What changed in this filing

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Item 1. Financial Statements

2020-08-14 compared with 2020-05-22 · 159 added, 154 removed, 325 unchanged (49% of the section changed)

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Condensed Consolidated Balance Sheets

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Current assets:

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100,000,000 shares authorized;

15,318,529 and 15,263,555 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively

15,181,276 and 15,263,355 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively

49,246,129 49,914,478

Retained earnings 152,775 1,208,395

Retained earnings (deficit) ( 765,500 ) 1,208,395

Total shareholders’ equity 48,480,629 51,122,873

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AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income (loss)

Three months ended March 31,

Condensed Consolidated Statements of Operations

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Net revenues $ 9,598,177 $ 9,417,443 $ 17,928,911 $ 18,147,303

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- diluted 15,241,463 15,523,628 15,241,020 15,497,989

Comprehensive income (loss) attributable to common shareholders ( 1,055,620 ) ( 73,878 )

Comprehensive (income) loss at subsidiary attributable to noncontrolling interests 9,525 ( 33,460 )

Total comprehensive income (loss) $ ( 1,065,145 ) $ ( 40,418 )

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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Condensed Consolidated Statements of Cash Flows

Three months ended March 31,

Six months ended June 30,

Cash flows from operating activities:

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Proceeds from sale of marketable securities — 8,563,988

Cash paid for acquisition — ( 5,000,000 )

Additions to intangible assets ( 722,131 ) ( 395,005 )

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Cash and cash equivalents at end of period $ 27,373,737 $ 20,951,180

Supplemental non-cash investing and financing activities:

Recognition of operating lease assets and liabilities through adoption of ASC 842 $ — $ 3,629,320

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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Balance, March 31, 2019 15,547,517 $ 50,759,257 $ 4,672,276 $ ( 240,806 ) $ 55,190,727

Common stock Retained earnings Noncontrolling interests Total equity

Balance, March 31, 2019 15,547,517 $ 50,759,257 $ 4,672,276 $ ( 240,806 ) $ 55,190,727

Share-based compensation 8,000 396,548 — — 396,548

Repurchase of subsidiary shares from noncontrolling interest — ( 685,805 ) — ( 114,195 ) ( 800,000 )

Repurchase of common shares ( 84,447 ) ( 531,746 ) — — ( 531,746 )

Net loss — — ( 549,507 ) ( 17,305 ) ( 566,812 )

Balance, June 30, 2019 15,471,070 $ 49,938,254 $ 4,122,769 $ ( 372,306 ) $ 53,688,717

Common stock Retained earnings (deficit) Noncontrolling interests Total equity

Shares Amount

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Balance, March 31, 2020 15,318,539 $ 49,737,428 $ 152,775 $ ( 47,145 ) $ 49,843,058

Share-based compensation 4,200 278,349 — — 278,349

Repurchase of common shares ( 141,463 ) ( 769,648 ) — — ( 769,648 )

Net loss — — ( 918,275 ) ( 22,314 ) ( 940,589 )

Balance, June 30, 2020 15,181,276 $ 49,246,129 $ ( 765,500 ) $ ( 69,459 ) $ 48,411,170

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report on Form 10-K”).

The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.

Total comprehensive income (loss) consisted solely of net income (loss) for the three months ended March 31, 2020 and 2019.

The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.

Discontinued Operations

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Refer to Note 10, for additional information.

Reclassification of prior period amounts

The Company has made certain reclassifications to prior period amounts to conform to the current-year presentation of the reporting of research and development expense and general and administrative expense on the condensed consolidated statements of operations.

Certain costs and expenses related to research and development were previously reported as general and administrative expenses on the condensed consolidated statements of operations.

These reclassifications have no effect on the reported operating loss or equity for the 2019 periods presented.

COVID-19 Pandemic

During March 2020, the U.S.

In March 2020, the U.S.

declared a health care emergency following the outbreak of the (SARS-CoV-2), a novel strain of coronavirus that causes COVID-19, a respiratory illness.

The Company is monitoring this situation both in the U.S.

and internationally, so Cumberland can maintain employee safety and well-being, while also keeping the business operating and secure.

Cumberland has remained open for business, as the Company is considered to be essential by the United States Department of Homeland Security.

All of the Company's corporate and Cumberland Emerging Technologies (“CET”) employees have been given the opportunity to work remotely, and those that wish to work from Cumberland's office and laboratories are encouraged to practice the behaviors outlined by the Centers for Disease Control.

Cumberland's sales organization has continued to make calls on medical professionals, providing information and product samples as requested.

However, their contact has largely shifted from in person to telephonic and electronic communications.

The Company has implemented measures to address the impact of the novel coronavirus on the business and taken appropriate action to protect the employees, secure the supply chain, and support the patients who can benefit from its medicines.

All of the Company's corporate, sales and Cumberland Emerging Technologies (“CET”) employees have been given the opportunity to work remotely, and those that wish to work from Cumberland's office and laboratories are encouraged to practice the behaviors outlined by the Centers for Disease Control.

Cumberland's sales organization has continued to interact with medical professionals, providing information and product samples as requested.

However, much of their contact has shifted from in person to telephonic and electronic communications.

Travel across the organization and attendance at medical meetings have largely been discontinued.

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The Company is aware that it may experience revenue loss, supply interruptions, time delays and incur unplanned expenses as a result of the impact of the ongoing COVID-19 pandemic.

During this national health care and economic crisis, Cumberland understands that the volume of patients seeking health care was negatively impacted by the stay-at-home orders across the country.

Declines in hospital admissions, patient visits to physician offices and postponement of elective surgeries have all been reported.

As a result, Cumberland is facing the same headwinds that are affecting all companies that rely on these factors to help drive revenue.

While the Company expects these dynamics to improve as the country reopens, it cannot be determined at this time when and to what extent that improvement will occur.

Given the uncertainty, magnitude and impact of such changes, the Company is unable to fully quantify the impact on the future results as of the date of this filing.

Given the uncertainty, magnitude and impact of such changes, the Company is unable to quantify the impact on the future results as of the date of this filing.

The Company continues to monitor the COVID-19 pandemic situation both in the U.S.

and internationally in order to maintain the employees’ safety and well-being, while also keeping its business operating.

Recent Accounting Guidance

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At the time of purchase, the Company classifies marketable securities as either trading securities or available-for-sale securities, depending on the intent at that time.

As of March 31, 2020 and December 31, 2019, marketable securities were comprised solely of trading securities.

As of June 30, 2020 and December 31, 2019, marketable securities were comprised solely of trading securities.

Trading securities are carried at fair value with unrealized gains and losses recognized as a component of interest income in the consolidated statements of operations.

As of March 31, 2020 and December 31, 2019, all trading securities were commercial paper with original maturities of less than ninety days and as a result, were classified as cash equivalents.

As of June 30, 2020 and December 31, 2019, all trading securities were investments with original maturities of less than ninety days and as a result, were classified as cash equivalents.

The Company's fair value measurements follow the appropriate rules as well as the fair value hierarchy that prioritizes the information used to develop the measurements.

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The following table summarizes the fair value of our marketable securities, by level within the fair value hierarchy, as of each period end:

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Level 1 Level 2 Total Level 1 Level 2 Total

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(3) EARNINGS (LOSS) PER SHARE

The following table reconciles the numerator and denominator used to calculate diluted earnings (loss) per share for the three months ended March 31, 2020 and 2019:

Three months ended March 31,

The following table reconciles the numerator and denominator used to calculate diluted earnings (loss) per share for the three and six months ended June 30, 2020 and 2019:

Three months ended June 30,

Net income (loss) from continuing operations $ ( 1,679,211 ) $ ( 1,338,521 )

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Weighted-average shares outstanding – diluted 15,241,463 15,523,628

As of March 31, 2020 and 2019, restricted stock awards and options to purchase 431,226 and 263,919 shares of common stock, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect would be antidilutive.

Six months ended June 30,

Net income (loss) from continuing operations $ ( 3,562,629 ) $ ( 2,526,075 )

Discontinued operations 1,556,895 1,918,845

Net income (loss) at subsidiary attributable to noncontrolling interest 31,839 ( 16,155 )

Net income (loss) attributable to common shareholders $ ( 1,973,895 ) $ ( 623,385 )

Weighted-average shares outstanding – basic 15,241,020 15,497,989

Dilutive effect of other securities — —

Weighted-average shares outstanding – diluted 15,241,020 15,497,989

As of June 30, 2020 and 2019, restricted stock awards and options to purchase 199,210 and 13,500 shares of common stock, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect would be antidilutive.

Product Revenues

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As part of the adoption of ASC 606, the Company applied the new standard on a modified retrospective basis analyzing open contracts as of January 1, 2018.

The Company’s net revenues consisted of the following for the three months ended March 31, 2020 and 2019:

Three months ended March 31,

The Company’s net revenues consisted of the following for the three and six months ended June 30, 2020 and 2019:

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Acetadote $ 595,310 $ 983,473 $ 1,308,711 $ 1,832,976

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Other Revenues

The Company has agreements with international partners for commercialization of the Company's products.

The international agreements provide that each of the partners are responsible for seeking regulatory approvals for the products, and following approvals, each partner will handle ongoing distribution and sales in the respective international territories.

The Company maintains responsibility for the intellectual property and product formulations.

Under the international agreements, the Company is typically entitled to receive a non-refundable, up-front payment at the time each agreement is entered into as a result of providing the distinct intellectual property rights for the respective international territory.

These agreements also provide for additional payments upon the partners' achievement of defined regulatory approvals, sales milestones or both.

The Company may also be entitled to receive royalties on future sales of the products under the agreements and a transfer price on

The contractual payments associated with the partners achievement of regulatory approvals, sales milestones and royalties on future sales are recognized as revenue upon occurrence, or at such time that the Company has a high degree of confidence that the revenue would not be reversed in a subsequent period.

Other revenues also include revenue generated by CET through grant funding from federal Small Business grant programs, and lease income generated by CET’s Life Sciences Center and contract services.

The Company has agreements with international partners for commercialization of the Company's products with associated payments included in other revenues.

Those agreements provide that each of the partners are responsible for seeking regulatory approvals for the product, and following approval, each partner will be responsible for the ongoing distribution and sales in the respective international territories.

The Company provides a dossier for product registration and maintains responsibility for the relevant intellectual property.

Cumberland is typically entitled to receive a non-refundable, up-front payment at the time each agreement is executed as consideration for the product dossier and for the rights to the distinct intellectual property rights in the respective international territory.

These agreements also typically provide for additional payments upon a partner’s achievement of a defined regulatory approval and sales milestones.

The Company may also be entitled to receive royalties on future sales of the products and a transfer price on supplies.

The contractual payments associated with the partner’s achievement of regulatory approvals, sales milestones and royalties on future sales are recognized as revenue upon occurrence, or at such time that the Company has a high degree of confidence that the revenue would not be reversed in a subsequent period.

Other revenues also include funding from federal grant programs including those secured by CET through the Small Business Administration as well as lease income generated by CET’s Life Sciences Center.

The Life Sciences Center is a research center that provides scientists with access to flexible lab space and other resources to develop biomedical products.

Grant revenue from these programs totaled approximately $ 0.2 million and $ 0.6 million for the three months ended March 31, 2020 and 2019, respectively.

Grant revenue from these programs totaled approximately $ 0.1 million and $ 0.2 million for the three months ended June 30, 2020 and 2019, and $ 0.3 million and $ 0.8 million for the six months ended June 30, 2020 and 2019, respectively.

(5) INVENTORIES

The Company works closely with third parties to manufacture and package finished goods for sale.

Based on the relationship with the manufacturer or packager, the Company will either take title to the finished goods at the time of shipment or at the time of arrival from the manufacturer.

The Company then warehouses such goods until distribution and sale.

Inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out method.

The Company continually evaluates inventory for potential losses due to excess, obsolete or slow-moving inventory by comparing sales history and sales projections to the inventory on hand.

Based on the arrangements with the manufacturer or packager, the Company will either take title to the finished goods at the time of shipment or at the time of arrival at the Company’s warehouses.

The Company then holds such goods in inventory until distribution and sale.

These finished goods inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out method.

The Company evaluates inventory for potential losses due to excess, obsolete or slow-moving goods by comparing sales history and projections to the inventory on hand.

When evidence indicates that the carrying value may not be recoverable, a charge is taken to reduce the inventory to its current net realizable value.

At March 31, 2020 and December 31, 2019, there were no cumulative obsolescence and discontinuance losses necessary.

In connection with the acquisition of certain product rights related to the Kristalose brand, the Company is responsible for the purchase of the active pharmaceutical ingredient (“API”) for Kristalose and maintains the inventory at the third-party manufacturer.

As the API is consumed in production, the value of the API is transferred from raw materials to finished goods.

API for the Company's Vaprisol brand is also included in the raw materials inventory total.

Consigned inventory represents Authorized Generic inventory stored until shipment.

At June 30, 2020 and December 31, 2019, there were no cumulative obsolescence and discontinuance losses necessary.

The Company is responsible for the purchase of the active pharmaceutical ingredient (“API”) for Kristalose and maintains the inventory at multiple locations.

As that API is consumed in production, the value of the API is transferred from raw materials to finished goods inventory.

Cumberland also maintains API for its Vaprisol brand which is classified as raw materials inventory.

The consigned inventory represents Authorized Generic product which is shipped to the Company’s distribution partner and stored until sale.

As part of the Vibativ acquisition, Cumberland acquired API and work in process inventories that are classified as non-current inventories.

During 2019, Cumberland also obtained $ 0.3 million in non-current inventory for API related to its ifetroban clinical initiatives.

At March 31, 2020 and December 31, 2019, total non-current inventory, including Vibativ and ifetroban, was $ 15.6 million.

The Company did not have any finished goods included in the non-current inventories at March 31, 2020 or December 31, 2019, respectively.

The Company also has obtained $ 0.4 million in non-current inventory for API related to its ifetroban clinical initiatives.

At June 30, 2020 and December 31, 2019, total non-current inventory, including Vibativ and ifetroban, was $ 15.6 million.

The Company did not have any finished goods included in the non-current inventories at June 30, 2020 or December 31, 2019, respectively.

The Company's net inventories consisted of the following:

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Raw materials and work in process $ 19,660,890 $ 19,345,723

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The primary effect of adopting ASU 2016-02 to the Company was to record right-of-use assets and obligations for the leases classified as operating leases.

The Company’s significant operating leases include the lease of approximately 25,500 square feet of office space in Nashville, Tennessee for its corporate headquarters.

Cumberland’s significant operating leases include the lease of approximately 25,500 square feet of office space in Nashville, Tennessee for its corporate headquarters.

This lease currently expires in October 2022.

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Operating lease right-of-use assets represent operating lease liabilities adjusted for lease incentives and initial direct costs.

As the Company’s leases do not contain implicit borrowing rates, the incremental borrowing rates were calculated based on information available at January 1, 2019.

As Cumberland’s leases do not contain implicit borrowing rates, the incremental borrowing rates were calculated based on information available at January 1, 2019.

Incremental borrowing rates reflect the Company’s estimated interest rates for collateralized borrowings over similar lease terms.

The weighted-average incremental borrowing rate used to discount the present value of the remaining lease payments is 7.42 %.

The weighted-average remaining lease term at March 31, 2020 is 2.7 years.

The weighted-average remaining lease term at June 30, 2020 is 2.5 years.

Lease Position

At March 31, 2020 and December 31, 2019 , the Company's lease assets and liabilities were as follows:

Right-of-Use Assets Balance Sheet Classification March 31, 2020 December 31, 2019

Operating lease right-of-use assets Other non-current assets $ 2,733,782 $ 2,960,569

Lease Liabilities Balance Sheet Classification March 31, 2020 December 31, 2019

Operating lease liabilities Other current liabilities $ 943,807 $ 920,431

Operating lease liabilities Other long-term liabilities 1,831,274 2,076,472

At June 30, 2020 and December 31, 2019 , the Company's lease assets and liabilities were as follows:

Right-of-Use Assets June 30, 2020 December 31, 2019

Operating lease right-of-use assets $ 2,502,850 $ 2,960,569

Lease Liabilities June 30, 2020 December 31, 2019

Operating lease current liabilities $ 967,656 $ 920,431

Operating lease noncurrent liabilities 1,580,203 2,076,472

Total $ 2,547,859 $ 2,996,903

Maturity of Leases Liabilities at March 31, 2020 Operating Leases

Maturity of Leases Liabilities at June 30, 2020

Operating Leases

2020 $ 566,713

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Share repurchases

The Company currently has a share repurchase program to repurchase up to $ 10 million of its common stock pursuant to Rule 10b-18 of the Securities Exchange Act of 1934.

Cumberland currently has a share repurchase program to repurchase up to $ 10 million of its common stock pursuant to Rule 10b-18 of the Securities Exchange Act of 1934.

In January 2019, the Company's Board of Directors established the current $ 10 million repurchase program to replace the prior authorizations.

During the three months ended March 31, 2020 and March 31, 2019, the Company repurchased 164,876 shares and 121,466 , respectively, of common stock for approximately $ 0.7 million and $ 0.7 million, respectively.

During the six months ended June 30, 2020 and June 30, 2019, the Company repurchased 306,329 shares and 205,913 , respectively, of common stock for approximately $ 1.2 million during both 2020 and 2019.

Share purchases and sales

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These purchases are designed to increase ownership in the Company by the members of the Board.

In November 2017, the Company filed a Shelf Registration on Form S-3 with the SEC associated with the sale of up to $ 100 million in corporate securities.

In November 2017, Cumberland filed a Shelf Registration on Form S-3 with the SEC associated with the sale of up to $ 100 million in corporate securities.

The Shelf Registration was declared effective in January 2018 including an At-The-Market ("ATM") feature enabling the Company to sell shares at market prices.

The Company did not issue any shares under the ATM during the three months ended March 31, 2020 or March 31, 2019.

The Company did not issue any shares under the ATM during the six months ended June 30, 2020 or June 30, 2019.

Restricted Share Grants

During the three months ended March 31, 2020, and March 31, 2019, the Company issued 229,141 shares and 222,269 shares of restricted stock to employees and directors, respectively.

During the six months ended June 30, 2020, and June 30, 2019, the Company issued 229,141 shares and 222,469 shares of restricted stock to employees and directors, respectively.

Restricted stock issued to employees generally cliff-vests on the fourth anniversary of the date of grant and for directors on the one-year anniversary of the date of grant.

Stock compensation expense is presented as a component of general and administrative expense in the condensed consolidated statements of operations and comprehensive income (loss).

Stock compensation expense is presented as a component of general and administrative expense in the condensed consolidated statements of operations.

Cumberland Emerging Technologies

In April 2019, Cumberland Emerging Technologies ("CET"), our majority-owned subsidiary, entered into an agreement with WinHealth whereby WinHealth made a $ 1 million investment through the purchase of shares of CET stock.

As part of the agreement, WinHealth obtained a Board position at CET and the first opportunity to license CET products for the Chinese market.

In connection with WinHealth's investment in CET, Cumberland also made an additional $ 1 million investment in CET.

Cumberland purchased additional CET shares through contribution of $ 0.3 million in cash and a conversion of $ 0.7 million in intercompany loans payable.

Upon completion of the additional investment by WinHealth and Cumberland, Gloria Pharmaceuticals agreed to return it's shares in CET in exchange for consideration of $ 0.8 million.

In April 2019, Cumberland Emerging Technologies ("CET"), our majority-owned subsidiary, entered into an agreement whereby Hongkong WinHealth Pharma Group Ltd.

("WinHealth") made a $ 1 million investment in CET through the purchase of shares of its common stock.

As part of the agreement, WinHealth obtained the rights to name an individual for appointment to the CET Board of Directors as well as the first opportunity to license CET products for the Chinese market.

In connection with WinHealth's investment in CET, during 2019, Cumberland also made an additional $ 1 million investment in CET.

Cumberland purchased additional CET common shares through contribution of $ 0.3 million in cash and a conversion of $ 0.7 million in intercompany loans payable.

Upon completion of the additional investment by WinHealth and Cumberland, Gloria Pharmaceuticals returned its shares in CET in exchange for $ 0.8 million that was funded during 2020.

Debt Agreement

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Under the Pinnacle Agreement, Cumberland was initially subject to one financial covenant, the maintenance of a Funded Debt Ratio, as such term is defined in the agreement and determined on a quarterly basis.

On August 14, 2018, the Company amended the Pinnacle Agreement ("First Amendment") to replace the single financial covenant with the maintenance of either the Funded Debt Ratio or a Tangible Capital Ratio, as defined in the First Amendment.

The Company was in compliance with the Tangible Capital Ratio financial covenant as of March 31, 2020.

defined in the First Amendment.

The Company was in compliance with the Tangible Capital Ratio financial covenant as of June 30, 2020.

The initial revolving line of credit under the Pinnacle Agreement was for up to an aggregate principal amount of $ 12.0 million with the ability to increase the principal amount available for borrowing up to $ 20.0 million, upon the satisfaction of certain conditions.

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The interest rate on the Pinnacle Agreement is based on LIBOR plus an interest rate spread.

There is no LIBOR minimum and the LIBOR pricing provides for an interest rate spread of 1.75 % to 2.75 % (representing an interest rate of 3.73 % at March 31, 2020).

There is no LIBOR minimum and the LIBOR pricing provides for an interest rate spread of 1.75 % to 2.75 % (representing an interest rate of 2.92 % at June 30, 2020).

In addition, a fee of 0.25 % per year is charged on the unused line of credit.

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Borrowings under the line of credit are collateralized by substantially all of our assets.

As of March 31, 2020 and December 31, 2019, the Company had $ 18.5 million in borrowings outstanding under our revolving credit facility.

As of June 30, 2020 and December 31, 2019, the Company had $ 17.0 million and $ 18.5 million in borrowings outstanding under our revolving credit facility, respectively.

Paycheck Protection Program Loan

On April 20, 2020, Cumberland received the funding of a loan from Pinnacle Bank in the aggregate amount of $ 2,187,140 pursuant to the Paycheck Protection Program (the “PPP”) under the Federal Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which was enacted March 27, 2020.

The PPP is administered by the U.S.

Small Business Administration.

The loan matures April 14, 2022, and bears interest at a rate of 1.0 % per year, payable monthly commencing during November 2020.

The note may be prepaid at any time prior to maturity with no prepayment penalties.

Funds from the loan are to be used to maintain payroll, continue group health care benefits and pay for rent and utilities.

Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act, including qualifying payroll costs, covered rent payments, and covered utilities.

From the date of funding the Company has used the loan amount for such qualifying expenses.

Cumberland has elected to account for the proceeds of the loan as a government grant under International Accounting Standard 20 ("IAS 20"), Accounting for Government Grants and Disclosure of Government Assistance.

The permitted analogous use of IAS 20 outlines a model for the accounting for government assistance, including forgivable loans.

As result, the Company has recorded the $ 2,187,140 as a deferred income liability, which is included as a component of other current liabilities on the condensed consolidated balance sheet.

The Company intends to apply IAS 20 to the PPP loan forgiveness and has presented the amounts expected to be forgiven as deferred income.

The Company will account for the anticipated forgiveness of the PPP loan under IAS 20 when the Company believes that the forgiveness is reasonably assured.

Cumberland applied for this loan after carefully considering, with its bank, the eligibility criteria to participate in this program, and determining that Cumberland met these criteria.

The Company evaluated and provided information on our payroll and other qualifying expenses to determine the amount of PPP funds to apply for.

Cumberland has not laid off or furloughed any employees as a result of the COVID-19 pandemic and, based on assistance from the PPP loan, the Company currently does not foresee doing so.

Cumberland will continue to monitor and evaluate changes to this program as they emerge and will take appropriate action, if necessary.

(8) INCOME TAXES

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“the Tax Act”).

The Tax Act makes broad and complex changes to the U.S.

tax code, including, but not limited to, (1) reducing the U.S.

federal corporate tax rate to 21%;

(2) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized;

(3) capital expensing;

and (4) creating new limitations on deductible interest expense and executive compensation.

The SEC staff issued Staff Accounting Bulletin (“SAB”) 118, providing guidance on applying the Tax Act.

SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740.

In accordance with SAB 118, a company reflects the income tax effects of the Tax Act for which the accounting under ASC 740 is complete.

To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but a reasonable estimate is available, it must record the estimate in the financial statements.

If a company cannot determine an estimate, it should continue to apply ASC 740 on the basis of the tax laws that were in effect immediately prior to enactment of the Tax Act.

As of March 31, 2020, the Company has approximately $ 44.1 million of net operating loss carryforwards resulting from the exercise of nonqualified stock options that have historically been used to significantly offset income tax obligations.

As of June 30, 2020, the Company has approximately $ 56.3 million in federal net operating loss carryforwards including approximately $ 44.1 million of net operating loss carryforwards resulting from the exercise of nonqualified stock options.

These have historically been used to significantly offset income tax obligations.

The Company expects it will continue to pay minimal income taxes during 2020 and beyond, through the continued utilization of these net operating loss carryforwards, on any taxable income generated from our operations.

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Cumberland is a party to several collaborative arrangements with research institutions to identify and pursue promising pharmaceutical product candidates.

The Company has determined that these collaborative agreements do not meet the criteria for accounting under ASC Topic 808, Collaborative Agreements .

The funding for these programs is primarily provided through Federal Small Business Administration (SBIR/STTR) and other grant awards.

The Company has determined that these collaborative agreements, with the exception of the collaborative payment discussed in Note 10 do not meet the criteria for accounting under ASC Topic 808, Collaborative Agreements .

The agreements do not specifically designate each party’s rights and obligations to each other under the collaborative arrangements.

Except for patent defense costs, expenses incurred by one party are not required to be reimbursed by the other party.

The funding for these programs is primarily provided through Federal Small Business Administration (SBIR/STTR) and other grant awards.

Expenses incurred under these collaborative agreements are included in research and development expenses and funding received from grants are recorded as net revenues in the condensed consolidated statements of operations and comprehensive income (loss).

(10) ADDITIONS AND RETURN OF PRODUCT RIGHTS

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Cumberland acquired Vibativ to further add to its product offerings, increase its net revenue and positively contribute to the Company's operating results.

Cumberland expects to deduct the goodwill acquired in the acquisition for tax purposes.

The Company expects to deduct the goodwill acquired in the acquisition for tax purposes.

Cumberland has accounted for the transaction as a business combination in accordance with ASC 805 and the product sales are included in the results of operations subsequent to the acquisition date.

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Cash paid at closing $ 20,000,000

Cash payment during early 2019 5,000,000

Cash payment during 2019 5,000,000

Fair value of contingent consideration - net sales royalty 9,182,000

Total consideration $ 34,182,000

The contingent consideration liability represents the future net sales royalty payments discussed above.

Cumberland prepared the valuations of the contingent consideration liability and the intangible assets utilizing significant unobservable inputs.

As a result, the valuations are classified as Level 3 fair value measurements.

The following table presents the changes in the fair value of the contingent consideration liability that is remeasured on a recurring basis.

The contingent consideration earned and accrued in operating expenses is paid to the seller quarterly.

Contingent consideration liability

Balance at November 12, 2018 $ 9,034,000

Change in fair value of contingent consideration included in operating expenses ( 40,000 )

Contingent consideration earned and accrued in operating expenses 508,000

Balance at December 31, 2018 9,502,000

Adjustment to initial fair value of the contingent consideration liability 148,000

Cash payment of royalty during the period ( 1,033,108 )

Change in fair value of contingent consideration included in operating expenses ( 804,167 )

Contingent consideration earned and accrued in operating expenses 820,864

Balance at December 31, 2019 8,633,589

Cash payment of royalty during the period ( 260,735 )

Change in fair value of contingent consideration included in operating expenses ( 543,006 )

Contingent consideration earned and accrued in operating expenses —

Balance at March 31, 2020 $ 7,829,848

The following table summarizes the final allocation of the fair values of the assets acquired as part of the acquisition of Vibativ:

8 unchanged sentences

Total assets acquired $ 34,182,000

In November 2016, the Company announced an Agreement to acquire the exclusive U.S.

rights to Nordic Group B.V.’s ("Nordic") injectable methotrexate product line as an asset purchase.

The products are designed for the treatment of active rheumatoid arthritis, juvenile idiopathic arthritis, severe psoriatic arthritis, and severe disabling psoriasis.

Under the terms of the Agreement, Cumberland is responsible for the products’ FDA submission and registration.

As consideration for the license, at closing, Cumberland paid a deposit of $ 100,000 .

The Company also recorded a liability of $ 0.9 million that was settled through 180,000 unvested restricted shares of Cumberland common stock.

These shares vested upon the FDA approval of the first Nordic product.

The contingent consideration liability represents the future net sales royalty payments discussed above.

Cumberland prepared the valuations of the contingent consideration liability and the intangible assets utilizing significant unobservable inputs.

As a result, the valuations are classified as Level 3 fair value measurements.

The following table presents the changes in the fair value of the contingent consideration liability that is remeasured on a recurring basis.

The contingent consideration earned and accrued in operating expenses is paid to the seller quarterly.

Balance at December 31, 2019 $ 8,633,589

Cash payment of royalty during the period ( 260,735 )

Change in fair value of contingent consideration included in operating expenses ( 645,571 )

Contingent consideration earned and accrued in operating expenses 573,279

Balance at June 30, 2020

The contingent consideration liability of $ 8.3 million was classified as other current liabilities of $ 2.8 million and other long-term liabilities of $ 5.5 million on the condensed consolidated balance sheet as of June 30, 2020.

In November 2016, the Company announced an agreement with the Nordic Group B.V.’ ("Nordic") to acquire the exclusive U.S.

rights to Nordic’s injectable methotrexate product line designed for the treatment of active rheumatoid arthritis, juvenile idiopathic arthritis, severe psoriatic arthritis, and severe disabling psoriasis.

As consideration for the license Cumberland paid a deposit of $ 100,000 at closing.

The Company provided $ 0.9 million in consideration through a grant of 180,000 restricted shares of Cumberland common stock to be vested upon the FDA approval of the first Nordic product.

Cumberland also agreed to provide Nordic a series of payments tied to the products’ FDA approval, launch and achievement of certain sales milestones.

Nordic is responsible for manufacturing and supply of the products.

On November 27, 2019, Cumberland received FDA approval for the RediTrex product line and brand name.

The 180,000 shares of restricted Cumberland common stock vested and were valued at $ 0.9 million on the vesting date.

In addition, the FDA approval resulted in Cumberland recording an additional $ 1.0 million other current liability due to Nordic that will be paid during 2020.

Under the terms of the agreement, Cumberland is responsible for the product registration and commercialization in the U.S.

Nordic is responsible for product manufacturing and supply.

On November 27, 2019, Cumberland received FDA approval for the first Nordic injectible product and authorization to market them under the RediTrex brand name.

The 180,000 shares of restricted Cumberland common stock previously provided to Nordic vested upon approval and were valued at $ 0.9 million on the vesting date.

The FDA approval also resulted a $ 1.0 million milestone payment due to Nordic.

This milestone payment was paid in July 2020 and is recorded as an other current liability at both June 30, 2020 and December 31, 2019.

During the three months ended June 30, 2020, Cumberland recognized $ 0.5 million of other revenue in its condensed consolidated statement of operations for a collaborative payment due from Nordic.

The payment was received during July 2020.

Ethyol and Totect

During May 2019, Cumberland entered into the Dissolution Agreement with Clinigen in which the Company returned the exclusive rights to commercialize Ethyol and Totect in the United States to Clinigen.

The Dissolution Agreement originally resulted in a transition from the Company's current arrangement with Clinigen effective September 30, 2019.

In early September 2019, Clinigen and Cumberland completed an Amendment to the Dissolution Agreement whereby the transition date was changed to late December 2019.

Under the terms of the Dissolution Agreement, Cumberland is no longer involved directly or indirectly with the distribution, marketing and promotion of either Ethyol or Totect or any competing products after December 31, 2019.

In exchange for the return of these product license rights and not competing with either product, Cumberland will receive $ 5 million in financial consideration paid in quarterly installments over the two-years following the transition date.

Cumberland recorded the first installment of $ 0.8 million during the quarter ended March 31, 2020 as discontinued operations and will record each future quarterly installment over the two year period.

There are no expenses associated with the installment payments under the Dissolution Agreement, resulting in $ 0.8 million in discontinued operations income during the quarter ended March 31, 2020.

The Ethyol and Totect products provided $ 3.2 million in revenue, $ 2.0 million in direct expenses and $ 1.1 million in discontinued operations income during the three months ended March 31, 2019.

These direct expenses do not reflect the selling and marketing costs attributable to the individuals at Cumberland responsible for direct selling and promotion of the Products.

Those selling and marketing individuals who supported the Products continue to support Cumberland's other products.

The December 31, 2019 current assets of discontinued operations included $ 0.5 million in inventory for the products sold back to Clinigen as part of the transaction.

As of March 31, 2020 and December 31, 2019 the remaining balance of the current assets of discontinued operations were accounts receivable and the current liabilities of discontinued operations were accounts payable associated with Ethyol and Totect.

During May 2019, Cumberland entered into the Dissolution Agreement with Clinigen in which the Company returned the exclusive rights to commercialize Ethyol and Totect (“the Products”) in the United States to Clinigen.

This Dissolution Agreement originally targeted a transition from the Company's arrangements with Clinigen effective September 30, 2019, but was then amended to change the transition date to December 31, 2019.

Under the terms of the Dissolution Agreement, Cumberland was no longer responsible for the distribution, marketing and promotion of either the Products or any competing products after December 31, 2019.

In exchange for the return of these product license rights and the non-compete provisions of the Dissolution Agreement, Cumberland is receiving $ 5 million in financial consideration paid in quarterly installments over the two-years following the transition date.

Cumberland recorded the first two quarterly installments totaling $ 1.5 million during the six months ended June 30, 2020 as discontinued operations and will record each future quarterly installment over the two year period.

As there are no expenses associated with these payments, approximately $ 1.5 million in discontinued operations income was recorded during the period ended June 30, 2020.

The Products provided $ 5.3 million in revenue, with $ 3.4 million in direct expenses resulting in $ 1.9 million in discontinued operations income during the six months ended June 30, 2019.

These direct expenses do not reflect the direct selling and marketing costs attributable to the individuals at Cumberland responsible for promotion of the Products.

Those sales and marketing individuals who supported the Products have subsequently shifted their efforts to support other Cumberland brands.

The December 31, 2019 current assets of discontinued operations included $ 0.5 million in remaining inventory for the Products sold and returned to Clinigen as part of the transaction.

As of June 30, 2020, and December 31, 2019, the remaining balance of the current assets of discontinued operations were accounts receivable and the current liabilities of discontinued operations were accounts payable associated with Ethyol and Totect.

The accounts receivable and accounts payable balances were not sold or disposed of as part of the Dissolution Agreement.

(11) SUBSEQUENT EVENTS

The PPP is administered by the U.S.

Small Business Administration.

The loan matures April 14, 2022, and bears interest at a rate of 1.0 % per year, payable monthly commencing during November 2020.

The note may be prepaid at any time prior to maturity with no prepayment penalties.

Funds from the loan are to be used to maintain payroll, continue group health care benefits and pay for rent and utilities.

Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.

The Company intends to use the majority of the loan amount for such qualifying expenses.

Cumberland applied for this loan after carefully considering, with its bank, the eligibility criteria to participate in this program, and determining that Cumberland met these criteria.

The Company evaluated and provided information on our payroll and other qualifying expenses to determine the amount of PPP funds to apply for.

Cumberland has not laid off or furloughed any employees as a result of the COVID-19 pandemic and, thanks to assistance from the PPP loan, the Company currently does not foresee doing so.

Cumberland will continue to monitor and evaluate changes to this program as they emerge and will take appropriate action, if necessary.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements