What changed in this filing

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Item 9A. Controls and Procedures

2021-03-12 compared with 2020-03-20 · 406 added, 300 removed, 1014 unchanged (41% of the section changed)

Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2019.

Based on that evaluation, they have concluded that our disclosure controls and procedures were effective as of December 31, 2019 to ensure that material information relating to us and our consolidated subsidiaries is made known to officers within these entities in order to allow for timely decisions regarding required disclosure.

Our Chief Executive Officer and Chief Financial Officer, with the participation of other members of management, have evaluated the effectiveness of our disclosure controls and procedures (as defined Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the year ended December 31, 2020.

Based on such evaluations, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective (at the reasonable assurance level) to ensure that the information required to be included in this Annual Report on Form 10-K has been recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information was accumulated and communicated to management to allow for timely decisions regarding disclosure.

Management’s report on internal control over financial reporting is included on page F-1 of this annual report on Form 10-K, and incorporated herein by reference.

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Consolidated Balance Sheets

Consolidated Statements of Operations and Comprehensive Income (Loss)

Consolidated Statements of Operations

Consolidated Statements of Cash Flows

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333-184091) as filed with the SEC on September 25, 2012

4.11 Description of Cumberland Pharmaceutical's Common Stock

10.7† Exclusive Distribution Agreement, effective as of July 1, 2010, by and between Cardinal Health 105, Inc.

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10.7.1† First Amendment to Exclusive Distribution Agreement, dated March 31, 2013, by and between Cardinal Health 105, Inc.

and Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit of the Registrant's Current Report of Form 8-K (File No.

and Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit of the Registrant's Current Report o n Form 8-K (File No.

001-33637) as filed with the SEC on June 3, 2013

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001-33637) as filed with the SEC on October 19, 2018

10.37 Seco nd Amendment to Revolving Credit Note and Third Amendment to Revolving Credit Loan Agreement , dated as of May 10, 2019 , by and between Cumberland Pharmaceuticals Inc.

and P innacle Bank, incorporated herein by refer ence to Ex hibit 10.2 to the Registrant's Quarterly Report on Form 10-Q (File No.

001-3363 71) as filed wit h the SEC on May 15, 2019.

10.37 Second Amendment to Revolving Credit Note and Third Amendment to Revolving Credit Loan Agreement, dated as of May 10, 2019, by and between Cumberland Pharmaceuticals Inc.

and Pinnacle Bank, incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q (File No.

001-336371) as filed with the SEC on May 15, 2019.

10.38# Amendment Number 2 to the Amended and Restated 2007 Long-Term Incentive Plan, incorporated herein by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q (File No.

001-33637) as filed with the SEC on August 14, 2020

10.39# Amendment Number 2 to the Amended and Restated 2007 Directors’ Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q (File No.

001-33637) as filed with the SEC on August 14, 2020

10.40 Payment Protection Program Note dated April 20, 2020, by and between Cumberland Pharmaceuticals Inc.

and Pinnacle Bank, incorporated herein by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q (File No.

001-33637) as filed with the SEC on August 14, 2020

10.41 Third Amendment to Revolving Credit Note and Fourth Amendment to Revolving Credit Loan Agreement, dated as of October 7, 2020, by and between Cumberland Pharmaceuticals Inc.

and Pinnacle Bank, incorporated herein by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q (File No.

001-33637) as filed with the SEC on November 13, 2020

21 Subsidiaries of Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit to the Registrant’s Registration Statement on Form S-1 (File No.

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23.1 Consent of BDO USA, LLP

23.2 Consent of BKD, LLP

31.1 Certification of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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Report of Independent Registered Public Accounting Firm

To the Shareholders, Board of Directors and Audit Committee

Cumberland Pharmaceuticals Inc.

Nashville, Tennessee

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Cumberland Pharmaceuticals Inc.

(the “Company”) as of December 31, 2020, and the related consolidated statements of operations, equity, and cash flows for the year ended December 31, 2020, and the related notes and schedule listed in the accompanying index (collectively referred to as the “financial statements”).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020 , in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Customer Allowances for Chargebacks, Discounts and Damaged Goods and Accruals for Rebates, Coupons, Product Returns and Certain Fees

As described in Note 2 to the consolidated financial statements, revenues from product sales are recorded net of estimated allowances for chargebacks, discounts and damaged goods and reflects sales related accruals for rebates,

coupons, product returns and certain fees.

These allowances and accruals are determined on a product-by-product basis, and are established by management as the Company’s best estimate at the time of sale based on each product’s historical experience adjusted to reflect known changes in the factors that impact such allowances.

Management reviews these allowances on an ongoing basis and adjusts them based on the most recent information available, including actual results since the end of the reporting period.

As of December 31, 2020, consolidated allowances in accounts receivable for chargebacks, cash discounts and damaged goods were $1.0 million and consolidated estimated liability for rebates, coupons, product returns and certain fees were $4.1 million.

These provisions are recognized concurrently with the sales of products.

Provisions for chargebacks involve estimates of usage by retailers and other indirect buyers with varying contract prices for multiple wholesalers.

The provision for chargebacks varies in relation to changes in product mix, pricing and the level of inventory at the wholesalers.

Provisions are calculated using historical chargeback experience, and/or expected chargeback levels for new products and anticipated pricing changes.

Provisions for rebates are recognized based on contractual obligations in place at the time of sales with consideration given to relevant factors that may affect the payment as well as historical experience for estimated market activity.

Provisions for Medicaid are based on historical trends of rebates paid, as well as on changes in wholesaler inventory levels, pricing data and increases or decreases in sales.

The principal consideration for our determination that performing procedures relating to these allowances and accruals is a critical audit matter was the significant judgment by management to estimate the reserves due to the significant measurement uncertainty involved in developing the reserves.

Management tracks the various types of allowances on several different schedules, each of which relates to different contracts agreed to with various customers or the interplay with government payors.

Management exercises judgment in computing the amount of sales subject to the allowances and tracks the amount of allowances taken over time.

All of this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions.

We identified the estimated sales allowances and accruals as a critical audit matter.

The primary procedures we performed to address this critical audit matter included:

• Testing the completeness and accuracy of the underlying data used to estimate the accrual by agreeing the sales data used in the calculation to reports that were reconciled to the financial statements, reconciling the various allowance percentages to signed customer contracts, tracing the allowance amounts used by the various customers during the year to supporting documentation and comparing the estimated allowances from the end of 2019 to actual results that occurred during 2020;

• Testing the assumptions used by management in the computation of selected allowances to historical results for the related products and any recent changes in factors that could influence the future allowances to be claimed;

• Comparing actual allowances reported since December 31, 2020 to the estimated reserves and accruals recorded on the December 31, 2020 consolidated balance sheet;

• Testing the clerical accuracy of the individual customer allowances computed by management and agreeing the total of all estimated allowances to the respective accounts on the financial statements.

We have served as the Company's auditor since 2020.

Nashville, Tennessee

March 12, 2021

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

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We have audited the accompanying consolidated balance sheets of Cumberland Pharmaceuticals Inc.

(the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31, 2019 and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 , in conformity with accounting principles generally accepted in the United States of America.

(the “Company”) as of December 31, 2019, the related consolidated statements of operations, equity, and cash flows for each of the two years in the period ended December 31, 2019 and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019 , in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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/s/ BDO USA, LLP

We have served as the Company's auditor since 2017.

We served as the Company's auditor from 2017 to 2020.

Nashville, Tennessee

March 20, 2020

March 20, 2020, except for the effects of presenting discontinued operations as discussed in Note 20, as to which the date is December 10, 2020.

CUMBERLAND PHARMACEUTICALS INC.

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Cash and cash equivalents $ 24,753,796 $ 28,212,635

Marketable securities — 8,290,679

Accounts receivable, net 12,377,713 7,859,006

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Prepaid and other current assets 2,199,926 2,757,456

Current assets associated with discontinued operations — 2,462,724

Total current assets 49,969,592 50,163,075

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Other current liabilities 11,254,381 11,084,869

Current liabilities associated with discontinued operations — 2,151,357

Total current liabilities 25,667,446 24,150,235

Revolving line of credit 15,000,000 18,500,000

Operating lease noncurrent liabilities 2,076,472 —

Operating lease non-current liabilities 1,059,693 2,076,472

Other long-term liabilities 7,862,772 8,737,323

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14,988,429 and 15,263,555 shares issued and outstanding as of December 31, 2020 and 2019, respectively

Retained earnings 1,208,395 4,746,154

49,121,523 49,914,478

Retained earnings (deficit) ( 2,131,013 ) 1,208,395

Total shareholders’ equity 46,990,510 51,122,873

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AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Income (Loss)

Consolidated Statements of Operations

Years ended December 31, 2020, 2019 and 2018

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Income tax (expense) benefit ( 55,902 ) 79,316 ( 16,636 )

Net income (loss) from continuing operations ( 6,625,779 ) ( 9,211,688 ) ( 10,820,996 )

Discontinued operations net of tax 3,206,875 5,665,177 3,782,224

Net income (loss) ( 3,418,904 ) ( 3,546,511 ) ( 7,038,772 )

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Earnings (loss) per share attributable to common shareholders:

-Continuing operations-basic $ ( 0.43 ) $ ( 0.60 ) $ ( 0.69 )

-Discontinued operations-basic 0.21 0.37 0.24

Basic $ ( 0.22 ) $ ( 0.23 ) $ ( 0.45 )

-Continuing operations-diluted $ ( 0.43 ) $ ( 0.60 ) $ ( 0.69 )

-Discontinued operations-diluted 0.21 0.37 0.24

Diluted $ ( 0.22 ) $ ( 0.23 ) $ ( 0.45 )

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Diluted 15,162,184 15,396,098 15,614,052

Comprehensive income (loss) attributable to common shareholders $ ( 3,537,759 ) $ ( 6,963,068 ) $ ( 7,978,633 )

Net loss at subsidiary attributable to noncontrolling interests 8,752 75,704 71,182

Total comprehensive income (loss) $ ( 3,546,511 ) $ ( 7,038,772 ) $ ( 8,049,815 )

See accompanying notes to consolidated financial statements.

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Net income (loss) $ ( 3,418,904 ) $ ( 3,546,511 ) $ ( 7,038,772 )

Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:

Discontinued operations 3,206,875 5,665,177 3,782,224

Net income (loss) from continuing operations ( 6,625,779 ) ( 9,211,688 ) ( 10,820,996 )

Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:

Depreciation and amortization expense 4,748,565 4,404,175 2,982,703

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Share-based compensation 1,046,516 1,485,898 1,364,698

Share-based compensation (foundation contribution) — — 372,500

Excess tax (benefit) expense derived from exercise of stock options — ( 81,886 ) ( 91,109 )

Excess tax benefit derived from exercise of stock options — — ( 81,886 )

Decrease in non-cash contingent consideration ( 1,160,202 ) ( 804,167 ) —

Write off of deferred offering costs 440,091 — —

Increase in cash surrender value of life insurance policies over premiums paid ( 154,611 ) — —

Noncash interest expense 47,636 47,525 99,883

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Other long-term liabilities ( 1,859,330 ) ( 729,820 ) ( 159,558 )

Net cash provided by (used in) operating activities 3,056,356 3,112,737 ( 557,714 )

Net cash provided by (used in) operating activities from continuing operations 1,896,819 ( 2,455,240 ) ( 1,390,808 )

Discontinued operations 3,518,242 5,511,596 4,503,545

Net cash provided by operating activities 5,415,061 3,056,356 3,112,737

Cash flows from investing activities:

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Additions to intangible assets ( 1,973,110 ) ( 772,944 ) ( 3,819,486 )

Proceeds from surrender of life insurance policies 460,888 — —

Increase in cash surrender value of life insurance policies ( 104,750 ) — —

Cash paid for acquisition — ( 5,000,000 ) ( 20,000,000 )

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Net cash provided by (used in) investing activities ( 1,757,789 ) 2,297,848 ( 27,724,818 )

2020 2019 2018

Cash flows from financing activities:

Borrowings on line of credit 59,000,000 76,000,000 56,000,000

Repayments on line of credit ( 77,500,000 ) ( 45,800,000 ) ( 18,800,000 )

Repurchase of common shares ( 3,494,921 ) ( 2,879,426 ) ( 3,724,375 )

Payments of deferred equity offering costs — ( 383,310 ) ( 27,950 )

Payments on line of credit ( 62,500,000 ) ( 77,500,000 ) ( 45,800,000 )

Sales of shares of common stock, net of offering costs — — 200,909

Payments of financing costs ( 52,500 ) — —

Cash payments of contingent consideration ( 1,033,108 ) — —

Payments made in connection with repurchase of common shares ( 1,851,526 ) ( 3,494,921 ) ( 2,879,426 )

Cash settlement of contingent consideration ( 819,180 ) ( 1,033,108 ) —

Repurchase of subsidiary shares from noncontrolling interest ( 800,000 ) — —

Sale of subsidiary shares to noncontrolling interest — 1,000,000 —

Payments of deferred equity offering costs ( 135,405 ) — ( 383,310 )

Payments of deferred financing costs ( 10,000 ) ( 52,500 ) —

Net cash provided by (used in) financing activities ( 7,116,111 ) ( 5,080,529 ) 7,138,173

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Noncash investing and financing activities:

Change in unpaid invoices for purchases of intangibles $ ( 576,837 ) $ ( 539,467 ) $ ( 513,481 )

Deferred offering costs included in accounts payable and other accrued expenses — — 97,254

Non cash increase in liabilities related to acquisition (see Note 3) — 14,034,000 —

Change in unpaid invoices for intangible asset additions $ ( 340,997 ) $ ( 576,837 ) $ ( 539,467 )

Noncash increase in liabilities related to other asset 200,000 — —

Noncash increase in liabilities related to acquisition (see Note 3) — — 14,034,000

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

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Cumberland Pharmaceuticals Inc.

Common stock Retained earnings Non-controlling interest Total equity

Common stock Retained earnings (deficit) Non-controlling interest Total equity

Shares Amount

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Net income (loss) — — ( 6,963,068 ) ( 75,704 ) ( 7,038,772 )

Cumulative effect from change in accounting principle — — 1,082,924 — 1,082,924

Share-based compensation 170,759 1,364,698 — — 1,364,698

Exercise of options and related tax benefit 50,000 372,500 — — 372,500

Repurchase of common shares ( 547,376 ) ( 3,719,890 ) — — ( 3,719,890 )

Balance, December 31, 2017 15,723,075 — 52,410,941 — 11,709,222 — ( 198,562 ) — 63,921,601

Net income (loss) — — ( 6,963,068 ) ( 75,704 ) ( 7,038,772 )

Share-based compensation 170,759 1,364,698 — — 1,364,698

Proceeds from sale of common stock, net of offering costs 30,704 200,909 — — 200,909

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Balance, December 31, 2019 15,263,555 $ 49,914,478 $ 1,208,395 $ ( 37,620 ) $ 51,085,253

Net income (loss) — — ( 3,339,408 ) ( 79,496 ) ( 3,418,904 )

Share-based compensation 228,500 1,046,516 — — 1,046,516

Repurchase of common shares ( 503,626 ) ( 1,839,471 ) — — ( 1,839,471 )

Balance, December 31, 2020 14,988,429 $ 49,121,523 $ ( 2,131,013 ) $ ( 117,116 ) $ 46,873,394

See accompanying notes to consolidated financial statements

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(“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.

The Company's primary target markets are hospital acute care, gastroenterology and rheumatology.

These medical specialties are characterized by relatively concentrated prescriber bases that the Company believes can be penetrated effectively by small, targeted sales forces.

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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 its shares in CET in exchange for consideration of $ 0.8 million.

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.

The Company's ownership in CET is now 85 %.

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CPSC is the subsidiary that employs the Company's hospital and field sales force personnel.

CUMBERLAND PHARMACEUTICALS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(2) Significant Accounting Policies

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generally accepted accounting principles.

These financial statements include the accounts of the Company and its

CUMBERLAND PHARMACEUTICALS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

wholly and majority-owned subsidiaries.

These financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries.

All significant intercompany transactions and accounts have been eliminated in consolidation.

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 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.

Cumberland has faced the same headwinds affecting other companies that rely on hospital admissions and patient visits to drive revenue.

During this pandemic, less patients sought care, some patients postponed elective surgeries and Cumberland's access to medical facilities was substantially limited.

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.

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.

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.

Use of Estimates

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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.

(1) its allowances for chargebacks and accruals for rebates and product returns (2) the allowances for obsolescent or unmarketable inventory and (3) valuation of contingent consideration liability associated with business combinations.

CUMBERLAND PHARMACEUTICALS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Segment Reporting

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The following section describes the valuation methodologies we use to measure different financial instruments at fair value on a recurring basis.

The Company’s financial instruments include cash and cash equivalents, marketable securities, accounts receivable, accounts payable, accrued liabilities, contingent consideration liability and a revolving line of credit.

The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, contingent consideration liability and a revolving line of credit.

The carrying values for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their short-term nature.

The revolving line of credit has a variable interest rate, which approximates the current market rate.

CUMBERLAND PHARMACEUTICALS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

The Company's fair values of marketable securities are determined based on valuations provided by a third-party pricing service, as derived from such services' pricing models, and are considered either Level 1 or Level 2 measurements, depending on the nature of the investment.

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The Company believes that the valuations provided by the third-party pricing service, as derived from such services' pricing models, represent prices that would be received to sell the assets at the measurement date (exit prices).

CUMBERLAND PHARMACEUTICALS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

The Company's contingent consideration liability is a Level 3 fair value measurement that is updated on a recurring basis at each reporting period using a valuation model.

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

At December 31, 2020 and December 31, 2019 , all our investments had original maturities of less than ninety days and as a result were classified as cash equivalents.

Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount.

The Company records allowances for amounts that could become uncollectible in the future based on historical experience, including amounts related to chargebacks, cash discounts and credits for damaged product.

The Company records allowances for amounts that could become uncollectible in the future based on historical experience, including amounts related to chargebacks and cash discounts.

The Company reviews each customer balance to assess collection status.

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The allowances against accounts receivable for chargebacks and discounts are determined on a product-by-product basis, and established by management as the Company’s best estimate at the time of sale based on each product’s historical experience adjusted to reflect known changes in the factors that impact such allowances.

These allowances are established based on the contractual terms with direct and indirect customers and analyses of historical levels of chargebacks, discounts and credits claimed for damaged and expired product.

The allowances in accounts receivable for chargebacks, cash discounts and damaged goods were $ 0.8 million at December 31, 2019 and $ 0.9 million at December 31, 2018.

These allowances are established based on the contractual terms with direct and indirect customers and analyses of historical levels of chargebacks and discounts.

The allowances in accounts receivable for chargebacks and cash discounts were $ 1.0 million at December 31, 2020 and $ 0.8 million at December 31, 2019.

Other organizations, such as managed care providers, pharmacy benefit management companies and government agencies, may receive rebates from the Company based on either negotiated contracts to carry the Company’s products or reimbursements for filled prescriptions.

These entities are considered indirect customers of

CUMBERLAND PHARMACEUTICALS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

In conjunction with recognizing a sale to a wholesaler, revenues are reduced and accrued liabilities are increased by the Company’s estimate of the rebate that may be claimed as well as the reserves for expired and damaged goods.

These entities are considered indirect customers of the Company.

In conjunction with recognizing a sale to a wholesaler, revenues are reduced and accrued liabilities are increased by the Company’s estimate of the rebate that may be claimed.

Cash discounts are reductions to invoiced amounts offered to customers for payment within a specified period of time from the date of the invoice.

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The Company then warehouses such goods until distribution and sale.

As discussed below, effective January 1, 2017, inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out method.

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 inventories for potential losses due to expired, short-dated or slow-moving inventory by comparing sales history and sales projections to the inventory on hand.

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

The Company classifies the Vibativ inventories that it does not expect to sell within one year as non-current inventories.

When evidence indicates the carrying value of a product may not be recoverable, a charge is recorded to reduce the inventory to its current net

CUMBERLAND PHARMACEUTICALS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

realizable value.

The Company classifies the Vibativ inventories and ifetroban inventories that it does not expect to sell within one year as non-current inventories.

Prepaid and Other Current Assets

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The Company expenses all prepaid and other current asset amounts as used or over the period of benefit primarily on a straight-line basis, as applicable.

Deferred offering costs are expenses directly related to the Form S-3 or Shelf Registration filed with the SEC on November 11, 2017 and declared effective on January 16, 2018.

These costs consist of legal, accounting, printing, and filing fees that the Company has capitalized.

Deferred costs associated with the Shelf Registration will be reclassified to additional paid in capital on a pro-rata basis as the Company completes sales of shares under the Shelf Registration, with any remaining deferred offering costs to be charged to the results of operations at the end of the three-year life of the Shelf Registration.

During the year ended December 31, 2019, the Company has not expensed any deferred offering costs associated with the Shelf Registration.

In November 2017, the Company filed its 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.

It also included an At the Market ("ATM") feature that allows the Company to sell common shares at market prices, along with an agreement with B.

Riley FBR Inc.

to support such a placement of shares.

The Company filed an updated Form S-3 with the SEC in December 2020, which was declared effective in January 2021.

The Company intends to continue an ATM feature through B.

Riley FBR, Inc.

that would allow the Company to issue shares of its common stock.

The Company has recorded deferred offering costs for payments directly related to the current Shelf Registration on Form S-3 that was completed during December 2020 and declared effective in January 2021.

These costs consist of legal and accounting fees that the Company has capitalized.

Deferred costs associated with the Shelf Registration will be reclassified to additional paid in capital on a pro-rata basis as the Company completes sales of shares under the Shelf Registration.

The Company did not issue any shares under this ATM during the year ended December 31, 2020.

During the year ended December 31, 2020, the Company has expensed $ 0.4 million in deferred offering costs associated with the Shelf Registration that was declared effective in January 2018.

Property and Equipment

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The economic life is estimated based upon several factors.

This includes the term of the license agreement, the patent life or market exclusivity of the product and as well as management's expectations

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Notes to Consolidated Financial Statements (Continued)

of continued involvement with the product and the assessment of future sales, the future periods under which the product will be sold and the profitability of the product.

This includes the term of the license agreement, the patent life or market exclusivity of the product and as well as management's expectations of continued involvement with the product and the assessment of future sales, the future periods under which the product will be sold and the profitability of the product.

This estimate is evaluated on a regular basis during the amortization period and adjusted if appropriate.

1 unchanged sentence

Capitalized patent costs consist of outside legal costs associated with obtaining and protecting patents on products that have been approved for marketing by the FDA.

If it becomes probable that a patent will not be issued or a patent has been declared invalid, related costs associated with the patent application are expensed at the time such determination is made.

If it becomes probable that a patent will not be issued or a patent has been declared invalid, related costs associated with the patent application are expensed at the time

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Notes to Consolidated Financial Statements (Continued)

such determination is made.

All costs associated with obtaining patents for products that have not been approved for marketing by the FDA are expensed as incurred.

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The Company recorded no impairment charges during 2020, 2019 and 2018.

Joint Venture Agreement

In August 2020, Cumberland entered into an agreement with WinHealth Investment (Singapore) Ltd creating WHC Biopharmaceuticals, Pte.

The joint venture, as a limited liability company, will focus on acquiring, developing, registering, and commercializing development stage and commercial stage biopharmaceuticals for China, Hong Kong and other Asian markets.

The agreement provides for initial investment from WinHealth in the form of a $ 0.2 million equity contribution and an initial investment from Cumberland in the form of $ 0.2 million convertible note.

The joint venture will seek additional future capital from additional investors and has entered into exclusive option agreements to license intellectual property from both Cumberland Pharmaceuticals Inc.

and Cumberland Emerging Technologies.

Revenue Recognition

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2014-09, "Revenue from Contracts with Customers," (ASC 606).

Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and are reported in accordance with ASC 605.

Net Product Revenue

9 unchanged sentences

Sales Rebates and Discounts

The allowances against accounts receivable for chargebacks, discounts, expired and damaged goods are determined on a product-by-product basis, and established by management as the Company’s best estimate at the time of sale based on each product’s historical experience adjusted to reflect known changes in the factors that impact such allowances.

The allowances against accounts receivable and accrued liabilities for chargebacks, discounts, service fees and expired product returns are determined on a product-by-product basis, and established by management as the Company’s best estimate at the time of sale based on each product’s historical experience adjusted to reflect known changes in the factors that impact such allowances.

These allowances are established based on the contractual terms with direct and indirect customers and analyses of historical levels of chargebacks, discounts and returns of expired product.

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The Company’s accounting policy with respect to interest and penalties arising from income tax settlements is to recognize them as part of the provision for income taxes.

Comprehensive Income (Loss)

Total comprehensive income (loss) was comprised solely of net income (loss) for all periods presented.

Earnings (Loss) per Share

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Except where the result would be antidilutive to income from continuing operations, diluted earnings (loss) per share is calculated by assuming the vesting of unvested restricted stock and the exercise of stock options and warrants and unrecognized compensation costs.

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Notes to Consolidated Financial Statements (Continued)

Share-Based Payments

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Prior to the lapse for those equity grants not valued on the grant date, the fair value is measured on the last day of the reporting period.

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Notes to Consolidated Financial Statements (Continued)

Collaborative Agreements

The Company is a party to several collaborative arrangements with certain research institutions to identify and pursue promising preclinical pharmaceutical product candidates.

The Company has determined these collaborative agreements do not meet the criteria for accounting under Accounting Standards Codification 808, Collaborative Agreements.

The 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 3 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 generally provided through private sector investments or federal Small Business Administration ("SBIR/STTR") grant programs.

Expenses incurred under these collaborative agreements are included in research and development expenses in the consolidated statements of operations.

Funding received from private sector investments and grants are recorded as net revenues in the consolidated statements of operations.

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 consolidated statements of operations.

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

These reclassifications have no effect on the reported operating loss or equity for the years ended December 31, 2018 and 2017.

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.

Discontinued Operations

As discussed further in Note 20, 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 in the financial statements and footnotes for all periods presented to reflect the discontinued status of these products.

Refer to Note 20, for additional information.

Recent Accounting Guidance

Recent Adopted Accounting Pronouncements

In May 2014, the FASB issued amended guidance in the form of ASU No.

2014-09, “Revenue from Contracts with Customers” (“ASC 606”).

The core principle of the new guidance is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.

The new guidance defines a five-step process to achieve this core principle and, in doing so, additional judgments and estimates may be required within the revenue recognition process.

The new standard replaced most of the existing revenue recognition standards in U.S.

GAAP when it became effective.

In July 2015, the FASB issued a one-year deferral of the adoption date, which extended the effective date for us to January 1, 2018, at which point Cumberland adopted the standard.

The Company evaluated its revenues and the new guidance had immaterial impacts to recognition practices upon adoption on January 1, 2018.

As part of the adoption, the Company elected to apply the new guidance on a modified retrospective basis.

The Company did not record a cumulative effect adjustment to historical retained earnings for initially applying the new guidance as no revenue recognition differences were identified in the timing or amount of revenue.

In February 2016, the Financial Accounting Standards Board ("FASB") issued guidance in the form of a FASB Accounting Standards Update ("ASU") No.

2016-02, “Leases.” The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months.

Leases will be classified as either finance (formerly "capital leases") or

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Notes to Consolidated Financial Statements (Continued)

operating, with classification affecting the pattern of expense recognition in the income statement.

The standard provides for a modified retrospective transition approach for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain optional practical expedients.

In July 2018, the FASB issued ASU 2018-11, "Leases:

Targeted Improvements", allowing for an alternative transition method (the effective date approach).

It allows an entity to initially apply the new lease guidance at the adoption date (rather than at the beginning of the earliest period presented).

Cumberland adopted the lease guidance effective January 1, 2019 using the package of transition practical expedients.

This allowed the Company to retain the lease classification for any leases existing prior to adoption, in addition to other benefits.

See additional discussion of the impact of adopting the lease accounting guidance in Note 15.

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 more information, including the information they use to track credit quality by year of origination for most financing receivables.

Companies will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.

This standard is effective for the Company on January 1, 2020.

The Company continues to evaluate this new standard on its trade and other receivables but does not expect a material impact on its consolidated financial statements.

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 elect 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, the election must be applied on an instrument-by-instrument basis, and the election is not available for either available-for-sale or held-to-maturity debt securities.

The effective date is the same as ASU 2016-13, January 1, 2020.

The Company continues to evaluate this new standard but does not expect a material impact on its consolidated financial statements.

In November 2018, the FASB issued ASU No.

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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.

The new standard will be effective for the Company on January 1, 2020.

The Company continues to evaluate this new standard but does not expect a material impact on its consolidated financial statements.

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.

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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 will be effective for the Company on January 1, 2020.

The Company continues to evaluate this new standard but does not expect a material impact on its consolidated financial statements and related disclosures.

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.

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

CUMBERLAND PHARMACEUTICALS INC.

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Notes to Consolidated Financial Statements (Continued)

(3) Omeclamox ® -Pak, RediTrex ® and Vibativ ®

Omeclamox-Pak

In December 2018, Cumberland completed an agreement with Gasto-enterlogics Inc.

("GEL") to acquire the remaining product rights associated with Omeclamox-Pak including the product’s FDA-approved New Drug Application and the domestic and international trademarks.

As part of the transaction, which was accounted for as an asset acquisition, Cumberland paid $ 2.3 million during 2018 and ended Cumberland’s payments of royalties and manufacturing fees to GEL.

The Company has now assumed responsibility for the maintenance of the product’s FDA approval and for the oversight of the product’s manufacturing and packaging.

This agreement follows the November 2015 agreement between Cumberland and GEL to assume the remaining commercial rights to Omeclamox-Pak for the United States.

The Company had previously signed an agreement with Pernix Therapeutics ("Pernix") to jointly commercialize the product in the United States in October 2013.

As part of the November 2015 GEL Agreement, Cumberland and Pernix terminated their arrangements.

The $ 4.0 million upfront payment that the Company paid in October 2013 to Pernix along with the payments made to GEL during 2018 are included in product and license rights and are being amortized over the remaining expected useful life of the acquired asset.

The Company evaluated the remaining expected useful life and maintained the existing estimated life of the product, June 2032.

Omeclamox-Pak contributed $ 0.8 million, $ 0.6 million, and $ 1.8 million in net revenues during 2019, 2018, and 2017, respectively.

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 will be settled through 180,000 unvested restricted shares of Cumberland common stock that vest upon the FDA approval of the first Nordic product.

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.

(3) RediTrex ® and Vibativ ®

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 of the pre-filled syringe.

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 an additional $ 1.0 million liability to Nordic that will be paid during 2020.

The value of the then unvested restricted Cumberland common stock shares was a liability of $ 1.1 million at December 31, 2018.

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 in a $ 1.0 million milestone payment due to Nordic.

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

During December 2020 Cumberland launched RediTrex and the launch also resulted in a $ 1.0 million milestone payment due to Nordic.

This milestone payment will be paid during 2021 and was recorded as an other current liability at December 31, 2020.

Cumberland has approximately $ 2.8 million in net intangible assets related to RediTrex at December 31, 2020.

During 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.

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.

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Cumberland 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 paid an upfront payment of $ 20.0 million at closing and a $ 5.0 million cash payment during early 2019.

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Notes to Consolidated Financial Statements (Continued)

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 paid an upfront payment of $ 20.0 million at closing and a $ 5.0 million cash payment during early 2019.

In addition, Cumberland agreed to pay a royalty of up to 20 % on future net sales of the product.

Cumberland agreed to pay a royalty of up to 20 % on future net sales of the product.

The future royalty payments were required to be recognized at their acquisition-date fair value as part of the contingent consideration transferred in the business combination.

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

The Company will continue to evaluate the assets acquired and liabilities assumed during the measurement period.

The following table presents the changes in the Company's Level 3 contingent consideration liability that is measured at fair value on a recurring basis.

The current and long-term portions of this liability are disclosed in Note 8.

The following table presents the changes in the Company's Level 3 contingent consideration liability that is remeasured at fair value on a recurring basis.

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

9 unchanged sentences

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

Cash payment of royalty during the period ( 819,180 )

Change in fair value of contingent consideration included in operating expenses ( 1,160,202 )

Contingent consideration earned and accrued in operating expenses 1,546,346

Balance at December 31, 2020 $ 8,200,553

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2020 2019 2018

Kristalose $ 15,567,562 $ 12,895,120 $ 12,055,625

Vibativ 10,870,990 8,691,550 5,075,057

Caldolor 5,336,943 5,222,282 5,001,997

Acetadote 1,874,206 3,824,449 4,284,111

Omeclamox-Pak 257,088 837,829 623,297

Kristalose 12,895,120 12,055,625 11,455,805

Vaprisol 1,077,227 936,615 1,763,874

Caldolor 5,222,281 5,001,997 4,178,443

Ethyol 12,774,831 10,545,906 10,835,038

Totect 369,912 850,965 3,992,467

Vibativ 8,691,550 5,075,057 —

RediTrex 856,657 — —

Total net product revenues $ 35,840,673 $ 32,407,845 $ 28,803,961

6 unchanged sentences

As a result of these agreements, Cumberland recognized approximately $ 0.3 million of non-refundable up-front payments as other revenue in the consolidated statement of operations during 2019.

There were no payments received in 2020.

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Notes to Consolidated Financial Statements (Continued)

The Company has entered into agreements, beginning in 2012, 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 entitled to receive non-refundable up-front payments at the time the agreements are entered into and payments upon the partners' achievement of defined regulatory approvals and sales milestones.

The Company will recognize revenue for these achievements once it is probable that these consideration amounts are no longer constrained.

The Company is also entitled to receive royalties on future sales of the products under the agreements.

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.

The international agreements provide for $ 1.0 million in non-refundable up-front payments, milestone payments of up to $ 2.2 million related to regulatory approvals and up to $ 4.8 million in payments related to product sales.

From 2012 through December 31, 2020, the Company has recognized a cumulative $ 1.2 million in upfront payments as other revenue and has recognized $ 0.1 million in revenue related to the milestone payments associated with these international agreements.

Other revenues during 2019, 2018 and 2017 also includes 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.

Other revenues during 2020, 2019 and 2018 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 SBIR/STTR programs totaled approximately $ 1.3 million, $ 0.1 million, and $ 0.2 million for the years ending December 31, 2019, 2018 and 2017, respectively.

Grant revenue from these programs totaled approximately $ 0.8 million, $ 1.3 million, and $ 0.1 million for the years ending December 31, 2020, 2019 and 2018, respectively.

(5) Inventories

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Total inventories classified as current $ 10,638,157 $ 8,871,254

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

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

At December 31, 2019 and 2018, the Company had recognized and maintained cumulative charges for potential obsolescence and discontinuance losses of approximately $ 0.1 million and $ 0.3 million, respectively.

At December 31, 2019 there were no cumulative obsolescence or discontinuance losses necessary.

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 continually 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 December 31, 2020 and 2019 the Company had recognized and maintained cumulative net realizable value charges for potential obsolescence and discontinuance losses of approximately $ 0.2 million and $ 0.1 million, respectively.

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Notes to Consolidated Financial Statements (Continued)

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 packagers.

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Consigned inventory represents Authorized Generic inventory stored with Perrigo until shipment.

As part of the Vibativ acquisition, Cumberland acquired API and work in process inventories of $ 15.7 million that are classified as non-current inventories at December 31, 2018.

At December 31, 2019, the Vibativ non-current inventory was $ 15.3 million.

Although the Company did not have any finished goods included in the non-current

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Notes to Consolidated Financial Statements (Continued)

inventories at December 31, 2019, we had $ 0.8 million in Vibativ finished goods included at December 31, 2018.

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

As part of the Vibativ acquisition, Cumberland acquired API and work in process inventories of $ 15.6 million that were classified as non-current inventories.

At December 31, 2020, the Vibativ non-current inventory was $ 11.2 million and $ 15.3 million at December 31, 2019.

The Company had Vibativ finished goods included in the non-current inventories at December 31, 2020 of $ 2.1 million and we did not have any Vibativ finished goods included at December 31, 2019.

At December 31, 2020 and December 31, 2019, Cumberland had $ 0.4 million and $ 0.3 million, respectively, in non-current inventory for API related to its ifetroban clinical initiatives.

(6) Property and Equipment

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Computer equipment 3 – 5 years

$ 1,275,703 $ 1,260,630

Office equipment 3 – 15 years

806,906 878,350

Furniture and fixtures 5 – 15 years

638,903 646,505

Leasehold improvements 3 – 15 years, or remaining lease term

1,409,744 1,356,640

Total property and

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Goodwill $ 882,000 $ 882,000

During 2013, the Company entered into an agreement with Pernix to distribute and promote the branded prescription product Omeclamox-Pak.

The $ 4.0 million upfront payment the Company paid to Pernix during October 2013 and the $ 2.3 million payments made to GEL during 2018 (discussed more fully in Note 3) are included in product and license rights and are being amortized through June 2032, the remaining expected useful life of the acquired asset.

During 2014, the Company acquired the rights of the branded prescription product Vaprisol from Astellas.

The intangible asset value is $ 3.0 million and is included in product and license rights.

The asset is being amortized through February 2022, the remaining expected useful life of the acquired asset, which coincides with the life of the primary intellectual property asset.

As discussed in Note 3, in November 2016, the Company acquired the U.S.

Product and license rights include assets associated with the Company's acquired products, including those discussed in Note 3, RediTrex and Vibativ.

In November 2016, the Company acquired the U.S.

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

1 unchanged sentence

The payments are being treated as consideration for the assets acquired and are being capitalized and amortized over the expected useful life of the acquired asset.

To date, the intangible assets related to the product include the $ 100,000 deposit paid at closing, the 180,000 restricted shares valued at $ 0.9 million that vested upon the November 2019 FDA approval and the additional $ 1.0 million owed to Nordic during 2020, also based on the FDA approval.

To date, the intangible assets related to the product include the $ 100,000 deposit paid at closing, the 180,000 restricted shares valued at $ 0.9 million that vested upon the November 2019 FDA approval, the additional $ 1.0 million paid to Nordic during 2020 based on the 2019 FDA approval and the $ 1.0 million owed to Nordic based on the 2020 product launch.

As discussed in Note 3, during November 2018, the Company acquired Vibativ from Theravance.

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These costs will be amortized over the remaining expected useful life of the associated patents.

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Notes to Consolidated Financial Statements (Continued)

Amortization expense related to product and license rights, trademarks and patents were as follows for the years ended December 31:

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Amortization expense $ 4,434,120 $ 4,134,557 $ 2,769,466

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Notes to Consolidated Financial Statements (Continued)

The expected amortization expense for the Company's current balance of intangible assets are as follows:

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Employee wages and benefits 998,064 1,295,905

Stock payable — 1,085,400

Current portion of accrued contingent consideration 2,787,741 2,374,776

Deferred acquisition liability — 5,000,000

Accrued inventory purchases 294,000 829,047

Accrued payment for asset purchase — 1,000,000

Paycheck Protection Program liability 2,187,140 —

Other 915,285 991,974

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Other long-term liabilities 2020 2019

Noncurrent portion of accrued contingent consideration $ 6,258,813 $ 7,212,000

Non-current portion of accrued contingent consideration $ 4,855,363 $ 6,258,813

Deferred compensation 2,702,772 2,278,164

4 unchanged sentences

Notes to Consolidated Financial Statements (Continued)

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.

On October 7, 2020, the Company entered into a Third Amendment to the Revolving Credit Note and Fourth Amendment (“Fourth Amendment”) to the Revolving Credit Loan Agreement with Pinnacle Bank (the “Pinnacle Agreement”).

The original Pinnacle Agreement was dated July 2017.

The Fourth Amendment provides for a principal available for borrowing of up to $ 15 million and Cumberland has the ability to request an increase of up to an additional $ 5 million, upon the satisfaction of certain conditions and approval by Pinnacle Bank.

If fully expanded, the Fourth Amendment would provide a maximum principal available for borrowing of up to $ 20 million, which was also the maximum aggregate principal available for borrowing under the previously amended Pinnacle Agreement.

The Fourth Amendment extends the maturity date of the Pinnacle Agreement through October 1, 2022.

On May 10, 2019, the Company entered into a third amendment ("Third Amendment") to the Pinnacle Agreement, which 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.

1 unchanged sentence

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 achieved compliance with the Tangible Capital Ratio financial covenant as of December 31, 2019.

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

2 unchanged sentences

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 4.5 % at December 31, 2019).

The pricing under the Fourth Amendment provides for an interest rate spread of 1.75 % to 2.75 % above LIBOR with a minimum LIBOR of 0.90 % (representing an interest rate of 3.65 % at December 31, 2020).

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

1 unchanged sentence

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

CUMBERLAND PHARMACEUTICALS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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 ("SBA").

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

The loan 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 a 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 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.

In October 2020, the Company submitted a request for forgiveness of the PPP loan.

The request was approved by the lender, Pinnacle Bank, who then submitted it to SBA for the SBA's review and approval.

(10) Shareholders’ Equity

9 unchanged sentences

During 2020, 2019 and 2018, the Company issued 228,500 shares, 225,536 shares and 170,759 shares of common stock, respectively, as a result of restricted shares vesting as well as other common share issuances.

Cumberland issued 3,409 common shares under option exercise transactions during 2016.

There were no option exercise transactions during 2020, 2019 and 2018.

2 unchanged sentences

Notes to Consolidated Financial Statements (Continued)

In January 2018, the Company's Form S-3 or Shelf Registration associated with the sale of up to $ 100 million in corporate securities was declared effective.

The Shelf Registration also included an At-the-Market ("ATM") feature enabling the Company to sell common shares at market prices, along with an agreement with B.

Riley FBR to support such a placement of shares.

In 2006, the Company signed a new line of credit agreement along with a term loan agreement with a financial institution.

In conjunction with these agreements, the Company issued warrants to purchase up to 3,958 shares of common stock at $ 9.00 per share within 10 years of issuance.

All of these warrants expired during 2017.

In November 2017, the Company filed its 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.

It also included an At the Market ("ATM") feature that allows the Company to sell common shares at market prices, along with an agreement with B.

Riley FBR Inc.

to support such a placement of shares.

The Company filed an updated Form S-3 with the SEC in December 2020, which was declared effective in January 2021.

The Company intends to continue an ATM feature through B.

Riley FBR, Inc.

that would allow the Company to issue shares of its common stock.

The Company did not issue any shares under this ATM during the year ended December 31, 2020 or 2019.

The Company issued 30,704 shares for proceeds of 0.2 million during the year end December 31, 2018.

In connection with the amendment to the debt agreements in 2009, the Company issued warrants to purchase up to 7,500 shares of common stock at $ 17.00 per share that expired in July 2019.

6 unchanged sentences

(f) 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, the Company also made an additional $ 1 million investment in CET.

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 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 its shares in CET in exchange for consideration of $ 0.8 million.

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

After the additional investment, the Company’s ownership in CET is 85 %.

7 unchanged sentences

The Foundation maintains separate financial statements and its ongoing operations will not impact the financial statements of Cumberland Pharmaceuticals.

Initial annual grants by the Foundation have been and are expected to remain consistent with the historic level of contributions made by Cumberland Pharmaceuticals.

During 2019, Cumberland Pharmaceuticals committed approximately $ 50,000 in cash contributions to be paid to the Foundation during 2020.

Initial annual grants by the Foundation have been and are expected to remain consistent with the

CUMBERLAND PHARMACEUTICALS INC.

1 unchanged sentence

Notes to Consolidated Financial Statements (Continued)

historic level of contributions made by Cumberland Pharmaceuticals.

During 2019, Cumberland Pharmaceuticals committed approximately $ 50,000 in cash contributions that were paid to the Foundation during 2020.

(h) Nordic Group B.V.

5 unchanged sentences

2020 2019 2018

Net income (loss) from continuing operations $ ( 6,625,779 ) $ ( 9,211,688 ) $ ( 10,820,996 )

Discontinued operations 3,206,875 5,665,177 3,782,224

Net income (loss) ( 3,418,904 ) ( 3,546,511 ) ( 7,038,772 )

Net loss at subsidiary attributable to noncontrolling interests 79,496 8,752 75,704

Net income (loss) attributable to common shareholders $ ( 3,339,408 ) $ ( 3,537,759 ) $ ( 6,963,068 )

41 unchanged sentences

Federal ( 21,802 ) ( 65,408 ) —

State — — ( 432,874 )

Total deferred income tax (expense) benefit ( 21,802 ) ( 65,408 ) —

6 unchanged sentences

Change in valuation allowance ( 23 ) % ( 31 ) % ( 25 ) %

Change in tax rate — % — % 2 %

Other permanent differences ( 7 ) % 1 % ( 1 ) %

1 unchanged sentence

Net income tax expense ( 2 ) % 2 % — %

In 2017, the Company determined that it was not more likely than not that its net deferred tax assets would be realized.

As such, the Company’s income tax provision for the year ended December 31, 2017 reflected a full valuation allowance against net deferred tax assets with the exception of the deferred tax asset for alternative minimum tax (“AMT”) credit carryforwards discussed further below.

The Company’s position is unchanged as of both December 31, 2018 and December 31, 2019.

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 Company believes that it is not more likely than not that its net deferred tax assets will be realized.

As such, the net deferred tax assets, with the exception of one noted below, are fully offset with a valuation allowance as of the periods ended December 31, 2020, December 31, 2019, and December 31, 2018.

The only deferred tax asset not offset with a valuation allowance as of the periods ended December 31, 2019 and December 31, 2018 was the Company’s AMT Credit Carryforward, which became refundable under the Tax Cuts and Jobs Act passed in 2017.

The Company received the balance of the refund related to this credit during the period ended December 31, 2020, and as such, the deferred tax asset has been realized and all remaining deferred tax assets are fully offset with a valuation allowance as of December 31, 2020.

CUMBERLAND PHARMACEUTICALS INC.

1 unchanged sentence

Notes to Consolidated Financial Statements (Continued)

In connection with our analysis of the impact of the Tax Act, we recorded a net tax benefit of $ 0.1 million in the period ended December 31, 2017.

This net tax benefit consisted entirely of the release of the valuation allowance against AMT credits that will be realizable under the Tax Act in future periods.

As of December 31, 2020, the Company has general business credit carryforwards of $ 1.7 million.

These credit carryforwards will expire in years 2021 through 2041.

Years of expiration Federal

2021 $ 173,475

2022-2029 622,276

2030-2039 836,129

Total federal and state credit carryforwards $ 1,729,124

The Company expects it will continue to pay minimal taxes in future periods through the continued utilization of net operating loss carryforwards, as it is able to achieve taxable income through its operations.

21 unchanged sentences

Share-based compensation - nonemployees ( 3,663 ) 4,882 120,092

Share-based compensation - foundation contribution — $ — 372,500

Total share-based compensation $ 1,046,516 $ 1,485,898 $ 1,364,698

At December 31, 2019, there was approximately $ 2.1 million of unrecognized compensation cost related to share-based payments, which is expected to be recognized over a weighted-average period of 2.5 years.

This amount relates primarily to unrecognized compensation cost for employee restricted stock awards.

CUMBERLAND PHARMACEUTICALS INC.

1 unchanged sentence

Notes to Consolidated Financial Statements (Continued)

At December 31, 2020, there was approximately $ 1.7 million of unrecognized compensation cost related to share-based payments, which is expected to be recognized over a weighted-average period of 2.28 years.

This amount relates primarily to unrecognized compensation cost for employee restricted stock awards.

Stock Options

12 unchanged sentences

The Company did not grant any stock options and there were no options exercised during 2020, 2019 and 2018.

Information related to the stock option plans during 2019, 2018 and 2017 was as follows:

2019 2018 2017

Intrinsic value of options exercised $ — $ — $ —

Weighted-average fair value of

options exercised

As such, there was no intrinsic value of options or weighted-average fair value of options exercised for the periods.

Restricted Stock Awards

9 unchanged sentences

Nonvested, December 31, 2020 779,415 $ 5.56

CUMBERLAND PHARMACEUTICALS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

The fair value of restricted stock granted was based on the closing market price of the Company’s common stock on the date of grant.

1 unchanged sentence

Once vested they are included in the basic weighted shares outstanding computation.

CUMBERLAND PHARMACEUTICALS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(14) Employee Benefit Plans

17 unchanged sentences

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 Company adopted ASU 2016-02 under the alternative transition method (the effective date approach).

It allowed the Company to initially apply the new lease guidance at the adoption date (rather than at the beginning of the earliest period presented).

Prior periods have not been adjusted.

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

1 unchanged sentence

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 Cumberland Emerging Technologies (“CET”),

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.

These operating leases resulted in initial ROU assets of $ 3.6 million and lease liabilities of $ 3.8 million as of January 1, 2019 for non-cancelable operating leases with original lease terms in excess of one year.

CUMBERLAND PHARMACEUTICALS INC.

1 unchanged sentence

Notes to Consolidated Financial Statements (Continued)

our majority-owned subsidiary, where it operates the CET Life Sciences Center.

This lease currently expires in April 2023.

The Company did not have any leases classified as finance leases at January 1, 2019 or December 31, 2019.

The new lease accounting standard did not have a significant impact on the Company's Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for any period presented.

The Company elected the package of practical expedients offered in the transition guidance which allows management not to reassess lease identification, lease classification and initial direct costs at the adoption date.

Operating lease liabilities were 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.

4 unchanged sentences

Lease Position

At December 31, 2019, the Company recorded the following on the Condensed Consolidated Balance Sheet:

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

Operating lease right-of-use assets Other noncurrent assets $ 2,960,569

Total $ 2,960,569

Lease Liabilities Balance Sheet Classification December 31, 2019

Operating lease liabilities Other current liabilities $ 920,431

Operating lease liabilities Other noncurrent liabilities 2,076,472

At December 31, 2020 and 2019, the Company recorded the following on the Consolidated Balance Sheet:

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

Operating lease right-of-use assets $ 2,028,148 $ 2,960,569

Lease Liabilities December 31, 2020 December 31, 2019

Operating lease current liabilities $ 1,016,779 $ 920,431

Operating lease non-current liabilities 1,059,693 2,076,472

Total $ 2,076,472 $ 2,996,903

CUMBERLAND PHARMACEUTICALS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Cumulative future minimum sublease income under non-cancelable operating subleases totals approximately $ 0.4 million and will be paid through the leases ending in October 2022 and April 2023.

Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) are as follows:

As of December 31, 2019:

2020 $ 1,120,066

Maturity of Leases Liabilities at December 31, 2020

Operating Leases

2021 $ 1,144,889

2022 1,019,313

Total future minimum lease payments 3,376,746

Less Interest ( 379,843 )

Total lease payments 2,256,680

Interest ( 180,208 )

Present value of lease liabilities $ 2,076,472

The Company's future minimum lease commitments, under Topic 840, predecessor to Topic 842, are as follows:

As of December 31, 2018:

2019 $ 959,902

2021 1,001,603

Total future minimum lease payments $ 3,858,702

(16) Fair Value of Financial Instruments

The Company owns marketable securities that are solely classified as trading securities as of December 31, 2019.

All of these securities had a maturity date of less than ninety days and classified as cash and cash equivalents at December 31, 2019.

The Company owns marketable securities that had a maturity date of less than ninety days and are classified as cash and cash equivalents at December 31, 2020 and December 31, 2019.

There were no transfers of assets between levels within the fair value hierarchy.

The following table summarizes the fair value of these marketable securities by level within the fair value hierarchy:

CUMBERLAND PHARMACEUTICALS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2020 December 31, 2019

Level 1 Level 2 Total Level 1 Level 2 Total

Treasury notes and bonds $ — $ — $ — $ 5,034,955 $ — $ 5,034,955

SBA loan pools - variable rate — — — — 2,504,551 2,504,551

Short-term cash investments — — — — 751,173 751,173

Commercial Paper — — — — $ 2,119,607 $ 2,119,607

2 unchanged sentences

There were no changes to the valuation techniques for the Level 2 marketable securities during 2020 or 2019.

CUMBERLAND PHARMACEUTICALS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(17) Market Concentrations

9 unchanged sentences

Customer 3 21 % 17 % 26 %

Customer 4 14 % 11 % *%

less than 10% of total

7 unchanged sentences

Each employment agreement provides for a salary for services performed, a potential annual bonus and, if applicable, a grant of restricted common shares pursuant to a restricted stock agreement.

CUMBERLAND PHARMACEUTICALS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(20) Discontinued Operations

5 unchanged sentences

Because of that progress, Cumberland felt that it was prudent to take a fresh look at our product portfolio, partners, and organization to ensure proper focus and capabilities.

In May 2019 following the strategic review, Cumberland entered into an agreement with Clinigen to return the exclusive rights to the Products (the "Agreement").

The Agreement provided for a conclusion of the Company's arrangements with Clinigen effective September 30, 2019.

Under the terms of the Agreement, Cumberland will no longer distribute the Products after the

CUMBERLAND PHARMACEUTICALS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

transition date and will receive $ 5 million in financial consideration from Clinigen, paid over a two -year period.

Cumberland agreed not to sell competing products during the same two -year period.

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

Under the final terms of the amended Agreement, the Company returned the Product rights to Clinigen on December 31, 2019.

Except for the Products' inventory as of December 31, 2019, no other operating assets and no liabilities were transferred to Clinigen.

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 four quarterly installments totaling $ 3.0 million during the year ended December 31, 2020.

The exit from the Ethyol and Totect Products meets the accounting criteria to be reported as discontinued operations.

2 unchanged sentences

As a result, January 1, 2020, was the first day of discontinued operations for the Ethyol and Totect products.

The Products provided revenue, incurred direct expenses and resulted in discontinued operations income during the periods presented.

The following amounts have been separated from continuing operations, as discontinued operations, for all periods presented.

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

Subsequent to the transaction date, th ose sales and marketing individuals who supported the Products shifted their efforts from the Products and continue to support other Cumberland brands.

2020 2019 2018

Revenues $ 3,206,875 $ 13,145,344 $ 11,396,871

Costs of products sold — 1,330,704 1,361,273

Selling, Marketing and other — 6,149,463 6,253,374

Income from discontinued operations $ 3,206,875 $ 5,665,177 $ 3,782,224

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

Except for the Products' inventory as of December 31, 2019, no other operating assets and no liabilities were transferred to Clinigen, as such t he accounts receivable and accounts payable associated with discontinued operations were not sold or disposed of as part of the Dissolution Agreement.

The following assets and liabilities have been presented as assets associated with discontinued operations or liabilities associated with discontinued operations, as appropriate, in the consolidated balance sheets.

CUMBERLAND PHARMACEUTICALS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Accounts receivable $ — $ 1,922,457

Inventory — 540,267

Current assets associated with discontinued operations $ — $ 2,462,724

Accounts payable $ — $ 1,918,868

Other current liabilities — 232,489

Current liabilities associated with discontinued operations $ — $ 2,151,357

(21) Commitments and Contingencies

14 unchanged sentences

The 356 Acetadote Patent is scheduled to expire in May 2026, which time period includes a 270-day patent term adjustment granted by the USPTO.

Since 2012, Cumberland has to continued to vigorously defend and protect its Acetadote product and related intellectual property rights including the use of all its legal options.

Since 2012, Cumberland has continued to vigorously defend and protect its Acetadote product and related intellectual property rights including the use of all its legal options.

The Company is a party to various other legal proceedings in the ordinary course of its business.

7 unchanged sentences

Operating income (loss) ( 1,846,001 ) ( 1,580,962 ) ( 1,208,686 ) ( 1,745,946 ) ( 6,381,595 )

Net income (loss) from continuing operations ( 1,883,418 ) ( 1,679,211 ) ( 1,275,620 ) ( 1,787,530 ) ( 6,625,779 )

Net income (loss) from discontinued operations 818,273 738,622 777,916 872,064 3,206,875

Net income (loss) attributable to common shareholders ( 1,055,620 ) ( 918,275 ) ( 481,737 ) ( 883,776 ) ( 3,339,408 )

Earnings (loss) per share attributable to common shareholders (1)

Continuing operations - basic $ ( 0.12 ) $ ( 0.11 ) $ ( 0.08 ) $ ( 0.12 ) $ ( 0.43 )

Discontinued operations - basic 0.05 0.05 0.05 0.06 0.21

Basic $ ( 0.07 ) $ ( 0.06 ) $ ( 0.03 ) $ ( 0.06 ) $ ( 0.22 )

Continuing operations - diluted $ ( 0.12 ) $ ( 0.11 ) $ ( 0.08 ) $ ( 0.12 ) $ ( 0.43 )

Discontinued operations - diluted 0.05 0.05 0.05 0.06 0.21

Diluted $ ( 0.07 ) $ ( 0.06 ) $ ( 0.03 ) $ ( 0.06 ) $ ( 0.22 )

1 unchanged sentence

Operating income (loss) ( 1,323,932 ) ( 1,373,424 ) ( 3,196,436 ) ( 3,394,390 ) ( 9,288,182 )

Net income (loss) from continuing operations ( 1,187,553 ) ( 1,338,521 ) ( 3,316,286 ) ( 3,369,329 ) ( 9,211,688 )

Net income (loss) from discontinued operations 1,147,136 771,709 1,349,351 2,396,981 5,665,177

Net income (loss) attributable to common shareholders ( 73,878 ) ( 549,507 ) ( 1,953,668 ) ( 960,706 ) ( 3,537,759 )

Earnings (loss) per share attributable to common shareholders (1)

Continuing operations - basic $ ( 0.08 ) $ ( 0.09 ) $ ( 0.22 ) $ ( 0.22 ) $ ( 0.60 )

Discontinued operations - basic 0.08 0.05 0.09 0.16 0.37

Basic $ — $ ( 0.04 ) $ ( 0.13 ) $ ( 0.06 ) $ ( 0.23 )

Continuing operations - diluted $ ( 0.08 ) $ ( 0.09 ) $ ( 0.22 ) $ ( 0.22 ) $ ( 0.60 )

Discontinued operations - diluted 0.08 0.05 0.09 0.16 0.37

Diluted $ — $ ( 0.04 ) $ ( 0.13 ) $ ( 0.06 ) $ ( 0.23 )

2 unchanged sentences

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(23) Subsequent events

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world.

As of March 20, 2020, the Company is aware of changes in its business as a result of COVID-19 but uncertain of the impacts of those changes on its consolidated statements of position, operations or cash flows.

Management believes any disruption, when and if experienced, could be temporary;

however, there is uncertainty around when any disruption might occur, the duration and hence the potential impact.

As a result, we are unable to estimate the potential impact on our business as of the date of this filing.

CUMBERLAND PHARMACEUTICALS INC.

AND SUBSIDIARIES

Valuation and Qualifying Accounts

14 unchanged sentences

(1) Composed of actual returns and credits for chargebacks and cash discounts.

(2) Amount includes $ 4,202,854 related to increase in the valuation allowance during the year, net of $ 4,867,893 related to the revaluation of deferred income tax balances for new rates under the Tax Act.

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-K

Item 9A. Controls and Procedures