company generates revenue from the marketing and selling of prescription
pharmaceutical products. Accordingly, the Company’s business is classified in a
single reportable segment, the sale and marketing of prescription products.
Prescription products include a variety of branded pharmaceuticals primarily in
pediatrics.




Allowances
for Returns, Discounts and Rebates




Pernix’s
estimates of product rebates and discounts are based on its estimated mix of
sales to various third-party payors, which are entitled either contractually or
statutorily to discounts from Pernix’s listed prices of its products. Pernix
makes these judgments based upon the facts and circumstances known to it in
accordance with GAAP. In the event that the sales mix to third-party payors is
different from its estimates, Pernix may be required to pay higher or lower
total rebates than it has estimated.




Sales
returns allowances are based on the products’ expiration dates and are generally
eighteen months from the date the product was originally sold. Sales returns
allowances were approximately $255,000, or 2.4% of gross sales, and $748,000, or
7.6% of gross sales, for the three months ended March 31, 2010 and 2009,
respectively.  The decrease in the sales returns allowances as a
percentage of gross sales is based on a cumulative decrease in the return trend
on gross sales and returns experience over twenty-three quarters applied to the
most recent eighteen months of sales.




Medicaid
rebates were approximately $1,307,000, or 12.1% of gross sales, and $1,198,000,
or 12.1% of gross sales, for the three months ended March 31, 2010 and 2009,
respectively.




Discounts
taken were approximately $922,000, or 8.5% of gross sales, and $684,000, or 6.9%
of gross sales, for the three months ended March 31, 2010 and 2009,
respectively.  Discounts are applied pursuant to the contracts
negotiated with certain vendors and are primarily based on
sales.  Approximately $140,000 and $127,000 in accrued allowances for
prompt pay discounts is netted against accounts receivable at March 31, 2010 and
December 31, 2009.




Sales
              Returns
            
            
            Rebates
            
            
            Discounts(In
      Thousands)Balance
      at December 31, 2008
            
            $
            2,386,000
            
            
            $
            738,000
            
            
            $
            709,000Current
      provision
            
            
            2,810,000
            
            
            
            4,824,000
            
            
            
            2,938,000Payments
      and credits
            
            
            (1,221,000
            )
            
            
            (3,261,000
            )
            
            
            (3,000,000
            )Balance
      at December 31, 2009
            
            
            3,975,000
            
            
            
            2,301,000
            
            
            
            647,000Current
      provision
            
            
            255,000
            
            
            
            1,307,000
            
            
            
            922,000Payments
      and credits
            
            
            (396,000
            )
            
            
            (1,363,000
            )
            
            
            (862,000
            )Balance
      at March 31, 2010
            
            $
            3,834,000
            
            
            $
            2,245,000
            
            
            $
            707,000





Accrued
Personnel and Other Expenses




As part
of the process of preparing its combined and consolidated financial statements,
Pernix is required to estimate certain expenses. This process involves
identifying services that have been performed on its behalf and estimating the
level of service performed and the associated cost incurred for such service as
of each balance sheet date in its combined and consolidated financial
statements. Examples of estimated expenses for which Pernix accrues include
professional fees, payroll, sales commissions and other sales benefits that will
be redeemed in the future.




23





Stock
based compensation




Compensation
expense is determined by reference to the fair market value of an award on the
date of grant and is amortized on a straight-line basis over the vesting period.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued
guidance under ASC 718, Accounting for Stock Options and
Other Stock Based Compensation, which was effective for interim and
annual reporting periods beginning after December 15, 2006.  As
discussed in Note 10 to the Notes to the Company’s combined and consolidated
financial statements, the Company uses the Black-Sholes-Merton model to
calculate the value of the option.  Several inputs utilized in this
calculation are subjective.  ASC 718 establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services.




On May
12, 2010, 540,000 option shares, in the aggregate, were granted from the 2009
Stock Incentive Plan.  This included 150,000 stock options to the
Company’s Executive Vice President of Operations and 75,000 stock options to the
Company’s CFO.  Certain other employees of the Company received option
awards based on seniority.  The exercise price is $3.73, the most
recent closing NYSE Alternext Exchange price prior to the grant date, as
specified by the Compensation Committee.   These options will
vest ratably over three years and expire ten years from the date of the
grant.




Inventory




Inventory
consists of finished goods which include pharmaceutical products ready for
commercial sale or distribution as samples. Inventory is stated at the actual
cost per bottle determined under the specific identification method. Pernix’s
estimate of the net realizable value of its inventories is subject to judgment
and estimation. The actual net realizable value of its inventories could vary
significantly from its estimates and could have a material effect on its
financial condition and results of operations in any reporting period. An
allowance for slow-moving or obsolete inventory, or declines in the value of
inventory is determined based on management’s assessments. The inventory reserve
includes provisions for inventory that may become damaged in shipping or in
distribution to the customer. As of March 31, 2010 and 2009, Pernix had
approximately $1,108,000 and $1,082,000 in inventory, respectively, for which no
reserve was deemed necessary.




Results
of Operations




Comparison
of the Three Months Ended March 31, 2010 and 2009




Net Sales




Net sales
were approximately $8,873,000 and $7,235,000 for the three months ended March
31, 2010 and  2009, respectively, an increase of approximately
$1,638,000, or 22.6%. This increase is primarily due to sales of new products,
including our BROVEX product line, PEDIATEX TD, and REZYST, and increases in
unit prices and the expansion of Pernix’s sales force in additional territories
offset by a decrease in the sales of ALDEX products and Z-Cof which was
discontinued.




Cost of Product
Sales




Cost of
sales was approximately $1,192,000 and $1,425,000 for the three months ended
March 31, 2010 and 2009, respectively, a decrease of approximately
16.4%.  The cost of product samples included in cost of product sales
was approximately $279,000 and $257,000 for the three months ended March 31,
2010 and 2009, respectively, an increase of approximately $22,000,
or  8.6%, which was primarily due to the addition of the BROVEX
product line and our expansion into new sales territories. Cost of product sales
in the three months ended March 31, 2010 and 2009 consisted primarily of the
expenses associated with manufacturing and distributing Pernix’s products. The
decrease in cost of sales period-over-period is primarily the result of the
significant difference in the cost of Z-Cof which was sold in significant volume
in the three months ended March 31, 2009 compared to the much lower cost of the
BROVEX products which was sold in significant volume in the three months ended
March 31, 2010.




Selling Expenses




Selling
expenses were approximately $1,456,000 and $1,465,000 for the three months ended
March 31, 2010 and 2009, respectively, a decrease of approximately $9,000, or
0.6%.  Sales salaries, commissions and incentives represented
approximately $1,031,000, or 70.8%, and $1,376,000, or 93.9%, of total selling
expenses for the three months ended March 31, 2010 and 2009, respectively. The
decrease in sales salaries, commissions and incentives of approximately
$345,000, or 25.1%, is primarily the result of the change in our product mix and
our corresponding change in the commission policy offset by an increase in sales
salaries of approximately $95,000 due to additions to our sales force . Other
selling expenses, including freight, packaging, advertising, promotional items,
cell phone, operating and office supplies, vehicle expenses, travel and
entertainment, and other miscellaneous overhead expenses of our sales force,
were approximately $426,000 and $89,000 for the three months  ended
March 31, 2010 and 2009, respectively. This increase of approximately $336,000,
or 377.5%, was primarily due to increases in (i) sales report expenses of
approximately $95,000, (ii) freight of approximately $28,000, (iii) training
expenses of approximately $89,000, (iv) program management fee expenses of
approximately $48,000, (v) auto expenses of approximately $40,000 due to an
increase of seven sales reps and (vi) other selling
expenses  including travel, entertainment, telephone, supplies and
postage expenses of approximately $37,000.




24




General and Administrative
Expenses




General
and administrative expenses were approximately $1,634,000 and $1,562,000 for the
three months ended March 31, 2010 and 2009, respectively, an increase of
approximately $72,000, or 4.6%.  Management and administrative
salaries and bonuses represented approximately $662,000, or 40.5%, and $223,000,
or 25.3%, of the total general and administrative expenses (excluding stock
compensation expense) for the three months ended March 31, 2010 and 2009,
respectively. The increase of approximately $439,000, or  196.7%, was
primarily due to the hiring of (i) a vice president of supply chain management
in October 2009 (ii) a regional sales director in September 2009, (iii) a chief
financial officer in March 2010, and (iv) an accounting supervisor in March 2010
along with approximately $276,000 in bonuses accrued in the three months ended
March 31, 2010.  Stock compensation expense was approximately $13,000
and $681,000 for the three months ended March 31, 2010 and 2009,
respectively.  The stock compensation expense for the three months
ended March 31, 2010 was related to 100,000 stock options and 100,000 shares of
restricted stock that were awarded to our non-employee board members on March
10, 2010.  The stock compensation expense for the three months ended
March 31, 2009 was related to a stock transaction in January 2009 at a
discount to fair value between one outside stockholder and certain officers of
Pernix.  Other general and administrative costs were approximately
$959,000 and $658,000 for the three months ended March 31, 2010 and 2009,
respectively, an increase of approximately $301,000, or 45.8%. This increase was
primarily due to increases of approximately  (i) $269,000 in
professional fees including legal and accounting primarily related to the merger
with GTA (as discussed in Note 1 to Pernix’s Combined and Consolidated Financial
Statements for the three months ended March 31, 2010 and 2009 contained in Part
I, Item I of this Form 10-Q), (ii) $20,000 in board fees and expenses as a
result of the new board public company structure, (iii) $17,000 in directors and
officers insurance as a result of becoming a public company and tail coverage on
the GTA policy, (iv) $12,000 in product liability insurance due to the addition
of new products and increased sales volumes, (v)  $12,000 in health
insurance costs due to the increase in personnel, and (vi) $16,000
in  rent and rental equipment expenses related to the office and
warehouse facilities leased effective July 2009 offset by a decrease of
approximately $24,000 in the 401k employer match expense due primarily to the
decrease in sales commissions and a net decrease of approximately $22,000 in
other general and administrative expenses including printing, contract labor,
utilities, telephone, travel and entertainment, maintenance and repair, taxes
and licenses and other miscellaneous expenses.




Research
and Development Expense




Research
and development expenses were approximately $271,000 and $143,000 for the three
months ended March 31, 2010 and 2009, respectively. The increase in research and
development expenses is primarily due to the amortization of the $1.5 million
development fee that we paid to Macoven in July 2009 which is being amortized
over the 18-month term of the agreement.  Other research and
development costs are related to the testing of current products’ durability.
For further discussion of research and development expenses see Note 5 to
Pernix’s Combined and Consolidated Financial Statements for the three months
ended March 31, 2010 and 2009 contained in Part I, Item I of this Form
10-Q.





Other
Income and Expenses




Depreciation and Amortization
Expense. Depreciation expenses were approximately $13,000 and $10,000 for
the three months ended March 31, 2010 and 2009, respectively. The increase of
approximately $3,000, or 30.0%, is due to the furniture and equipment acquired
in the merger with GTA and also furniture and IT purchases in 2009 offset by the
depreciation decrease related to the distribution of the office and warehouse
facilities in Magnolia, Texas and Gonzales, Louisiana to Pernix’s stockholders
in the third quarter of 2009. Each stockholder of Pernix contributed his or her
interests in these two properties to a limited liability company wholly-owned by
the stockholders of Pernix (in proportion to their respective ownership
interests in Pernix) that, in turn, leased both properties back to Pernix. The
term of each lease is month to month and may be terminated by either party
without penalty. As of March 31, 2010, Pernix pays rent of $2,500 and $1,500 per
month for the Texas and Louisiana facilities, respectively, which Pernix
believes approximates market rates.




Amortization
expense was approximately $56,000 and $45,000 for the three months ended March
31, 2010 and 2009.  The increase of approximately $11,000, or 24.4%,
is due to the amortization under certain agreements that were entered in to in
2009. For a description of Pernix’s license and other agreements, see Note
12–“Intangible Assets”  to Pernix’s Combined and Consolidated
Financial Statements for the three months ended March 31, 2010 and 2009
contained in Part I, Item I of this Form 10-Q.




Interest
Income.Interest income was approximately $4,000 for both
three month periods ended March  31, 2010 and
2009.  Interest expense was approximately $700 for the three months
ended March 31, 2010 and we had no interest expense during the three months
ended March 31, 2009.




25





Liquidity
and Capital Resources




Sources
of Liquidity




Pernix’s
net income before income taxes and non-controlling interest was approximately
$4,254,000 and $2,588,000 for the three months ended March 31, 2010 and 2009,
respectively. As an S-corporation for the year ended December 31, 2009, Pernix
generally did not pay federal income taxes. Instead, Pernix’s income
and losses were generally included in the taxable income of its stockholders,
who reported the income and losses on their individual income tax returns and
paid the appropriate tax individually. Effective January 1, 2010, Pernix revoked
its S-corporation election, and began to pay income taxes at prevailing federal
and state corporate income tax rates.




Pernix
requires cash to meet its operating expenses and for capital expenditures,
acquisitions, and in-licenses of rights to products. To date, Pernix has funded
its operations primarily from product sales and co-promotion agreement revenues.
As of March 31, 2010, Pernix had approximately $12,671,000 in cash and cash
equivalents.




Cash
Flows




The
following table provides information regarding Pernix’s cash flows for the three
months ended March 31, 2010 and 2009.




Three
      Months Ended
              March 31,2010
            
            
            2009Cash
      provided by (used in)Operating
      activities
            
            $
            3,749,000
            
            
            $
            3,047,000Investing
      activities
            
            
            (1,500,000
            )
            
            
            (100,000
            )Financing
      activities
            
            
            5,843,000
            
            
            
            (3,107,000
            )Net
      increase (decrease) in cash and cashequivalents
            
            $
            8,092,000
            
            
            $
            (160,000
            )




Net
Cash Provided By Operating Activities




Net cash
provided by operating activities for the three months ended March 31, 2010 and
2009 was approximately $3,749,000 and $3,047,000, respectively.  Net
cash provided by operating activities for the three months ended March 31, 2010
primarily reflected Pernix’s net income of approximately $5,272,000, adjusted by
non-cash expenses totaling $2,221,000 and changes in accounts receivable,
inventories, accrued expenses and other operating assets and liabilities.
Non-cash items included amortization and depreciation of approximately $69,000,
stock compensation expense of approximately $13,000, provision for returns of
approximately $255,000 and provision for deferred income tax benefit of
approximately $2,557,000 (which includes a one-time tax benefit of approximately
$1,858,000 related to the Company’s change in tax status and a one-time tax
benefit of approximately $770,000 related to the net operating losses acquired
in the merger).  For 2009, Pernix was an S corporation, therefore,
operating results did not include income taxes. Net cash provided by operating
activities for the three months ended March 31, 2009 primarily reflected
Pernix’s net income of approximately $2,648,000, adjusted by non-cash expenses
totaling $1,243,000 and changes in accounts receivable, inventories, accrued
expenses and other operating assets and liabilities. Non-cash items included
amortization and depreciation of approximately $55,000, stock compensation
expense of approximately $681,000 and provision for returns of approximately
$506,000.




Net
Cash Provided by Investing Activities




Net cash
used in investing activities for the three months ended March 31, 2010 and
2009  was approximately $1,500,000 and $100,000,
respectively.  The $1,500,000 used in the three months ended March 31,
2010 was the first installment of the purchase price of CEDAX.  See
Note 4–“Business Combination”  to Pernix’s combined and consolidated
financial statements for the three months ended March 31, 2010 and 2009
contained in Part I, Item I of this Form 10-Q.  The $100,000 used in
the three months ended March 31, 2009 was a fee paid to Kiel Laboratories to
amend an existing development agreement.  See Note 12–“Intangible
Assets” to Pernix’s combined and consolidated financial statements for the three
months ended March 31, 2010 and 2009 contained in Part I, Item I of this Form
10-Q.




Net
Cash Provided by Financing Activities




Net cash
provided by financing activities for the three months ended March 31, 2010 was
approximately $5,844,000 which represents cash acquired in connection with the
merger with GTA of approximately $5,966,000 less included distributions to
stockholders of approximately $122,000.  See Note 1–“Organization and
Merger” and for the three months ended March 31, 2010 and 2009 contained in Part
I, Item I of this Form 10-Q.  For the three months ended March 31,
2009, $3,108,000 was used in financing activities which represented
distributions to stockholders.




26





Funding
Requirements




As of
March 31, 2010, Pernix had no long-term debt. Pernix’s future capital
requirements will depend on many factors, including:




●
            the
      level of product sales of its currently marketed products and any
      additional products that Pernix may market in the
  future;




●
            the
      scope, progress, results and costs of development activities for Pernix’s
      current product candidates;




●
            the
      costs, timing and outcome of regulatory review of Pernix’s product
      candidates;




●
            the
      number of, and development requirements for, additional product candidates
      that Pernix pursues;




●
            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 Pernix’s product candidates and
      products;




●
            the
      extent to which Pernix acquires or invests in products, businesses and
      technologies;




●
            the
      extent to which Pernix chooses to establish collaboration, co-promotion,
      distribution or other similar arrangements for its 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
Pernix.




To the
extent that Pernix’s capital resources are insufficient to meet its future
capital requirements, Pernix will need to finance its cash needs through public
or private equity offerings, debt financings, corporate collaboration and
licensing arrangements or other financing alternatives. Equity or debt
financing, or corporate collaboration and licensing arrangements, may not be
available on acceptable terms, if at all.




In
connection with a certain manufacturing vendor, the Company was required to
provide a letter of credit agreement as security for its performance of payment
in the amount of $500,000.  The letter of credit expires on April 30,
2011.




Pernix is
currently reviewing proposals received in response to a request for indications
of interest to provide the Company with a $4.0 million to $5.0 million revolving
credit facility to provide funding, if needed, for future deal funding and/or
other uses.




As of
March 31, 2010, Pernix has approximately $12,671,000 of cash and cash
equivalents on hand.  Pernix expects to fund the remaining
installments totaling $4.6 million of the $6.1 million purchase price for
substantially all of Shionogi’s assets and rights related to CEDAX with existing
cash, cash equivalents and revenues from product sales.  Additionally,
based on its current operating plans, Pernix believes that its existing cash and
cash equivalents and revenues from product sales will be sufficient to continue
to fund its existing level of operating expenses and capital expenditure
requirements for the foreseeable future.




Stock
Repurchase Authorization




On May
12, 2010, the Company’s Board of Directors authorized the repurchase of up to
$5,000,000 in shares of the Company's common stock. Stock repurchases under this
authorization may be made through open market and privately negotiated
transactions at times and in such amounts as management deems appropriate. The
timing and actual number of shares repurchased will depend on a variety of
factors, including price, cash balances, general business and market conditions,
the dilutive effects of share-based incentive plans, alternative investment
opportunities and working capital needs. The stock repurchase authorization does
not have an expiration date and may be limited or terminated by the Board of
Directors at any time without prior notice. The purchases will be funded from
available cash balances and repurchased shares will be designated as treasury
shares.  Each individual stock repurchase will be subject to Board
approval.  As of May 14, 2010,  no shares have been
repurchased pertaining to this authorization.




Off-Balance
Sheet Arrangements




Since its
inception, Pernix has not engaged in any off-balance sheet arrangements,
including structured finance, special purpose entities or variable interest
entities.




Effects
of Inflation




Pernix
does not believe that inflation has had a significant impact on its revenues or
results of operations since inception.




27





Recent
Accounting Pronouncements




See Note
2 – “Summary of Significant Accounting Policies” to Pernix’s Combined and
Consolidated Financial Statements for the three months ended March 31, 2010 and
2009 contained in Part I, Item I of this Form 10-Q.




Seasonality




Historically,
the months of September through March account for a greater portion of the
Company’s sales than the other months of the fiscal year. This sales pattern is
likely to continue if the Company sells primarily cough and cold products which
are subject to seasonal fluctuations.


ITEM
3.    QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK






We have
not entered into any transactions using derivative financial instruments. We
have no outstanding debt.




We have
not entered into any transactions using foreign currency or derivative commodity
instruments; therefore, we do not face any foreign currency exchange rate risk
or commodity price risk.


ITEM
4.    CONTROLS
AND PROCEDURES






We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and our
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.




As of
March 31, 2010, we evaluated, under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Exchange Act Rule 13a-15(e)).
Management concluded that as of March 31, 2010, our disclosure controls and
procedures are effective.




There has
been no change in our internal control over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




28





PART II.   OTHER
INFORMATION


ITEM
1.    LEGAL
PROCEEDINGS






Pernix 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 Pernix’s combined and consolidated financial
position or results of operations.


ITEM
1A. RISK
FACTORS




If any of
the following risks actually occur, our results of operations, cash flows and
the value of our shares


could be
negatively impacted. Although we believe that we have identified and discussed
below the key risk factors affecting our business, there may be additional risks
and uncertainties that are not presently known that may adversely affect our
performance or financial condition.





Risks Related to
Commercialization
  The commercial
success of our currently marketed products and any additional products that we
successfully commercialize will depend upon the degree of market acceptance by
physicians, patients, healthcare payors and others in the medical
community.


Any
products that we bring to the market may not gain market acceptance by
physicians, patients, healthcare payors and others in the medical community. If
our products do not achieve an adequate level of acceptance, we may not generate
significant product revenue and may not be profitable. The degree of market
acceptance of our products depends on a number of factors,
including:


●
              the
      prevalence and severity of any side
effect;
  ●
              the
      efficacy and potential advantages over the alternative
      treatments;
  ●
              the
      ability to offer our products for sale at competitive prices, including in
      relation to any generic products;
  ●
              relative
      convenience and ease of
administration;
  ●
              the
      willingness of the target patient population to try new therapies and of
      physicians to prescribe these
therapies;
  ●
              the
      strength of marketing and distribution support;
  and


●
              sufficient
      third party coverage or
reimbursement.


We
face competition, which may result in others discovering, developing or
commercializing products before or more successfully than us.




The
development and commercialization of drugs is highly competitive. We face
competition with respect to our currently marketed products and any products
that we may seek to develop or commercialize in the future. Our competitors
include major pharmaceutical companies, specialty pharmaceutical companies and
biotechnology companies worldwide. Potential competitors also include academic
institutions, government agencies and other private and public research
organizations that seek patent protection and establish collaborative
arrangements for development, manufacturing and commercialization. We face
significant competition for our currently marketed products. Some of our
currently marketed products do not have patent protection and in most cases face
generic competition. All of our products face significant price competition from
a range of branded and generic products for the same therapeutic
indications.




29





Some or
all of our product candidates, if approved, may face competition from other
branded and generic drugs approved for the same therapeutic indications,
approved drugs used off label for such indications and novel drugs in clinical
development. For example, our product candidates may not demonstrate sufficient
additional clinical benefits to physicians to justify a higher price compared to
other lower cost products within the same therapeutic class. Notwithstanding the
fact that we may devote substantial amounts of our resources to bringing product
candidates to market, our commercial opportunity could be reduced or eliminated
if competitors develop and commercialize products that are more effective,
safer, have fewer or less severe side effects, are more convenient or are less
expensive than any products that we may develop and/or
commercialize.





Our
patent rights will not protect our products if competitors devise ways of making
products that compete with our products without legally infringing our patent
rights. The Federal Food, Drug, and Cosmetic Act (“FDCA”) and FDA regulations
and policies provide certain exclusivity incentives to manufacturers to create
modified, non-infringing versions of a drug in order to facilitate the approval
of abbreviated new drug applications (“ANDAs”) for generic substitutes. These
same types of exclusivity incentives encourage manufacturers to submit new drug
applications (“NDAs”) that rely, in part, on literature and clinical data not
prepared for or by such manufacturers. Manufacturers might only be required to
conduct a relatively inexpensive study to show that their product has the same
API, dosage form, strength, route of administration and conditions of use or
labeling as our product and that the generic product is absorbed in the body at
the same rate and to the same extent as our product, a comparison known as
bioequivalence. Such products would be significantly less costly than our
products to bring to market and could lead to the existence of multiple
lower-priced competitive products, which would substantially limit our ability
to obtain a return on the investments we have made in those products. Our
competitors also may obtain FDA or other regulatory approval for their product
candidates more rapidly than we may obtain approval for our product
candidates.




Our
products compete principally with the following:




●
            ALDEX
      Line – Other branded prescription antihistamine, decongestant, and cough
      suppressants marketed in the United States, such as WraSer
      Pharmaceutical’s VazoTab®, VazoBIDTM
      and VazoTan®;Atley
      Pharmaceutical Inc.’s Sudal®-12 and ATuss® DS; Centrix Pharmaceutical
      Inc.’s Dicel®.





●
            PEDIATEX
      TD – Other branded phenylephrine products, such as Johnson and Johnson’s
      Sudafed PE, Wyeth’s Robitussin® CF, McNeil-PPC, Inc.’s Tylenol® Sinus,
      Novartis Consumer Health Inc.’s Theraflu®, ALDEX CT, ALDEX D and ALDEX DM;
      and other pseudoephedrine products, such as Johnson and Johnson’s
      Sudafed®, Burroughs Wellcome Fund’s Actifed®, GlaxoSmithKline plc’s
      Contac®, and Schering-Plough HealthCare Products Inc’s
      Claritin®-D.





●
            BROVEX
      Line – Other antihistamine combination products with the common API
      brompheniramine maleate, such as Histex PD 12 ®, Pamlab LLC’s Palgic ®,
      McNeil-ppc, Inc’s Zyrtec ® and Vazol-D
®.





●
            Z-COF
      8DM – Other antitussive/decongestant/expectorant combination products,
      including Johnson and Johnson’s Sudafed®, Wyeth’s Robitussin® DAC and
      Robitussin® AC and Reckitt Benckiser Group plc’s
  Mucinex®.





●
            REZYST
      IM – Other probiotic treatment options, including Lactanax®, Amerifit
      Brands Inc.’s Culturelle®, Ganeden Biotech Inc.’s Sustenex®, and BioGaia©
      AB’s probiotic products.





●
            QUINZYME
      – Currently there are no prescription competitors. Over-The-Counter
      ubiquinone products include CoQ10 branded
  products.





●
            CEDAX
      – Suprax®, an important anti-infective product available in tablets and
      suspension formulations and marketed by  Lupin Pharmaceuticals,
      Inc.





Many of
our competitors have significantly greater financial, technical and human
resources than we have and superior expertise in marketing and sales, research
and development, manufacturing, preclinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing approved products and thus may be
better equipped than us to discover, develop, manufacture and commercialize
products. These competitors also compete with us in recruiting and retaining
qualified management personnel, and acquiring technologies. Many of our
competitors have collaborative arrangements in our target markets with leading
companies and research institutions. In many cases, products that compete with
our products have already received regulatory approval or are in late-stage
development, have well known brand names, are distributed by large
pharmaceutical companies with substantial resources and have achieved widespread
acceptance among physicians and patients. Smaller or early stage companies may
also prove to be significant competitors, particularly through collaborative
arrangements with large and established companies.





30





We will
face competition based on the safety and effectiveness of our products, the
timing and scope of regulatory approvals, the availability and cost of supply,
marketing and sales capabilities, reimbursement coverage, price, patent position
and other factors. Our competitors may develop or commercialize more effective,
safer or more affordable products, or products with more effective patent
protection, than our products. Accordingly, our competitors may commercialize
products more rapidly or effectively than we are able to, which would adversely
affect our competitive position, our revenue and profit from existing products
and anticipated revenue and profit from product candidates. If our products or
product candidates are rendered noncompetitive, we may not be able to recover
the expenses of developing and commercializing those products or product
candidates.





As
our competitors introduce their own generic equivalents of our products, our net
revenues from such products are expected to decline.




Product
sales of generic pharmaceutical products often follow a particular pattern over
time based on regulatory and competitive factors. The first company to introduce
a generic equivalent of a branded product is often able to capture a substantial
share of the market. However, as other companies introduce competing generic
products, the first entrant’s market share, and the price of its generic
product, will typically decline. The extent of the decline generally depends on
several factors, including the number of competitors, the price of the branded
product and the pricing strategy of the new competitors.





For
example, in the generic drug industry, when a company is the first to introduce
a generic drug, the pricing of the generic drug is typically set based on a
discount from the published price of the equivalent branded product. Other
generic manufacturers may enter the market and, as a result, the price of the
drug may decline significantly. In such event, we may in our discretion provide
our customers a credit with respect to the customers’ remaining inventory for
the difference between our new price and the price at which we originally sold
the product to our customers. There are circumstances under which we may, as a
matter of business strategy, not provide price adjustments to certain customers
and, consequently, we may lose future sales to competitors.





Macoven
Pharmaceuticals was formed in 2008 for the purpose of launching generic drugs.
Macoven is owned 60% by the former stockholders of PTI, 20% by an officer of the
Company and 20% by an officer of Macoven. Pursuant to the terms of a development
agreement, we granted Macoven the right to develop and sell generic equivalents
of our products in return for 100% of the net sales proceeds from the sales of
such generic equivalents.





Negative
publicity regarding any of our products or product candidates could delay or
impair our ability to market any such product, delay or prevent approval of any
such product candidate and may require us to spend time and money to address
these issues.


If any of
our products or any similar products distributed by other companies prove to be,
or are asserted to be, harmful to consumers, our ability to successfully market
and sell our products could be impaired. Because of our dependence on patient
and physician perceptions, any adverse publicity associated with illness or
other adverse effects resulting from the use or misuse of our products or any
similar products distributed by other companies could limit the commercial
potential of our products and expose us to potential liabilities.


If
we are unable to attract, hire and retain qualified sales and management
personnel, the commercial opportunity for our products may be
diminished.




As of May
12, 2010, our sales force consists of 32 full-time sales representatives, 2
national sales directors and 3 regional sales directors. We may not be able to
attract, hire, train and retain qualified sales and sales management personnel.
If we are not successful in our efforts to maintain a qualified sales force, our
ability to independently market and promote our products may be impaired. In
such an event, we would likely need to establish a collaboration, co-promotion,
distribution or other similar arrangement to market and sell such products.
However, we might not be able to enter into such an arrangement on favorable
terms, if at all. Even if we are able to effectively maintain a qualified sales
force, our sales force may not be successful in commercializing our
products.





31





A
failure to maintain optimal inventory levels to meet commercial demand for our
products could harm our reputation and subject us to financial
losses.




Our
ability to maintain optimal inventory levels to meet commercial demand depends
on the performance of third-party contract manufacturers. Certain of our
products, including Z-COF 8DM, PEDIATEX TD, BROVEX PSE-DM and BROVEX PSB-DM
contain controlled substances, which are regulated by the DEA under the
Controlled Substances Act. DEA quota requirements limit the amount of
controlled substance drug products a manufacturer can manufacture and the amount
of API it can use to manufacture those products. In some instances, third-party
manufacturers have encountered difficulties obtaining raw materials needed to
manufacture our products as a result of DEA regulations and because of the
limited number of suppliers of pseudoephedrine, an active ingredient in several
of our products.  If our manufacturers are unsuccessful in obtaining
quotas, if we are unable to manufacture and release inventory on a timely and
consistent basis, if we fail to maintain an adequate level of product inventory,
if inventory is destroyed or damaged or if our inventory reaches its expiration
date, patients might not have access to our products, our reputation and our
brands could be harmed and physicians may be less likely to prescribe our
products in the future, each of which could have a material adverse effect on
our financial condition, results of operations and cash flows.





If
we or our manufacturers fail to comply with regulatory requirements for our
controlled substance products the DEA may take regulatory actions detrimental to
our business, resulting in temporary or permanent interruption of distribution,
withdrawal of products from the market or other penalties.





We, our
manufacturers and certain of our products including Z-COF 8DM, PEDIATEX TD,
Brovex PSE-DM and Brovex PSB-DM, are subject to the Controlled Substances Act
and DEA regulations thereunder. Accordingly, we and our contract manufacturers
must adhere to a number of requirements with respect to our controlled substance
products including registration, recordkeeping and reporting requirements;
labeling and packaging requirements; security controls, procurement and
manufacturing quotas; and certain restrictions on prescription refills. Failure
to maintain compliance with applicable requirements can result in enforcement
action that could have a material adverse effect on our business, results of
operations and financial condition. The DEA may seek civil penalties, refuse to
renew necessary registrations or initiate proceedings to revoke those
registrations. In certain circumstances, violations could result in criminal
proceedings.





Product liability
lawsuits against us could cause us to incur substantial liabilities and limit
commercialization of any products that we may develop.


We face
an inherent risk of product liability exposure related to the sale of our
currently marketed products and any other products that we successfully develop
or commercialize. If we cannot successfully defend ourselves against claims that
our products or product candidates caused injuries, we will incur substantial
liabilities. Regardless of merit or eventual outcome, liability claims may
result in:


●
              decreased
      demand for our products or any products that we may
    develop;


●
              injury
      to reputation;
 
 ●
              withdrawal
      of client trial participants;
 
 ●
              withdrawal
      of a product from the market;
 
 ●
              costs
      to defend the related litigation;
 
 ●
              substantial
      monetary awards to trial participants or
  patients;
 
 ●
              diversion
      of management time and attention;
 
 ●
              loss
      of revenue; and


●
              the
      inability to commercialize any products that we may
    develop.





The
amount of insurance that we currently hold may not be adequate to cover all
liabilities that we may incur. Insurance coverage is increasingly expensive. We
may not be able to maintain insurance coverage at a reasonable cost and we may
not be able to obtain insurance coverage that will be adequate to satisfy any
liability that may arise.


Risks Related to Our Dependence on
Third Parties


We use third
parties to manufacture all of our products and product candidates. This may
increase the risk that we will not have sufficient quantities of our products or
product candidates or such quantities at an acceptable cost, which could result
in development and commercialization of our product candidates being delayed,
prevented or impaired.


We do not
own or operate, and do not currently have plans to establish, any manufacturing
facilities for our products or product candidates. We have limited personnel
with experience in drug manufacturing and we lack the resources and the
capabilities to manufacture any of our products or product candidates on a
clinical or commercial scale.
 
 32
 
 We
currently rely, and expect to continue to rely, on third parties for the supply
of the active pharmaceutical ingredients in our products and product candidates,
and the manufacture of the finished forms of these drugs and packaging. The
current manufacturers of our products and product candidates are, and any future
third party manufacturers that we enter into arrangements with will likely be,
our sole suppliers of our products and product candidates for a significant
period of time. These manufacturers are commonly referred to as single source
suppliers. Some of our manufacturing arrangements may be terminated at-will by
either party without penalty.
 
 If any of
these manufacturers should become unavailable to us for any reason, we may be
unable to conclude arrangements with replacements on favorable terms, if at all,
and may be delayed in identifying and qualifying such replacements. In any
event, identifying and qualifying a new third party manufacturer could involve
significant costs associated with the transfer of the active pharmaceutical
ingredient or finished product manufacturing process. With any FDA approved
products, a change in manufacturer requires formal approval by the FDA before
the new manufacturer may produce commercial supplies of our FDA approved
products. This approval process typically takes a minimum of 12 to
18 months and, during that time, we may face a shortage of supply of our
products.
 
 Reliance
on third party manufacturers entails risks to which we would not be subject if
we manufactured products or product candidates ourselves,
including:


●
              reliance
      on third party for regulatory compliance and quality
      assurance;


●
              the
      possible breach of the manufacturing arrangement by the third party
      because of factors beyond our control;
and
 
 ●
              the
      possible termination or nonrenewal of the manufacturing relationship by
      the third party, based on its own business priorities, at a time that is
      costly or inconvenient for us.


Our
products and product candidates may compete with other products and product
candidates for access to manufacturing facilities. There are a limited number of
manufacturers that operate under current good manufacturing practice, or cGMP,
regulations and that are both capable of manufacturing for us and willing to do
so. If the third parties that we engage to manufacture a product for commercial
sale or for clinical trials should cease to continue to do so for any reason, we
likely would experience delays in obtaining sufficient quantities of our
products for us to meet commercial demand or in advancing clinical trials while
we identify and qualify replacement suppliers. If for any reason we are not able
to obtain adequate supplies of our product candidates or the drug substances
used to manufacture them, it will be more difficult for us to develop our
product candidates and compete effectively.


We also
import the API for substantially all of our products from third parties that
manufacture such items outside the United States, and we expect to do so from
outside the United States in the future. This may give rise to difficulties in
obtaining API in a timely manner as a result of, among other things, regulatory
agency import inspections, incomplete or inaccurate import documentation or
defective packaging. For example, in January 2009, the FDA released draft
guidance on Good Importer Practices, which, if adopted, will impose additional
requirements on us with respect to oversight of our third-party manufacturers
outside the United States. The FDA has stated that it will inspect 100% of API
that is imported into the United States. If the FDA requires additional
documentation from third-party manufacturers relating to the safety or intended
use of the API, the importation of the API could be delayed. While in transit
from outside the United States or while stored with our third-party logistics
provider, DDN, our API could be lost or suffer damage, which would render such
items unusable. We have attempted to take appropriate risk mitigation steps and
to obtain transit or casualty insurance. However, depending upon when the loss
or damage occurs, we may have limited recourse for recovery against our
manufacturers or insurers. As a result, our financial performance could be
impacted by any such loss or damage.





Our
current and anticipated future dependence upon others for the manufacture of our
products and product candidates may adversely affect our profit margins and our
ability to develop and commercialize products and product candidates on a timely
and competitive basis.


We rely on our
third party manufacturers for compliance with applicable regulatory
requirements. This may increase the risk of sanctions being imposed on us or on
a manufacturer of our products or product candidates, which could result in our
inability to obtain sufficient quantities of these products or product
candidates.


33


Our
manufacturers may not be able to comply with cGMP regulations or other
regulatory requirements or similar regulatory requirements outside the United
States. DEA regulations also govern facilities where controlled substances are
manufactured. Our manufacturers are subject to DEA registration requirements and
unannounced inspections by the FDA, the DEA, state regulators and similar
regulators outside the United States. Our failure, or the failure of our third
party manufacturers, to comply with applicable regulations could result in
sanctions being imposed on us, including:
  ●
              fines;


●
              injunctions;
 
 ●
              civil
      penalties;
 
 ●
              failure
      of regulatory authorities to grant marketing approval of our product
      candidates;
 
 ●
              FDA
      regulatory action against any currently marketed products or products in
      development;
 
 ●
              delays,
      suspension or withdrawal of
approvals;
 
 ●
              suspension
      of manufacturing operations;
 
 ●
              license
      revocation;
 
 ●
              seizures
      or recalls of products or product
candidates;
 
 ●
              operating
      restrictions; and
 
 ●
              criminal
      prosecutions.


Any of
these sanctions could significantly and adversely affect supplies of our
products and product candidates.





We intend to rely
on third parties to conduct our clinical trials, and those third parties may not
perform satisfactorily, including failing to meet established deadlines for the
completion of such trials.


We do not
intend to independently conduct clinical trials for our product candidates. We
will rely on third parties, such as contract research organizations, clinical
data management organizations, medical institutions and clinical investigators,
to perform this function. Our reliance on these third parties for clinical
development activities reduces our control over these activities. We are
responsible for ensuring that each of our clinical trials is conducted in
accordance with the general investigational plan and protocols for the trial.
Moreover, the FDA requires us to comply with standards, commonly referred to as
Good Clinical Practices, for conducting, recording, and reporting the results of
clinical trials to assure that data and reported results are credible and
accurate and that the rights, integrity and confidentiality of trial
participants are protected. We do not have experience conducting clinical trials
or complying with these requirements. Our reliance on third parties that we do
not control does not relieve us of these responsibilities and requirements.
Furthermore, these third parties may also have relationships with other
entities, some of which may be our competitors. If these third parties do not
successfully carry out their contractual duties, meet expected deadlines or
conduct our clinical trials in accordance with regulatory requirements or our
stated protocols, we will not be able to obtain, or may be delayed in obtaining,
regulatory approvals for our product candidates and will not be able to, or may
be delayed in our efforts to, successfully commercialize our product
candidates.


Our
success depends in part on our relationships with Kiel Laboratories and other
strategic partners.





We have
acquired a substantial amount of our intellectual property rights through
strategic partnerships with third parties, including Kiel Laboratories. We have
exclusive licenses to use Kiel’s patented drug delivery technology, or Kiel
Technology, to manufacture and market our Aldex, Z-COF and Pediatex product
lines. For the three months ended March 31, 2010 and 2009, gross sales of the
products covered by these license arrangements accounted for approximately 33.7%
and 99.7% of our gross sales, respectively. We expect sales from products using
the Kiel Technology will continue to constitute a meaningful but
decreasing percentage of our gross sales as we continue to expand our
product offerings.





34





Gaine,
Inc. was formed in 2007 as a holding company for certain intellectual property
rights. We hold a 50% ownership interest in Gaine, with the remaining 50% owned
by various Kiel employees. Gaine’s board of directors is comprised of two of our
officers and two Kiel employees. Subject to certain limited exceptions, any
action of Gaine’s board of directors or stockholders may be taken by the
approval of a majority of the votes cast. In September 2007, we loaned
Gaine $475,000 in order to finance Gaine’s purchase of a U.S. patent with an API
that we expect to use in certain of our antitussive product candidates. In
consideration for advancing the loan proceeds, Gaine granted us an exclusive,
royalty-free license to use the patent and related intellectual property rights
to develop, manufacture and market certain of our antitussive product
candidates. As collateral for the loan, we entered into a Grant of Security
Interest/Assignment of Patent Rights Agreement with Gaine. This agreement
provides that in the event of a default by Gaine that remains uncured for thirty
days following notice of the default, we may accelerate the remaining balance
due on the loan or, alternatively, require Gaine to assign ownership of the
patent to us. On February 5, 2010, we granted Gaine an extension on its
obligation to pay the outstanding balance on the loan until June 30,
2010.  During this time, we agreed not to declare the loan in default
or otherwise take any action to obtain ownership of the patent securing Gaine’s
obligations.





Our
inability to maintain our existing strategic relationships, including our
relationships with Kiel and the other co-owners of Gaine, or enter into new ones
could negatively affect our business and results of operations.





The concentration
of our product sales to only a few wholesale distributors increases the risk
that we will not be able to effectively distribute our products if we need to
replace any of these customers, which would cause our sales to
decline.


The
majority of our sales are to a small number of pharmaceutical wholesale
distributors, which in turn sell our products primarily to retail pharmacies,
which ultimately dispense our products to the end consumers. In 2009, Cardinal
Health accounted for 37% of our total gross sales, McKesson Corporation
accounted for 32% of our total gross sales and Morris & Dickson accounted
for 13% of our total gross sales.
 
 If any of
these customers cease doing business with us or materially reduce the amount of
product they purchase from us and we cannot conclude agreements with replacement
wholesale distributors on commercially reasonable terms, we might not be able to
effectively distribute our products through retail pharmacies. The possibility
of this occurring is exacerbated by the recent significant consolidation in the
wholesale drug distribution industry, including through mergers and acquisitions
among wholesale distributors and the growth of large retail drugstore chains. As
a result, a small number of large wholesale distributors control a significant
share of the market.


Any collaboration
arrangements that we may enter into in the future may not be successful, which
could adversely affect our ability to develop and commercialize our product
candidates.


We may
enter into collaboration arrangements in the future on a selective basis. Any
future collaborations that we enter into may not be successful. The success of
our collaboration arrangements will depend heavily on the efforts and activities
of our collaborators. Collaborators generally have significant discretion in
determining the efforts and resources that they will apply to these
collaborations.
 
 Disagreements
between parties to a collaboration arrangement regarding clinical development
and commercialization matters can lead to delays in the development process or
commercializing the applicable product candidate and, in some cases, termination
of the collaboration arrangement. These disagreements can be difficult to
resolve if neither of the parties has final decision making
authority.
 
 Collaborations
with pharmaceutical companies and other third parties often are terminated or
allowed to expire by the other party. Any such termination or expiration could
adversely affect us financially and could harm our business
reputation.


Our  business
could suffer as a result of a failure to manage and maintain its distribution
network.


We rely
on third parties to distribute its products. We have contracted with
DDN/Obergfel, LLC, or DDN, for the distribution of its products to wholesalers,
retail drug stores, mass merchandisers and grocery stores in the United
States.
 
 This
distribution network requires significant coordination with our supply chain,
sales and marketing and finance organizations. Failure to maintain our contract
with DDN, or the inability or failure of DDN to adequately perform as agreed
under its contract with us, could negatively impact us.  We currently
have our own warehouse capabilities; however, we plan to transition all of our
warehouse functions to DDN. If we were unable to replace DDN in a timely manner
in the event of a natural disaster, failure to meet FDA and other regulatory
requirements, business failure, strike or any other difficulty affecting DDN,
the distribution of its products could be delayed or interrupted, which would
damage the Company’s  results of operations and market position.
Failure to coordinate financial systems could also negatively impact the
Company’s ability to accurately report and forecast product sales and fulfill
our regulatory obligations. If we are unable to effectively manage and maintain
our distribution network, sales of our products could be severely compromised
and our business could be harmed.


We depend
on the distribution abilities of our wholesale customers to ensure that
our  products are effectively distributed through the supply chain. If
there are any interruptions in our  customers’ ability to distribute
products through their distribution centers, our products may not be effectively
distributed, which could cause confusion and frustration among pharmacists and
lead to product substitution. For example, in the fourth quarter of 2007 and the
first quarter of 2008, several Cardinal Health distribution centers were placed
on probation by the DEA and were prohibited from distributing controlled
substances. Although Cardinal Health had a plan in place to re-route all orders
to the next closest distribution center for fulfillment, system inefficiency
resulted in a failure to effectively distribute our  products to all
areas.





35





Risks Related to Intellectual
Property





If we are unable
to obtain and maintain protection for the intellectual property relating to our
technology and products, the value of our technology and products will be
adversely affected.


Our
success will depend in part on our ability to obtain and maintain protection for
the intellectual property covering or incorporated into our technology and
products. The patent situation in the field of pharmaceuticals is highly
uncertain and involves complex legal and scientific questions. We may not be
able to obtain additional patent rights relating to our technology or products.
Even if issued, patents issued to us or licensed to us may be challenged,
narrowed, invalidated, held to be unenforceable or circumvented, which could
limit our ability to stop competitors from marketing similar products or limit
the length of term of patent protection we may have for our products. Changes in
either patent laws or in interpretations of patent laws in the United States and
other countries may diminish the value of our intellectual property or narrow
the scope of our patent protection.
 
 Our
patents also may not afford us protection against competitors with similar
technology. Because patent applications in the United States and many other
jurisdictions are typically not published until 18 months after filing, or
in some cases not at all, and because publications of discoveries in the
scientific literature often lag behind actual discoveries, neither we nor our
licensors can be certain that we or they were the first to make the inventions
claimed in our or their issued patents or pending patent applications, or that
we or they were the first to file for protection of the inventions set forth in
these patent applications. If a third party has also filed a U.S. patent
application covering our product candidates or a similar invention, we may have
to participate in an adversarial proceeding, known as an interference, declared
by the U.S. Patent and Trademark Office to determine priority of invention
in the United States. The costs of these proceedings could be substantial and it
is possible that our efforts could be unsuccessful, resulting in a loss of our
U.S. patent position. In addition, patents generally expire, regardless of
the date of issue, 20 years from the earliest claimed non-provisional
filing date.
 
 Some of
our products do not have patent protection and in some cases face generic
competition. For a description of our patent protection, see Item 1 - “Patents”
contained above.
 
 Our
collaborators and licensors may not adequately protect our intellectual property
rights. These third parties may have the first right to maintain or defend our
intellectual property rights and, although we may have the right to assume the
maintenance and defense of our intellectual property rights if these third
parties do not, our ability to maintain and defend our intellectual property
rights may be comprised by the acts or omissions of these third
parties.


Trademark
protection of our products may not provide us with a meaningful competitive
advantage.


We use
trademarks on most of our currently marketed products and believe that having
distinctive marks is an important factor in marketing those products,
particularly ALDEX, BROVEX, CEDAX and PEDIATEX. Distinctive marks may also be
important for any additional products that we successfully develop and
commercially market. However, we generally do not expect our marks to provide a
meaningful competitive advantage over other branded or generic products. We
believe that efficacy, safety, convenience, price, the level of generic
competition and the availability of reimbursement from government and other
third party payors are and are likely to continue to be more important factors
in the commercial success of our products. For example, physicians and patients
may not readily associate our trademark with the applicable product or active
pharmaceutical ingredient. In addition, prescriptions written for a branded
product are typically filled with the generic version at the pharmacy, resulting
in a significant loss in sales of the branded product, including for indications
for which the generic version has not been approved for marketing by the FDA.
Competitors also may use marks or names that are similar to our trademarks. If
we initiate legal proceedings to seek to protect our trademarks, the costs of
these proceedings could be substantial and it is possible that our efforts could
be unsuccessful.





If we fail to
comply with our obligations in our intellectual property licenses with third
parties, we could lose license rights that are important to our
business.


We have
acquired rights to some of our products and all of our product candidates under
license agreements with third parties and expect to enter into additional
licenses in the future.
 
 Our
existing licenses impose, and we expect that future licenses will impose,
various development and commercialization,  royalty, sublicensing,
patent protection and maintenance, insurance and other obligations on us. If we
fail to comply with these obligations or otherwise breach the license agreement,
the licensor may have the right to terminate the license in whole, terminate the
exclusive nature of the license or bring a claim against us for damages. Any
such termination or claim could prevent or impede our ability to market any
product that is covered by the licensed patents. Even if we contest any such
termination or claim and are ultimately successful, our results of operations
and stock price could suffer. In addition, upon any termination of a license
agreement, we may be required to license to the licensor any related
intellectual property that we developed.
 
 36


If we are unable
to protect the confidentiality of our proprietary information and know-how, the
value of our technology and products could be adversely
affected.


In
addition to patented technology, we rely upon unpatented proprietary technology,
processes and know-how. We seek to protect our unpatented proprietary
information in part by confidentiality agreements with our employees,
consultants and third parties. These agreements may be breached and we may not
have adequate remedies for any such breach. In addition, our trade secrets may
otherwise become known or be independently developed by competitors. If we are
unable to protect the confidentiality of our proprietary information and
know-how, competitors may be able to use this information to develop products
that compete with our products, which could adversely impact our
business.
 
 If
we infringe or are alleged to infringe intellectual property rights of third
parties, it will adversely affect our business.





Our
development and commercialization activities, as well as any product candidates
or products resulting from these activities, may infringe or be claimed to
infringe one or more claims of an issued patent or may fall within the scope of
one or more claims in a published patent application that may be subsequently
issued and to which we do not hold a license or other rights. Third parties may
own or control these patents or patent applications in the United States and
abroad. These third parties could bring claims against us or our collaborators
that would cause us to incur substantial expenses and, if successful against us,
could cause us to pay substantial damages. Further, if a patent infringement
suit were brought against us or our collaborators, we or they could be forced to
stop or delay development, manufacturing or sales of the product or product
candidate that is the subject of the suit.
 
 As a
result of patent infringement or other similar claims or to avoid potential
claims, we or our potential future collaborators may choose or be required to
seek a license from a third party and be required to pay license fees or
royalties or both. These licenses may not be available on acceptable terms, or
at all. Even if we or our collaborators were able to obtain a license, the
rights may be nonexclusive, which could result in our competitors gaining access
to the same intellectual property. Ultimately, we could be prevented from
commercializing a product, or be forced to cease some aspect of our business
operations, if, as a result of actual or threatened patent infringement claims,
we or our collaborators are unable to enter into licenses on acceptable terms.
This could harm our business significantly.
 
 There has
been substantial litigation and other proceedings regarding patent and other
intellectual property rights in the pharmaceutical and biotechnology industries.
In addition to infringement claims against us, we may become a party to other
patent litigation and other proceedings. The cost to us of any patent litigation
or other proceeding, even if resolved in our favor, could be substantial. Some
of our competitors may be able to sustain the costs of such litigation or
proceedings more effectively than we can because of their substantially greater
financial resources. Uncertainties resulting from the initiation and
continuation of patent litigation or other proceedings could have a material
adverse effect on our ability to compete in the marketplace. Patent litigation
and other proceedings may also absorb significant management time.
 
 Many of
our employees were previously employed at other pharmaceutical companies,
including our competitors or potential competitors. We try to ensure that our
employees do not use the proprietary information or know-how of others in their
work for us. However, we may be subject to claims that we or these employees
have inadvertently or otherwise used or disclosed intellectual property, trade
secrets or other proprietary information of any such employee’s former employer.
Litigation may be necessary to defend against these claims and, even if we are
successful in defending ourselves, could result in substantial costs to us or be
distracting to our management. If we fail to defend any such claims, in addition
to paying monetary damages, we may lose valuable intellectual property rights or
personnel.


Risks
Related to Our Financial Position and Need for Additional Capital
 
 We may need
substantial additional funding and may be unable to raise capital when needed,
which would force us to delay, reduce or eliminate our product development
programs, commercialization efforts or acquisition strategy.


We make
significant investments in our currently-marketed products for sales, marketing,
securing commercial quantities of product from our manufacturers, and
distribution. In addition, we expect to make significant investments with
respect to development, particularly to the extent we conduct clinical trials
and seek FDA approval for product candidates. We have used, and expect to
continue to use, revenue from sales of our marketed products to fund a
significant portion of our development costs and establishing and expanding our
sales and marketing infrastructure. However, we may need substantial additional
funding for these purposes and may be unable to raise capital when needed or on
attractive terms, which would force us to delay, reduce or eliminate our
development programs or commercialization efforts.


As of
March 31, 2010, we had approximately $12.7 million of cash and cash equivalents.
We believe that our existing cash and cash equivalents and revenue from product
sales will be sufficient to enable us to fund our operating expenses and capital
expenditure requirements for at least the next 12 months. Our future
capital requirements will depend on many factors, including:


●
              the
      level of product sales from our currently marketed products and any
      additional products that we may market in the
  future;
 
 ●
              the
      scope, progress, results and costs of clinical development activities for
      our product candidates;
 
 37
  ●
              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;
 
 ●
              the
      extent to which we acquire or invest in products, businesses and
      technologies;
 
 ●
              the
      extent to which we choose to establish collaboration, co-promotion,
      distribution or other similar arrangements for our products and product
      candidates; and


●
            the
      costs of preparing, filing and prosecuting patent applications and
      maintaining, enforcing and defending intellectual property-related
      claims.





To the
extent that our capital resources are insufficient to meet our future capital
requirements, we will need to finance our cash needs through public or private
equity offerings, debt financings, corporate collaboration and licensing
arrangements or other financing alternatives. Additional equity or debt
financing, or corporate collaboration and licensing arrangements, may not be
available on acceptable terms, if at all.
 
 If we
raise additional funds by issuing equity securities, our stockholders will
experience dilution. Debt financing, if available, may involve agreements that
include covenants limiting or restricting our ability to take specific actions,
such as incurring additional debt, making capital expenditures or declaring
dividends. Any debt financing or additional equity that we raise may contain
terms, such as liquidation and other preferences, which are not favorable to us
or our stockholders. If we raise additional funds through collaboration and
licensing arrangements with third parties, it may be necessary to relinquish
valuable rights to our technologies, future revenue streams or product
candidates or to grant licenses on terms that may not be favorable to
us.


If
the estimates that we make, or the assumptions upon which we rely, in preparing
our financial statements prove inaccurate, our future financial results may vary
from expectations.





Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of our financial
statements requires us to make estimates and judgments that affect the reported
amounts of our assets, liabilities, stockholders’ equity, revenues and expenses,
the amounts of charges accrued by us and related disclosure of contingent assets
and liabilities. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances. For
example, at the same time we recognize revenues for product sales, we also
record an adjustment, or decrease, to revenue for estimated charge backs,
rebates, discounts, vouchers and returns, which management determines on a
product-by-product basis as its best estimate at the time of sale based on each
product’s historical experience adjusted to reflect known changes in the factors
that impact such reserves. Actual sales allowances may exceed our estimates for
a variety of reasons, including unanticipated competition, regulatory actions or
changes in one or more of our contractual relationships. We cannot assure you,
therefore, that any of our estimates, or the assumptions underlying them, will
be correct.





If
we fail to meet all applicable continued listing requirements of the NYSE Amex
and it determines to delist our common stock, the market liquidity and market
price of our common stock could decline.





If we
fail to meet all applicable listing requirements of NYSE Amex and it determines
to delist our common stock, a trading market for our common stock may not be
sustained and the market price of our common stock could decline. If a trading
market for our common stock is not sustained, it will be difficult for our
stockholders to sell shares of our common stock without further depressing the
market price of our common stock or at all. A delisting of our common stock also
could make it more difficult for us to obtain financing for the continuation of
our operations and could result in the loss of confidence by investors,
suppliers and employees.





If
significant business or product announcements by us or our competitors cause
fluctuations in our stock price, an investment in our stock may suffer a decline
in value.





The
market price of our common stock may be subject to substantial volatility as a
result of announcements by us or other companies in our industry, including our
collaborators. Announcements that may subject the price of our common stock to
substantial volatility include announcements regarding:





38




●
            our
      operating results, including the amount and timing of sales of our
      products;





●
            the
      availability and timely delivery of a sufficient supply of our
      products;





●
            our
      licensing and collaboration agreements and the products or product
      candidates that are the subject of those
  agreements;





●
            the
      results of discoveries, preclinical studies and clinical trials by us or
      our competitors;





●
            the
      acquisition of technologies, product candidates or products by us or our
      competitors;





●
            the
      development of new technologies, product candidates or products by us or
      our competitors;





●
            regulatory
      actions with respect to our product candidates or products or those of our
      competitors; and





●
            significant
      acquisitions, strategic partnerships, joint ventures or capital
      commitments by us or our
competitors.





Because we acquired Pernix
Therapeutics, Inc.  by means of a reverse merger, we may not be able
to attract the attention of major brokerage firms.





On March
9, 2010, Pernix Therapeutics, Inc. merged with and into a transitory subsidiary,
with the transitory subsidiary surviving the merger, and became a wholly-owned
subsidiary of the Company.  Additional risks to our investors may
exist because we acquired Pernix through a “reverse merger.” Prior to the
merger, security analysts of major brokerage firms did not provide coverage for
us. In addition, because of past abuses and fraud concerns stemming primarily
from a lack of public information about new public businesses, there are many
people in the securities industry and business in general who view reverse
merger transactions with suspicion. Without brokerage firm and analyst coverage,
there may be fewer people aware of the combined company and its business,
resulting in fewer potential buyers of our securities, less liquidity, and
depressed stock prices for our investors.





Because we do not
anticipate paying any cash dividends on our capital stock in the foreseeable
future, capital appreciation, if any, will be your sole source of
gain.


We have
not declared or paid cash dividends on our capital stock since 2001. We
currently intend to retain all of our future earnings, if any, to finance the
growth and development of our business. In addition, the terms of any future
debt agreements may preclude us from paying dividends. As a result, capital
appreciation, if any, of our common stock will be your sole source of gain for
the foreseeable future.


Insiders  have
substantial control over the combined company and could delay or prevent a
change in corporate control, including a transaction in which the combined
company’s stockholders could sell or exchange their shares for a
premium.


The
Company’s directors and executive officers together with their affiliates
beneficially own, in the aggregate, approximately 62% of our common stock, on a
fully diluted basis. As a result, our directors and executive officers, together
with their affiliates, if acting together, have the ability to affect the
outcome of matters submitted to stockholders for approval, including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets. In addition, these persons, acting together,
will have the ability to control our management and affairs. Accordingly, this
concentration of ownership may harm the value of our common stock
by:


●
              delaying,
      deferring or preventing a change in
  control;


●
            impeding
      a merger, consolidation, takeover or other business
      combination; or





●
            discouraging
      a potential acquirer from making an acquisition proposal or otherwise
      attempting to obtain control.





39





Resales
of shares of common stock could materially adversely affect the market price of
our common stock.





We issued
shares of common stock in the merger to the former stockholders of Pernix
Therapeutics, Inc., representing approximately 84% of the aggregate common stock
then outstanding, on a fully diluted basis.





These
shares were issued in the merger pursuant to an exemption from the registration
requirements of the 1933 Act and are therefore “restricted securities” as
defined in Rule 144 under the 1933 Act. In addition to being subject to
restrictions on transfer imposed under the securities laws, each former
stockholder of Pernix entered into a stockholder agreement (which together cover
all 20.9 million shares issued in the merger), which among other things,
prohibits the sale or transfer of these shares following the consummation of the
merger for specified periods.





Additionally,
the executive officers and three independent directors of the Company at the
time of the merger each entered into a stockholder agreement prohibiting the
sale or transfer of shares issuable pursuant to 310,000 options for as long as
one year following the filing of this Form 8-K with the SEC. The stockholder
agreements entered into by the three independent directors also prohibit the
transfer or sale of an additional 1,328,183 shares (representing shares acquired
in the open market or in privately negotiated transactions from parties other
than the Company or one of its affiliates) for 90 days following the
consummation of the merger. Thereafter, until the nine-month anniversary of the
consummation of the merger, transfers or sales by these directors collectively
in any one-week calendar period may not exceed 29% of the prior week’s trading
volume of the Company’s common stock as reported on NYSE Amex.





In
addition, the 2009 Stock Incentive Plan permits the issuance of up to
approximately 3.7 million shares pursuant to the Plan. We have registered the
shares issuable under the Plan under the 1933 Act so that they will generally be
available for resale when issued.




We may
waive the restrictions on transfer under the stockholder agreements described
above, although we currently have no intention to do so. When the restrictions
in the stockholder agreements described above lapse and the shares become
available for resale, sales of a substantial number of shares of our common
stock in the public market, or the perception that these sales could occur,
could materially adversely affect the market price of our common
stock.





Our
operating results are likely to fluctuate from period to period.





We
anticipate that there may be fluctuations in our future operating results.
Potential causes of future fluctuations in our operating results may
include:





●
              period-to-period
      fluctuations in financial
results;


●
            issues
      in manufacturing products;





●
            unanticipated
      potential product liability
claims;




●
            new
      or increased competition from
generics;





●
            the
      introduction of technological innovations or new commercial products by
      competitors;





●
            changes
      in the availability of reimbursement to the patient from third-party
      payers for our products;





●
            the
      entry into, or termination of, key agreements, including key strategic
      alliance agreements;





●
            the
      initiation of litigation to enforce or defend any of our intellectual
      property rights;





●
            the
      loss of key employees;





●
            the
      results of pre-clinical testing, IND application, and potential clinical
      trials of some product candidates;





40




●
            regulatory
      changes;





●
            the
      results and timing of regulatory reviews relating to the approval of
      product candidates;





●
            the
      results of clinical trials conducted by others on products that would
      compete with our products and product
  candidates;





●
            failure
      of any of our products or product candidates to achieve commercial
      success;





●
            general
      and industry-specific economic conditions that may affect research and
      development expenditures;





●
              future
      sales of our common stock;
and


●
            changes
      in the structure of health care payment systems resulting from proposed
      healthcare legislation or
otherwise.





Moreover,
stock markets in general have experienced substantial volatility that has often
been unrelated to the operating performance of individual companies. These broad
market fluctuations may also adversely affect the trading price of our common
stock.


Risks Related to Product
Development


We
may invest a significant portion of our efforts and financial resources in the
development of our product candidates and there is no guarantee we will obtain
requisite regulatory approvals or otherwise timely bring these product
candidates to market.


We intend
to seek FDA approval for two of our product candidates and are in the earliest
stages of that process. We do not have experience with that process, and
therefore it will require a significant amount of our managerial and financial
resources. Our ability to bring these products to market depends on a number of
factors including:


●
            successful
      completion of pre-clinical laboratory and animal
  testing;





●
            approval
      by the FDA of an investigational new drug application or IND application,
      which must occur before human clinical trials may
  commence;





●
            successful
      completion of clinical trials;





●
            receipt
      of marketing approvals from the
FDA;





●
            establishing
      commercial manufacturing arrangements with third party
      manufacturers;





●
            launching
      commercial sales of the product;





●
            acceptance
      of the product by patients, the medical community and third party
      payors;





●
            competition
      from other therapies;





●
            achieving
      and maintaining compliance with all regulatory requirements applicable to
      the product; and





●
            a
      continued acceptable safety profile of the product following
      approval.





41


If we are
not successful in commercializing any of our product candidates, or are
significantly delayed in doing so, our business will be harmed, possibly
materially.  On April 13, 2010, we entered into a consulting agreement
with Kiel whereby we paid Kiel an aggregate fee of $200,000 to assist us in the
development of these two product candidates and the preparation and filing of an
investigational new drug application with the FDA.


If our clinical
trials do not demonstrate safety and efficacy in humans, we may experience
delays, incur additional costs and ultimately be unable to commercialize our
product candidates.


Before
obtaining regulatory approval for the sale of some of our product candidates, we
must conduct, at our own expense, extensive clinical trials to demonstrate the
safety and efficacy of our product candidates in humans. Clinical testing is
expensive, difficult to design and implement, can take many years to complete
and is uncertain as to outcome. The outcome of early clinical trials may not be
predictive of the success of later clinical trials, and interim results of a
clinical trial do not necessarily predict final results. Even if early phase
clinical trials are successful, it is necessary to conduct additional clinical
trials in larger numbers of patients taking the drug for longer periods before
seeking approval from the FDA to market and sell a drug in the United States.
Clinical data is often susceptible to varying interpretations, and many
companies that have believed their products performed satisfactorily in clinical
trials have nonetheless failed to obtain FDA approval for their products.
Similarly, even if clinical trials of a product candidate are successful in one
indication, clinical trials of that product candidate for other indications may
be unsuccessful. A failure of one or more of our clinical trials can occur at
any stage of testing.
 
 We may
experience numerous unforeseen events during, or as a result of, the clinical
trial process that could delay or prevent our ability to receive regulatory
approval or commercialize our product candidates, including:


●
            regulators
      or institutional review boards may not authorize us to commence a clinical
      trial or conduct a clinical trial at a prospective trial
    site;





●
            our
      clinical trials may produce negative or inconclusive results, and we may
      decide, or regulators may require us, to conduct additional clinical
      trials or we may abandon projects that we expect to be
      promising;





●
            the
      number of patients required for our clinical trials may be larger than we
      anticipate, enrollment in our clinical trials may be slower than we
      anticipate, or participants may drop out of our clinical trials at a
      higher rate than we anticipate;





●
            our
      third party contractors may fail to comply with regulatory requirements or
      meet their contractual obligations to us in a timely
    manner;





●
            we
      might have to suspend or terminate our clinical trials if the participants
      are being exposed to unacceptable health
risks;





●
            regulators
      or institutional review boards may require that we hold, suspend or
      terminate clinical research for various reasons, including noncompliance
      with regulatory requirements;




●
            the
      cost of our clinical trials may be greater than we
    anticipate;





●
            the
      supply or quality of our product candidates or other materials necessary
      to conduct our clinical trials may be insufficient or inadequate;
      and





●
            the
      effects of our product candidates may not be the desired effects or may
      include undesirable side effects or the product candidates may have other
      unexpected characteristics.





42


If we are
required to conduct additional clinical trials or other testing of our product
candidates in addition to those that we currently contemplate, if we are unable
to successfully complete our clinical trials or other testing, if the results of
these trials or tests are not positive or are only modestly positive or if there
are safety concerns, we may:


●
              be
      delayed in obtaining marketing approval for one or more of our product
      candidates;
 
 ●
              not
      be able to obtain marketing
approval;
 
 ●
              obtain
      approval for indications that are not as broad as intended;
    or
 
 ●
              have
      the product removed from the market after obtaining marketing
      approval.


Our
product development costs also will increase if we experience delays in testing
or approvals. Significant clinical trial delays also could shorten the patent
protection period during which we may have the exclusive right to commercialize
our product candidates or allow our competitors to bring products to market
before we do and impair our ability to commercialize our products or product
candidates.


Risks Related to Regulatory
Matters
 
 Some
of our specialty pharmaceutical products are now being marketed without FDA
approvals.


Even
though the FDCA requires pre-marketing approval of all new drugs, as a matter of
history and regulatory policy, the FDA has historically refrained from taking
enforcement action against some marketed, unapproved new drugs. Specifically,
some marketed prescription and nonprescription drugs are not the subject of an
approved marketing application because they are thought to be identical,
related, or similar to historically-marketed products, which were thought not to
require pre-market review and approval, or which were approved only on the basis
of safety, at the time they entered the marketplace. Many such drugs are
marketed under FDA enforcement policies established in connection with the FDA’s
Drug Efficacy Study Implementation, or DESI, program, which was established to
determine the effectiveness of drug products approved before 1962. Prior to
1962, the FDCA required proof of safety but not efficacy for new drugs. Drugs
that were not subject to applications approved between 1938 and 1962 were not
subject to DESI review. For a period of time, the FDA permitted these drugs to
remain on the market without approval. In 1984, the FDA created a program, known
as the Prescription Drug Wrap-Up, also known as DESI II, to address these
remaining unapproved drugs. Most of these drugs contain active pharmaceutical
ingredients that were first marketed prior to 1938. The FDA asserts that all
drugs subject to the Prescription Drug Wrap-Up are on the market illegally and
are subject to FDA enforcement discretion because all prescription drugs must be
the subject of an approved drug application. There are several narrow
exceptions. For example, both the original statutory language of the FDCA and
the amendments enacted in 1962 include provisions exempting specified drugs from
the new drug requirements. The 1938 clause exempts drugs that were on the market
prior to the passage of the FDCA in 1938 and that contain the same
representations concerning the conditions of use as they did prior to passage of
the FDCA. The 1962 amendments exempt, in specified circumstances, drugs that
have the same composition and labeling as they had prior to the passage of the
1962 amendments. The FDA and the courts have interpreted these two exceptions
very narrowly. The FDA has adopted a risk-based enforcement policy concerning
these unapproved drugs. While all such drugs are considered to require FDA
approval, FDA enforcement against such products as unapproved new drugs
prioritizes products that pose potential safety risks, lack evidence of
effectiveness, prevent patients from seeking effective therapies or are marketed
fraudulently. In addition, the FDA has indicated that approval of an NDA for one
drug within a class of drugs marketed without FDA approval may also trigger
agency enforcement of the new drug requirements against all other drugs within
that class that have not been so approved.
 
 Some of
our specialty pharmaceutical products are marketed in the United States without
an FDA-approved marketing application because they have been considered by us to
be identical, related or similar to products that have existed in the market
without an NDA or ANDA. Our gross sales of these unapproved products was
approximately $32.0 million, or 84.1% of gross sales, for the year ended
December 31, 2009, and $24.5 million, or 93% of gross sales, for the year
ended December 31, 2008.  These products are marketed subject to
the FDA’s regulatory discretion and enforcement policies, and it is possible
that the FDA could disagree with our determination that one or more of these
products is identical, related or similar to products that have existed in the
marketplace without an NDA or ANDA. If the FDA were to disagree with our
determination, it could ask or require the removal of our unapproved products
from the market, which would significantly reduce our gross sales.
 
 43
 
 In
addition, if the FDA issues an approved NDA for one of the drug products within
the class of drugs that includes one or more of our unapproved products or
completes the efficacy review for that drug product, it may require us to also
file an NDA or ANDA application for its unapproved products in that class of
drugs in order to continue marketing them in the United States. While the FDA
generally provides sponsors with a one-year grace period during which time they
are permitted to continue selling the unapproved drug, it is not statutorily
required to do so and could ask or require that the unapproved products be
removed from the market immediately. In addition, the time it takes us to
complete the necessary clinical trials and submit an NDA or ANDA to the FDA may
exceed any applicable grace period, which would result in an interruption of
sales of such unapproved products. If the FDA asks or requires that the
unapproved products be removed from the market, our financial condition and
results of operations would be materially and adversely affected.


If we are not
able to obtain required regulatory approvals, we will not be able to
commercialize our product candidates, and our ability to generate increased
revenue will be materially impaired.





Our
product candidates and the activities associated with their development and
commercialization, including their testing, manufacture, safety, efficacy,
recordkeeping, labeling, storage, approval, advertising, promotion, sale and
distribution, are subject to comprehensive regulation by the FDA, the DEA and
other regulatory agencies in the United States and by comparable authorities in
other countries. Failure to obtain regulatory approval for a product candidate
will prevent us from commercializing the product candidate. We have not received
approval from the FDA or demonstrated our ability to obtain regulatory approval
for any drugs that we have developed or are developing. We have no significant
experience in filing and prosecuting the applications necessary to gain
regulatory approvals and expect to rely on third party contract research
organizations to assist us in this process. Securing FDA approval requires the
submission of extensive preclinical and clinical data and supporting information
to the FDA for each therapeutic indication to establish the product candidate’s
safety and efficacy. Securing FDA approval also requires the submission of
information about the product manufacturing process to, and inspection of
manufacturing facilities by, the FDA. Our future products may not be effective,
may be only moderately effective or may prove to have undesirable or unintended
side effects, toxicities or other characteristics that may preclude our
obtaining regulatory approval or prevent or limit commercial use.
 
 The
process of obtaining regulatory approvals is expensive, often takes many years,
if approval is obtained at all, and can vary substantially based upon a variety
of factors, including the type, complexity and novelty of the product candidates
involved and the nature of the disease or condition to be treated. Changes in
regulatory approval policies during the development period, changes in or the
enactment of additional statutes or regulations, or changes in regulatory review
for each submitted product application, may cause delays in the approval or
rejection of an application. The FDA has substantial discretion in the approval
process and may refuse to accept any application or may decide that our data is
insufficient for approval and require additional preclinical, clinical or other
studies. In addition, varying interpretations of the data obtained from
preclinical and clinical testing could delay, limit or prevent regulatory
approval of a product candidate. Any regulatory approval we ultimately obtain
may be limited or subject to restrictions or post-approval commitments that
render the approved product not commercially viable.


Our lack of
experience in obtaining FDA approvals could delay, limit or prevent such
approvals for its product candidates.


We
have  no significant experience in preparing and submitting the
applications necessary to gain FDA approvals and expects to rely on third-party
contract research organizations to assist it in this process. On April 13, 2010,
we entered into a consulting agreement with Kiel whereby we paid Kiel an
aggregate fee of $200,000 to assist us in the development of two of our
antitussive product candidates and the preparation and filing of our first
investigational new drug application with the FDA.  We are in the
earliest stages of this process.
 
 We
acquired the rights to most of our currently marketed products and product
candidates through licensing transactions and acquisitions. We have not received
approval from the FDA for any of our products or demonstrated our ability to
obtain regulatory approval for any drugs that we have developed or are
developing. Our limited experience in this regard could delay or limit approval
of our product candidates if we are unable to effectively manage the applicable
regulatory process with either the FDA or foreign regulatory authorities. In
addition, significant errors or ineffective management of the regulatory process
could prevent approval of a product candidate, especially given the substantial
discretion that the FDA and foreign regulatory authorities have in this
process.
 
 44


If we are unable
to obtain adequate reimbursement and pricing from governments or third party
payors for our products, our revenue and prospects for profitability will
suffer.


Our level
of revenue depends, and will continue to depend, heavily upon the availability
of adequate reimbursement for the use of our products from governmental and
other third party payors in the United States. Reimbursement by a third party
payor may depend upon a number of factors, including the third party payor’s
determination that use of a product is:


●
              a
      covered benefit under its health
plan;
 
 ●
              safe,
      effective and medically necessary;
 
 ●
              appropriate
      for the specific patient;
 
 ●
              cost-effective;
      and
 
 ●
              neither
      experimental nor investigational.


Obtaining
reimbursement approval for a product from a government or other third party
payor is a time consuming and costly process that could require us to provide
supporting scientific, clinical and cost-effectiveness data for the use of our
products to the payor. We may not be able to provide data sufficient to gain
acceptance with respect to reimbursement. Even when a payor determines that a
product is eligible for reimbursement, the payor may impose coverage limitations
that preclude payment for some uses that are approved by the FDA or comparable
authorities. In addition, there is a risk that full reimbursement may not be
available for high priced products. Moreover, eligibility for coverage does not
imply that any product will be reimbursed in all cases or at a rate that allows
us to make a profit or even cover our costs. Interim payments for new products,
if applicable, may also not be sufficient to cover our costs and may not be made
permanent.   In 2003, the U.S. government enacted the Medicare
Prescription Drug Improvement and Modernization Act, which became effective in
January 2006.  The act provides a partial prescription drug benefit
for Medicare recipients. However, to obtain payments under this program, we are
required to sell products to Medicare recipients through drug procurement
organizations operating pursuant to this legislation. These organizations
negotiate prices for our products, which are generally lower than those we might
otherwise obtain.




In both
the U.S. and some foreign jurisdictions, there have been a number of legislative
and regulatory proposals and initiatives to change the health care system in
ways that could affect our ability to sell our products profitably. Some of
these proposed and implemented reforms could result in reduced reimbursement
rates or changes in rebate obligations for our products, which would adversely
affect our business strategy, operations and financial results. For example, in
March 2010, President Obama signed into law a legislative overhaul of the U.S.
healthcare system, known as the Patient Protection and Affordable Care Act of
2010, as amended by the Healthcare and Education Affordability Reconciliation
Act of 2010. This law, which we refer to as the PPACA, will significantly impact
the pharmaceutical industry, including the reimbursement and rebate obligations
for prescribed drugs; however, the full effects cannot be known until its
provisions are implemented and federal and state agencies have issued applicable
regulations and guidance.




Further
federal and state proposals and health care reforms could limit payments for our products and the
product candidates, and may further limit our commercial opportunity. Our
results of operations could be materially adversely affected by the possible
effect of such current or future legislation on amounts that private insurers
will pay and by other health care reforms that may be enacted or adopted in the
future.





Any product for
which we obtain marketing approval could be subject to restrictions or
withdrawal from the market and we may be subject to penalties if we fail to
comply with regulatory requirements or if we experience unanticipated problems
with our products, when and if any of them are
approved.


45




Any
product for which we obtain marketing approval, along with the manufacturing
processes, post-approval clinical data, recordkeeping, labeling, advertising and
promotional activities for such product, will be subject to continual
requirements of and review by the FDA and comparable regulatory authorities.
These requirements include submissions of safety and other post-marketing
information and reports, registration requirements, cGMP requirements relating
to quality control, quality assurance and corresponding maintenance of records
and documents, requirements regarding the distribution of samples to physicians
and recordkeeping. Even if regulatory approval of a product is granted, the
approval may be subject to limitations on the indicated uses for which the
product may be marketed or to the conditions of approval, or contain
requirements for costly post-marketing testing and surveillance to monitor the
safety or efficacy of the product. Later discovery of previously unknown
problems with our products, manufacturers or manufacturing processes, or failure
to comply with regulatory requirements, may result in actions such
as:


●
            withdrawal
      of the products from the market;





●
            restrictions
      on the marketing or distribution of such
  products;





●
            restrictions
      on the manufacturers or manufacturing
processes;





●
            warning
      letters;





●
            refusal
      to approve pending applications or supplements to approved applications
      that we submit;





●
            recalls;





●
            fines;





●
            suspension
      or withdrawal of regulatory
approvals;





●
            refusal
      to permit the import or export of our
products;





●
            product
      seizure; or





●
            injunctions
      or the imposition of civil or criminal
  penalties.





Our relationships
with customers and payors are subject to applicable fraud and abuse and other
healthcare laws and regulations, which could expose us to criminal sanctions,
civil penalties, contractual damages, reputation harm, and diminished profits
and future earnings.





Healthcare
providers, physicians and others play a primary role in the recommendation and
prescription of our products. Our arrangements with third party payors and
customers may expose us to broadly applicable fraud and abuse and other
healthcare laws and regulations that may constrain the business or financial
arrangements and relationships through which we market, sell and distribute our
products. Applicable federal and state healthcare laws and regulations, include,
but are not limited to, the following:


●
            The
      federal healthcare anti-kickback statute prohibits, among other things,
      persons from knowingly and willfully soliciting, offering, receiving or
      providing remuneration, directly or indirectly, in cash or in kind, to
      induce or reward either the referral of an individual for, or the
      purchase, order or recommendation of, any good or service, for which
      payment may be made under federal healthcare programs such as Medicare and
      Medicaid.





●
            The
      Ethics in Patient Referrals Act, commonly referred to as the Stark Law,
      and its corresponding regulations, prohibit physicians from referring
      patients for designated health services reimbursed under the Medicare and
      Medicaid programs to entities with which the physicians or their immediate
      family members have a financial relationship or an ownership interest,
      subject to narrow regulatory
exceptions.





●
            The
      federal False Claims Act imposes criminal and civil penalties, including
      civil whistleblower or qui tamactions,
      against individuals or entities for knowingly presenting, or causing to be
      presented, to the federal government, claims for payment that are false or
      fraudulent or making a false statement to avoid, decrease, or conceal an
      obligation to pay money to the federal
  government.





●
            The
      federal Health Insurance Portability and Accountability Act of 1996, or
      HIPAA, imposes criminal and civil liability for executing a scheme to
      defraud any healthcare benefit program and also imposes obligations,
      including mandatory contractual terms, with respect to safeguarding the
      privacy, security and transmission of individually identifiable health
      information.





●
            The
      federal false statements statute prohibits knowingly and willfully
      falsifying, concealing or covering up a material fact or making any
      materially false statement in connection with the delivery of or payment
      for healthcare benefits, items or
services.





●
            Analogous
      state laws and regulations, such as state anti-kickback and false claims
      laws, may apply to sales or marketing arrangements and claims involving
      healthcare items or services reimbursed by non-governmental third party
      payors, including private insurers, and some state laws require
      pharmaceutical companies to comply with the pharmaceutical industry’s
      voluntary compliance guidelines and the relevant compliance guidance
      promulgated by the federal
government.





46


Efforts
to ensure that our business arrangements with third parties comply with
applicable healthcare laws and regulations could be costly. It is possible that
governmental authorities will conclude that our business practices may not
comply with current or future statutes, regulations or case law involving
applicable fraud and abuse or other healthcare laws and regulations. If our past
or present operations, including activities conducted by our sales team or
agents, are found to be in violation of any of these laws or any other
governmental regulations that may apply to us, we may be subject to significant
civil, criminal and administrative penalties, damages, fines, exclusion from
third party payor programs, such as Medicare and Medicaid, and the curtailment
or restructuring of our operations. If any of the physicians or other providers
or entities with whom we do business are found to be not in compliance with
applicable laws, they may be subject to criminal, civil or administrative
sanctions, including exclusions from government funded healthcare
programs.
 
 Many
aspects of these laws have not been definitively interpreted by the regulatory
authorities or the courts, and their provisions are open to a variety of
subjective interpretations, which increases the risk of potential violations. In
addition, these laws and their interpretations are subject to change. Any action
against us for violation of these laws, even if we successfully defend against
it, could cause us to incur significant legal expenses, divert our management’s
attention from the operation of our business and damage our
reputation.


Recently enacted
legislation may make it more difficult and costly for us to obtain regulatory
approval of our product candidates and to produce, market and distribute our
existing products.


The Food
and Drug Administration Amendments Act of 2007, or the FDAAA, grants a variety
of new powers to the FDA, many of which are aimed at improving drug safety and
assuring the safety of drug products after approval. Under the FDAAA, companies
that violate the new law are subject to substantial civil monetary penalties.
The new requirements and other changes that the FDAAA imposes may make it more
difficult, and likely more costly, to obtain approval of new pharmaceutical
products and to produce, market and distribute existing products.


We may be subject
to investigations or other inquiries concerning our compliance with reporting
obligations under federal healthcare program pharmaceutical pricing
requirements.


Under
federal healthcare programs, some state governments and private payors
investigate and have filed civil actions against numerous pharmaceutical
companies alleging that the reporting of prices for pharmaceutical products has
resulted in false and overstated average wholesale price, which in turn may be
alleged to have improperly inflated the reimbursements paid by Medicare, private
insurers, state Medicaid programs, medical plans and others to healthcare
providers who prescribed and administered those products or pharmacies that
dispensed those products. These same payors may allege that companies do not
properly report their “best prices” to the state under the Medicaid program.
Suppliers of outpatient pharmaceuticals to the Medicaid program are also subject
to price rebate agreements. Failure to comply with these price rebate agreements
may lead to federal or state investigations, criminal or civil liability,
exclusion from federal healthcare programs, contractual damages, and otherwise
harm our reputation, business and prospects.


Risks Related to Employee Matters and
Managing Growth
 
 If we fail to
attract and retain key personnel, or to retain our executive management team, we
may be unable to successfully develop or commercialize our
products.


Our
success depends in part on our continued ability to attract, retain and motivate
highly qualified managerial personnel. We are highly dependent upon our
executive management team. The loss of the services of any one or more of the
members of our executive management team or other key personnel could delay or
prevent the successful completion of some of our development and
commercialization objectives.
 
 Recruiting
and retaining qualified sales and marketing personnel is critical to our
success. We may not be able to attract and retain these personnel on acceptable
terms given the competition among numerous pharmaceutical and biotechnology
companies for similar personnel. In addition, we rely on consultants and
advisors, including scientific and clinical advisors, to assist us in
formulating our development and commercialization strategy. Our consultants and
advisors may be employed by employers other than us and may have commitments
under consulting or advisory contracts with other entities that may limit their
availability to us.


We may encounter
difficulties in managing our growth, which could disrupt our
operations.


To manage
our anticipated future growth, we must continue to implement and improve our
managerial, operational and financial systems, and continue to recruit and train
additional qualified personnel. Due to our limited financial resources and the
inexperience of our management team in managing a company during a period of
such anticipated growth, we may not be able to effectively manage the expansion
of our operations or recruit and train additional qualified personnel. The
expansion of our operations may lead to significant costs and may divert our
management and business development resources. Any inability to manage growth
could delay the execution of our business plans or disrupt our
operations.
 
 47





Our
management will be required to devote substantial time to comply with public
company regulations.





As a
public company, we expect to incur significant legal, accounting and other
expenses. In addition, the Sarbanes-Oxley Act, as well as rules subsequently
implemented by the SEC and NYSE Amex, imposes various requirements on public
companies, including with respect to corporate governance
practices.  Moreover, these rules and regulations will increase legal
and financial compliance costs and will make some activities more time-consuming
and costly.





In
addition, the Sarbanes-Oxley Act requires, among other things, that our
management maintain adequate disclosure controls and procedures and internal
control over financial reporting. In particular, we must perform system and
process evaluation and testing of our internal control over financial reporting
to allow management and, as applicable, our independent registered public
accounting firm to report on the effectiveness of our internal control over
financial reporting, as required by Section 404 of the Sarbanes-Oxley Act.
Our compliance with Section 404 will require us to incur substantial
accounting and related expenses and expend significant management efforts. We
may need to hire additional accounting and financial staff to satisfy the
ongoing requirements of Section 404. If we are not able to comply with the
requirements of Section 404, or if we or our independent registered public
accounting firm identifies deficiencies in our internal control over financial
reporting that are deemed to be material weaknesses, our financial reporting
could be unreliable and misinformation could be disseminated to the
public.





Any
failure to develop or maintain effective internal control over financial
reporting or difficulties encountered in implementing or improving our internal
control over financial reporting could harm our operating results and prevent us
from meeting our reporting obligations. Ineffective internal controls also could
cause our stockholders and potential investors to lose confidence in our
reported financial information, which would likely have a negative effect on the
trading price of our common stock. In addition, investors relying upon this
misinformation could make an uninformed investment decision, and we could be
subject to sanctions or investigations by the SEC, NYSE Amex or other regulatory
authorities, or to stockholder class action securities litigation.





Risks Related to Our Acquisition
Strategy





Our
strategy of obtaining, through product acquisitions and in-licenses, rights to
products and product candidates for our development pipeline and to proprietary
drug delivery and formulation technologies for our life cycle management of
current products may not be successful.





Part of
our business strategy is to acquire rights to pharmaceutical products,
pharmaceutical product candidates in the late stages of development and
proprietary drug delivery and formulation technologies. Because we do not have
discovery and research capabilities, the growth of our business will depend in
significant part on our ability to acquire or in-license additional products,
product candidates or proprietary drug delivery and formulation technologies
that we believe have significant commercial potential and are consistent with
our commercial objectives. However, we may be unable to license or acquire
suitable products, product candidates or technologies from third parties for a
number of reasons.





The
licensing and acquisition of pharmaceutical products, product candidates and
related technologies is a competitive area, and a number of more established
companies are also pursuing strategies to license or acquire products, product
candidates and drug delivery and formulation technologies, which may mean fewer
suitable acquisition opportunities for us, as well as higher acquisition prices.
Many of our competitors have a competitive advantage over us due to their size,
cash resources and greater clinical development and commercialization
capabilities.





Other
factors that may prevent us from licensing or otherwise acquiring suitable
products, product candidates or technologies include:





●
            We
      may be unable to license or acquire the relevant products, product
      candidates or technologies on terms that would allow us to make an
      appropriate return on investment;





●
            Companies
      that perceive us as a competitor may be unwilling to license or sell their
      product rights or technologies to
us;





●
            We
      may be unable to identify suitable products, product candidates or
      technologies within our areas of
  expertise; and





●
            We
      may have inadequate cash resources or may be unable to obtain financing to
      acquire rights to suitable products, product candidates or technologies
      from third parties.





48





If we are
unable to successfully identify and acquire rights to products, product
candidates and proprietary drug delivery and formulation technologies and
successfully integrate them into our operations, we may not be able to increase
our revenues in future periods, which could result in significant harm to our
financial condition, results of operations and prospects.





If we fail to
successfully manage any acquisitions, our ability to develop our product
candidates and expand our product pipeline may be harmed.


Our
failure to adequately address the financial, operational or legal risks of any
acquisitions or in-license arrangements could harm our business. Financial
aspects of these transactions that could alter our financial position, reported
operating results or stock price include:


●
            use
      of cash resources;





●
            higher
      than anticipated acquisition costs and
expenses;





●
            potentially
      dilutive issuances of equity
securities;





●
            the
      incurrence of debt and contingent liabilities, impairment losses or
      restructuring charges;





●
            large
      write-offs and difficulties in assessing the relative percentages of
      in-process research and development expense that can be immediately
      written off as compared to the amount that must be amortized over the
      appropriate life of the
asset; and





●
            amortization
      expenses related to other intangible
assets.





Operational
risks that could harm our existing operations or prevent realization of
anticipated benefits from these transactions include:


●
            challenges
      associated with managing an increasingly diversified
    business;





●
            disruption
      of our ongoing business;





●
            difficulty
      and expense in assimilating the operations, products, technology,
      information systems or personnel of the acquired
  company;





●
            diversion
      of management’s time and attention from other business
      concerns;





●
            inability
      to maintain uniform standards, controls, procedures and
      policies;





●
            the
      assumption of known and unknown liabilities of the acquired company,
      including intellectual property
claims; and





●
            subsequent
      loss of key personnel.





If we are
unable to successfully manage our acquisitions, our ability to develop and
commercialize new products and continue to expand our product pipeline may be
limited.
 
 49


We  may
not realize the benefits we expect  from the
merger.


On March
9, 2010, Pernix Therapeutics, Inc. merged with and into a transitory subsidiary,
with the transitory subsidiary surviving the merger, and became a wholly-owned
subsidiary of the Company.  We will need to overcome significant
challenges related to integration and will face many risks in order to realize
any benefits from this merger. These challenges and risks include:





●
            the
      potential disruption of our  ongoing business and distraction of
      management;





●
            the
      potential strain on our financial and managerial controls and reporting
      systems and procedures;





●
            unanticipated
      expenses and potential delays related to integration of the operations,
      technology and other resources of the two
  companies;





●
            the
      impairment of relationships with employees, suppliers and customers as a
      result of any integration of new management
  personnel;





●
            greater
      than anticipated costs and expenses related to
      integration; and





●
            potential
      unknown or currently unquantifiable liabilities associated with the merger
      and the combined operations.





We may
not succeed in addressing these risks or any other problems encountered in
connection with the merger. The inability to successfully integrate the
operations, technology and personnel of the respective businesses, or any
significant delay in achieving integration, could have a material adverse effect
on us and, as a result, on the market price of our common
stock.


ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS




Upon
consummation of the merger on March 9, 2010, the former stockholders of PTI
received an aggregate of 20,900,000 shares of the Company’s common stock,
representing approximately 84% of the aggregate common stock of the Company
outstanding. The issuance of shares of the Company’s common stock to the former
shareholders of PTI in the merger was made in an unregistered offering, in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, which exempts transactions by an issuer not involving a
public offering.  These securities may not be offered or sold in the
United States absent registration or an applicable exemption from
registration.  Reliance on Section 4(2) was based primarily on the
following factors:




i)
            
            the
      offer was limited to the five former stockholders of PTI, all of whom
      served as officers or directors of PTI;ii)
            
            each
      of PTI’s former stockholders are sophisticated investors and had available
      to them all information necessary to make an informed investment decision
      regarding the merger;iii)
            
            each
      of PTI’s former stockholders was an active participant in considering the
      merits and risks of the merger;iv)
            
            the
      merger was a negotiated transaction, as opposed to a widespread
      offering;v)
            
            there
      was no public solicitation; andvi)
            
            the
      substantial contractual restrictions on resale by the former stockholders
      of PTI ensure they will not be deemed to be
      underwriters.




ITEM
3.    DEFAULTS
UPON SENIOR SECURITIES






None.




ITEM
4.    RESERVED
AND REMOVED.




ITEM
5.    OTHER
INFORMATION






None.


ITEM
6.    EXHIBITS


50


EXHIBIT
INDEX





Exhibit
      No.
            
            Description2.1
            
            Agreement
      and Plan of Merger By and Among Golf Trust of America, Inc., GTA
      Acquisition, LLC and Pernix Therapeutics, Inc. dated as of October 6, 2009
      (previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed
      on October 7, 2009, and incorporated herein by
  reference)2.2
            
            Asset
      Purchase Agreement dated January 8, 2010 by and between Sciele Pharma,
      Inc. as Seller and Pernix Therapeutics, Inc. as Buyer (previously filed as
      Exhibit 2.1 to our Current Report on Form 8-K filed on March 30, 2010, and
      incorporated herein by reference)3.1
            
            Articles
      of Incorporation, as currently in effect (previously filed as Exhibit 3.1
      to our Current Report on Form 8-K filed on March 15, 2010, and
      incorporated herein by reference)3.2
            
            Seventh
      Amended and Restated Bylaws, as currently in effect (previously filed as
      Exhibit 3.2 to our Current Report on Form 8-K filed on March 15, 2010, and
      incorporated herein by reference)10.1
            
            2009
      Stock Incentive Plan (previously filed as Exhibit 10.1 to our Current
      Report on Form 8-K filed on March 15, 2010, and incorporated herein by
      reference)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 Accounting Officer pursuant to Section 302
      of the Sarbanes-Oxley Act of 2002.32.1*
            
            Certification
      of the Registrant’s Chief Executive Officer and Principal Accounting
      Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.





* Filed
herewith.


51


SIGNATURES





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:
            May
      14, 2010
            
            By:
            /s/ Cooper
      CollinsCooper
      Collins
              Chief
      Executive Officer and PresidentDate:
            May
      14, 2 010
            
            By:
            /s/ TracyS. CliffordTracy
      S. CliffordChief
      Financial Officer and Secretary








52