CUMBERLAND PHARMACEUTICALS INC 10-Q

Item 1. Financial Statements (Unaudited) CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) June 30, 2020 December 31, 2019 ASSETS Current assets: Cash and cash equivalents $ 27,373,737 $ 28,212,635 Accounts receivable, net 7,924,338 7,843,917 Inventories 7,627,270 8,871,254 Current assets of discontinued operations 744,403 2,477,813 Prepaid and other current assets 2,085,230 2,757,456 Total current assets 45,754,978 50,163,075 Non-current inventories 15,640,060 15,554,992 Property and equipment, net 631,534 747,796 Intangible assets, net 29,151,228 30,920,324 Goodwill 882,000 882,000 Deferred tax assets, net 21,802 21,802 Operating lease right-of-use assets 2,502,850 2,960,569 Other assets 2,939,003 3,298,725 Total assets $ 97,523,455 $ 104,549,283 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 10,829,982 $ 9,993,578 Current liabilities of discontinued operations — 1,918,868 Operating lease current liabilities 967,656 920,431 Other current liabilities 10,866,765 11,317,358 Total current liabilities 22,664,403 24,150,235 Revolving line of credit 17,000,000 18,500,000 Operating lease noncurrent liabilities 1,580,203 2,076,472 Other long-term liabilities 7,867,679 8,737,323 Total liabilities 49,112,285 53,464,030 Commitments and contingencies Equity: Shareholders’ equity: Common stock— no par value; 100,000,000 shares authorized; 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 (deficit) ( 765,500 ) 1,208,395 Total shareholders’ equity 48,480,629 51,122,873 Noncontrolling interests ( 69,459 ) ( 37,620 ) Total equity 48,411,170 51,085,253 Total liabilities and equity $ 97,523,455 $ 104,549,283 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 1 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) 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 Costs and expenses: Cost of products sold 2,609,982 1,792,293 4,244,163 3,451,082 Selling and marketing 3,865,406 3,982,379 7,573,082 7,419,311 Research and development 1,421,502 1,716,169 3,144,057 3,115,856 General and administrative 2,190,764 2,270,318 4,227,048 4,807,057 Amortization 1,091,485 1,029,708 2,167,524 2,051,353 Total costs and expenses 11,179,139 10,790,867 21,355,874 20,844,659 Operating income (loss) ( 1,580,962 ) ( 1,373,424 ) ( 3,426,963 ) ( 2,697,356 ) Interest income 28,661 130,565 58,549 246,426 Interest expense ( 119,455 ) ( 91,200 ) ( 152,520 ) ( 152,111 ) Income (loss) from continuing operations before income taxes ( 1,671,756 ) ( 1,334,059 ) ( 3,520,934 ) ( 2,603,041 ) Income tax (expense) benefit ( 7,455 ) ( 4,462 ) ( 41,695 ) 76,966 Net income (loss) from continuing operations ( 1,679,211 ) ( 1,338,521 ) ( 3,562,629 ) ( 2,526,075 ) Discontinued operations 738,622 771,709 1,556,895 1,918,845 Net income (loss) ( 940,589 ) ( 566,812 ) ( 2,005,734 ) ( 607,230 ) Net (income) loss at subsidiary attributable to noncontrolling interests 22,314 17,305 31,839 ( 16,155 ) Net income (loss) attributable to common shareholders $ ( 918,275 ) $ ( 549,507 ) $ ( 1,973,895 ) $ ( 623,385 ) Earnings (loss) per share attributable to common shareholders - Continuing operations - basic $ ( 0.11 ) $ ( 0.09 ) $ ( 0.23 ) $ ( 0.16 ) - Discontinued operations - basic 0.05 0.05 0.10 0.12 $ ( 0.06 ) $ ( 0.04 ) $ ( 0.13 ) $ ( 0.04 ) - Continuing operations - diluted $ ( 0.11 ) $ ( 0.09 ) $ ( 0.23 ) $ ( 0.16 ) - Discontinued operations - diluted 0.05 0.05 0.10 0.12 $ ( 0.06 ) $ ( 0.04 ) $ ( 0.13 ) $ ( 0.04 ) Weighted-average shares outstanding - basic 15,241,463 15,523,628 15,241,020 15,497,989 - diluted 15,241,463 15,523,628 15,241,020 15,497,989 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 2 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30, 2020 2019 Cash flows from operating activities: Net income (loss) $ ( 2,005,734 ) $ ( 607,230 ) Discontinued operations 1,556,895 1,918,845 Net income (loss) from continuing operations ( 3,562,629 ) ( 2,526,075 ) Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization expense 2,334,669 2,174,397 Deferred tax expense — 43,605 Share-based compensation 542,923 760,982 Decrease in non-cash contingent consideration ( 645,571 ) ( 321,894 ) Noncash interest expense 22,973 28,111 Noncash investment gains — ( 125,804 ) Net changes in assets and liabilities affecting operating activities: Accounts receivable ( 80,421 ) ( 652,652 ) Inventories 1,158,916 883,545 Other current assets and other assets 1,017,650 141,577 Accounts payable and other current liabilities 2,413,768 ( 163,530 ) Other long-term liabilities ( 869,644 ) ( 342,940 ) Net cash provided by (used in) operating activities from continuing operations 2,332,634 ( 100,678 ) Discontinued operations 1,371,437 1,565,604 Net cash provided by (used in) operating activities 3,704,071 1,464,926 Cash flows from investing activities: Additions to property and equipment ( 50,883 ) ( 89,070 ) Purchases of marketable securities — ( 9,627,191 ) Proceeds from sale of marketable securities — 8,563,988 Cash paid for acquisition — ( 5,000,000 ) Additions to intangible assets ( 722,131 ) ( 395,005 ) Net cash used in investing activities ( 773,014 ) ( 6,547,278 ) Cash flows from financing activities: Borrowings on line of credit 35,500,000 36,000,000 Repayments on line of credit ( 37,000,000 ) ( 36,000,000 ) Cash payment of contingent consideration ( 260,735 ) ( 684,738 ) Repurchase of subsidiary shares from noncontrolling interest ( 800,000 ) — Repurchase of common shares ( 1,209,220 ) ( 1,220,690 ) Net cash used in financing activities ( 3,769,955 ) ( 1,905,428 ) Net decrease in cash and cash equivalents ( 838,898 ) ( 6,987,780 ) Cash and cash equivalents at beginning of period $ 28,212,635 $ 27,938,960 Cash and cash equivalents at end of period $ 27,373,737 $ 20,951,180 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 3 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Condensed Consolidated Statements of Equity (Unaudited) Common stock Retained earnings Noncontrolling interests Total equity Shares Amount Balance, December 31, 2018 15,481,497 $ 51,098,613 $ 4,746,154 $ ( 274,266 ) $ 55,570,501 Share-based compensation 187,486 364,434 — — 364,434 Repurchase of common shares ( 121,466 ) ( 703,790 ) — — ( 703,790 ) Net loss — — ( 73,878 ) 33,460 ( 40,418 ) Balance, March 31, 2019 15,547,517 $ 50,759,257 $ 4,672,276 $ ( 240,806 ) $ 55,190,727 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 Balance, December 31, 2019 15,263,555 $ 49,914,478 $ 1,208,395 $ ( 37,620 ) $ 51,085,253 Share-based compensation 219,850 264,574 — — 264,574 Repurchase of common shares ( 164,866 ) ( 441,624 ) — — ( 441,624 ) Net loss — — ( 1,055,620 ) ( 9,525 ) ( 1,065,145 ) Balance, March 31, 2020 15,318,539 $ 49,737,428 $ 152,775 $ ( 47,145 ) $ 49,843,058 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. 4 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (1) ORGANIZATION AND BASIS OF PRESENTATION Cumberland Pharmaceuticals Inc. (“Cumberland,” the “Company,” or as used in the context of “we,” “us,” or “our”) is a specialty pharmaceutical company focused on the acquisition, development and commercialization of branded prescription products. The Company's primary target markets are hospital acute care and gastroenterology. These medical specialties are characterized by relatively concentrated prescriber bases that the Company believes can be penetrated effectively by small, targeted sales forces. Cumberland is dedicated to providing innovative products that improve quality of care for patients and address unmet or poorly met medical needs. Cumberland focuses its resources on maximizing the commercial potential of its products, as well as developing new product candidates, and has both internal development and commercial capabilities. The Company’s products are manufactured by third parties, which are overseen by Cumberland’s quality control and manufacturing professionals. The Company works closely with its third-party distribution partners to make its products available in the United States. In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company have been prepared on a basis consistent with the December 31, 2019 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly present the information set forth herein. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (the “SEC”), and certain information and disclosures have been condensed or omitted as permitted by the SEC for interim period presentation. 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 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 As discussed further in Note 10, during May 2019, Cumberland entered into a Dissolution Agreement ("Dissolution Agreement") with Clinigen Healthcare Limited ("Clinigen") in which the Company returned the exclusive rights to commercialize Ethyol and Totect in the United States to Clinigen. 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 following December 31, 2019. The Company's exit from the products meets the accounting criteria to be reported as discontinued operations and the discontinued operating results have been reclassified on the face of the financial statements and footnotes for all periods presented to reflect the discontinued status of these products. 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 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. Cumberland has remained open for business, as the Company is considered to be essential by the United States Department of Homeland Security. 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. 5 Cumberland relies on third-party organizations around the world to supply components, manufacture and distribute its products. 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. 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 Recent Adopted Accounting Pronouncement In November 2018, the FASB issued ASU No. 2018-18, “Collaboration Arrangements: Clarifying the Interaction between Topic 808 and Topic 606” (ASU 2018-18). The issuance of ASU 2014-09 raised questions about the interaction between the guidance on collaborative arrangements and revenue recognition. ASU 2018-18 addresses this uncertainty by (1) clarifying that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASU 2014-09 when the collaboration arrangement participant is a customer, (2) adding unit of account guidance to assess whether the collaboration arrangement or a part of the arrangement is with a customer and (3) precluding a company from presenting transactions with collaboration arrangement participants that are not directly related to sales to third parties together with revenue from contracts with customers. Cumberland adopted the standard effective January 1, 2020 with no impact on the Company's consolidated financial statements. In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” (ASU 2017-04). The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. As a result of the revised guidance, a goodwill impairment will be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The new standard was adopted by Cumberland effective January 1, 2020 and was applied prospectively with no impact on the Company's consolidated financial statements. Recent Accounting Pronouncements - Not Yet Adopted In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses,” which changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, companies will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, companies will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities. Companies will have to disclose additional information, including information they use to track credit quality by year of origination for most financing receivables. Companies will apply the ASU’s provisions as a cumulative-effect adjustment, if any, to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. Related to ASU No. 2016-13 discussed above, in May 2019, the FASB issued ASU 2019-05, "Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief" which provides transition relief for ASU 2016-13 by providing entities with an alternative to irrevocably electing the fair value option for eligible financial assets measured at amortized cost upon adoption of the new credit losses standard. Certain eligibility requirements must be met and the election must be applied on an instrument-by-instrument basis. The election is not available for either available-for-sale or held-to-maturity debt securities. The Company will adopt both ASU 2016-13 and ASU 2019-05 on January 1, 2023 . The adoption of ASU 2016-13 and ASU 2019-05 are not expected to have a material impact on the Company’s consolidated financial statements. Accounting Policies: Use of Estimates The preparation of the condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates under different assumptions and conditions. The Company's most significant estimates include: (1) its allowances for chargebacks and accruals for rebates and product returns (2) the allowances for obsolescent or unmarketable inventory (3) assumptions used in estimating acquisition date fair value of assets acquired in business combinations and (4) valuation of contingent consideration liability associated with business combinations. 6 Operating Segments The Company has one operating segment which is specialty pharmaceutical products. Management has chosen to organize the Company based on the type of products sold. Operating segments are identified as components of an enterprise about which separate discrete financial information is evaluated by the chief operating decision maker, or decision-making group, in making decisions regarding resource allocation and assessing performance. The Company, which uses consolidated financial information in determining how to allocate resources and assess performance, has concluded that our specialty pharmaceutical products compete in similar economic markets and similar circumstances. Substantially all of the Company’s assets are located in the United States and total revenues are primarily attributable to U.S. customers. (2) INVESTMENTS IN CASH EQUIVALENTS AND MARKETABLE SECURITIES The Company invests in marketable securities in order to maximize its return on cash. Marketable securities consist of short-term cash investments, U.S. Treasury notes and bonds, corporate bonds and commercial paper. 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 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 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. It applies whenever other guidance requires (or permits) assets or liabilities to be measured at fair value and gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). A summary of the fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels is described below: Level 1 - Quoted prices for identical instruments in active markets. Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Level 3 - Significant inputs to the valuation model are unobservable. The Company's fair values of marketable securities are determined based on valuations provided by a third-party pricing service, as derived from such service's pricing models, and are considered either Level 1 or Level 2 measurements, depending on the nature of the investment. The Company has no marketable securities in which the fair value is determined based on Level 3 measurements. The level of management judgment required in evaluating fair value for Level 1 investments is minimal. Similarly, there is little subjectivity or judgment required for Level 2 investments valued using valuation models that are standard across the industry and whose parameter inputs are quoted in active markets. Inputs to the models may include, but are not limited to, reported trades, executable bid and ask prices, broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. Based on the information available, the Company believes that the valuations provided by the third-party pricing service, as derived from such service's pricing models, are representative of prices that would be received to sell the assets at the measurement date (exit prices). There were no transfers of assets between levels within the fair value hierarchy. The following table summarizes the fair value of our marketable securities, by level within the fair value hierarchy, as of each period end: June 30, 2020 December 31, 2019 Level 1 Level 2 Total Level 1 Level 2 Total Commercial paper — — — — $ 2,119,607 $ 2,119,607 Total fair value of marketable securities — — — — $ 2,119,607 $ 2,119,607 7 (3) EARNINGS (LOSS) PER SHARE 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, 2020 2019 Numerator: Net income (loss) from continuing operations $ ( 1,679,211 ) $ ( 1,338,521 ) Discontinued operations 738,622 771,709 Net (income) loss at subsidiary attributable to noncontrolling interest 22,314 17,305 Net income (loss) attributable to common shareholders $ ( 918,275 ) $ ( 549,507 ) Denominator: Weighted-average shares outstanding – basic 15,241,463 15,523,628 Dilutive effect of other securities — — Weighted-average shares outstanding – diluted 15,241,463 15,523,628 Six months ended June 30, 2020 2019 Numerator: 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 ) Denominator: 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. 8 (4) REVENUES Product Revenues The Company accounts for revenues from contracts with customers under ASC 606, which became effective January 1, 2018. 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 and six months ended June 30, 2020 and 2019: Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 Products: Acetadote $ 595,310 $ 983,473 $ 1,308,711 $ 1,832,976 Omeclamox-Pak 10,948 478,604 124,371 678,141 Kristalose 3,477,471 3,476,807 6,771,433 6,785,050 Vaprisol 174,159 212,526 382,016 499,202 Caldolor 1,166,569 1,054,718 2,261,286 2,372,599 Vibativ 3,299,507 2,599,280 5,721,708 4,659,471 Other revenue 874,213 612,035 1,359,386 1,319,864 Total net revenues $ 9,598,177 $ 9,417,443 $ 17,928,911 $ 18,147,303 Other Revenues 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 $ 0.1 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 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 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. 9 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. 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: June 30, 2020 December 31, 2019 Raw materials and work in process $ 19,660,890 $ 19,345,723 Consigned inventory 219,228 416,468 Finished goods 3,387,212 4,664,055 Total inventories 23,267,330 24,426,246 less non-current inventories ( 15,640,060 ) ( 15,554,992 ) Total inventories classified as current $ 7,627,270 $ 8,871,254 (6) LEASES In March 2016, the FASB issued ASU 2016-02. ASU 2016-02’s core principle is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information. 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. 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. The operating leases also include the lease of approximately 14,200 square feet of wet laboratory and office space in Nashville, Tennessee by CET, our majority-owned subsidiary, where it operates the CET Life Sciences Center. This lease currently expires in April 2023. Operating lease liabilities are recorded as the present value of remaining lease payments not yet paid for the lease term discounted using the incremental borrowing rate associated with each lease. Operating lease right-of-use assets represent operating lease liabilities adjusted for lease incentives and initial direct costs. 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 June 30, 2020 is 2.5 years. Lease Position 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 10 Maturity of Leases Liabilities at June 30, 2020 Operating Leases 2020 $ 566,713 2021 1,144,889 2022 1,019,313 2023 92,478 After 2023 — Total lease payments 2,823,393 Less: Interest ( 275,534 ) Present value of lease liabilities $ 2,547,859 (7) SHAREHOLDERS’ EQUITY AND DEBT Share repurchases 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 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 During the Company's March 2020 trading window, several members of Cumberland's Board of Directors entered into share purchase agreements of the Company's stock pursuant to Rule 10b-18 of the Securities Exchange Act of 1934. These purchases are designed to increase ownership in the Company by the members of the Board. Share Sale 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 six months ended June 30, 2020 or June 30, 2019. Restricted Share Grants 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. Cumberland Emerging Technologies 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 On May 10, 2019, the Company entered into a third amendment ("Third Amendment") to the Revolving Credit Loan Agreement, dated July 28, 2017, with Pinnacle Bank (“Pinnacle Agreement”). The Third Amendment extended the term of the Pinnacle Agreement through July 31, 2021 as well as modified certain definitions and terms of the existing financial covenants, including the definition of the Funded Debt Ratio and the compliance target of the Tangible Capital Ratio. Both Third Amendment modifications were related to the Vibativ transaction. 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 11 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. On October 17, 2018, the Company entered into a second amendment (“Second Amendment”) which increased the maximum aggregate principal available for borrowing under the Pinnacle Agreement to $ 20.0 million. 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 2.92 % at June 30, 2020). In addition, a fee of 0.25 % per year is charged on the unused line of credit. Interest and the unused line fee are payable quarterly. Borrowings under the line of credit are collateralized by substantially all of our assets. 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 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. The Company does not allocate any portion of its income tax expense (benefit) to discontinued operations. 12 (9) COLLABORATIVE AGREEMENTS Cumberland is a party to several collaborative arrangements with research institutions to identify and pursue promising pharmaceutical product candidates. 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. 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. (10) ADDITIONS AND RETURN OF PRODUCT RIGHTS Vibativ During November 2018, the Company closed on an agreement with Theravance Biopharma ("Theravance") to acquire the global responsibility for Vibativ including the marketing, distribution, manufacturing and regulatory activities associated with the brand. Vibativ is a patented, Food and Drug Administration ("FDA") approved injectable anti-infective for the treatment of certain serious bacterial infections including hospital-acquired and ventilator-associated bacterial pneumonia and complicated skin and skin structure infections. It addresses a range of Gram-positive bacterial pathogens, including those that are considered difficult-to-treat and multidrug-resistant. Cumberland acquired Vibativ to further add to its product offerings, increase its net revenue and positively contribute to the Company's operating results. 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. The Company made an upfront payment of $ 20.0 million at the closing of the transaction and a $ 5.0 million milestone payment in early April 2019. In addition, Cumberland has agreed to pay a royalty of up to 20 % on future net sales of the product. The future royalty payments are required to be recognized at their acquisition-date fair value as part of the contingent consideration transferred in the business combination. The following table summarizes the initial payments and consideration for the business combination: Consideration: Cash paid at closing $ 20,000,000 Cash payment during 2019 5,000,000 Fair value of contingent consideration - net sales royalty 9,182,000 Total consideration $ 34,182,000 The following table summarizes the final allocation of the fair values of the assets acquired as part of the acquisition of Vibativ: Finished goods inventory $ 6,624,000 Work in process - unlabeled vials 3,970,000 Work in process - validation vials 1,827,000 Raw materials 9,129,000 Total inventory $ 21,550,000 Intellectual property amortizable intangible assets 11,750,000 Goodwill 882,000 Total intangibles and goodwill 12,632,000 Total assets acquired $ 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. 13 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 $ 8,300,562 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. RediTrex 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. 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 (“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. 14