Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial position and results of operations should be read together with our audited consolidated financial statements and related notes appearing elsewhere in this Form 10-K. This discussion and analysis may contain forward-looking statements that involve risks and uncertainties – please refer to the section entitled, “Special Note Regarding Forward-Looking Statements,” contained in Part I, Item 1A, “Risk Factors,” of this Form 10-K. You should review the “Risk Factors” section of this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.
EXECUTIVE SUMMARY
We are a specialty pharmaceutical company focused on the acquisition, development and commercialization of branded prescription products. Our primary target markets are hospital acute care, gastroenterology and rheumatology. These medical specialties are characterized by relatively concentrated prescriber bases that we believe can be penetrated effectively by small, targeted sales forces. Cumberland is dedicated to providing innovative products that improve the quality of care for patients and address unmet or poorly met medical needs. We promote our approved products through our hospital and field sales forces in the United States and are establishing a network of international partners to bring our medicines to patients in their countries.
Our portfolio of FDA approved brands includes:
• Acetadote ® ( acetylcysteine ) Injection, for the treatment of acetaminophen poisoning;
• Caldolor ® ( ibuprofen ) Injection, for the treatment of pain and fever;
• Kristalose ® ( lactulose ) for Oral Solution, a prescription laxative, for the treatment of chronic and acute constipation;
• Omeclamox ® -Pak , ( omeprazole, clarithromycin, amoxicillin ) for the treatment of Helicobacter pylori ( H. pylori ) infection and related duodenal ulcer disease;
• Vaprisol ® ( conivaptan ) Injection, to raise serum sodium levels in hospitalized patients with euvolemic and hypervolemic hyponatremia;
• Vibativ ® ( telavancin ) Injection, for the treatment of certain serious bacterial infections including hospital-acquired and ventilator-associated bacterial pneumonia, as well as complicated skin and skin structure infections; and
• RediTrex ® ( methotrexate ) Injection, for the treatment of active rheumatoid, juvenile idiopathic and severe psoriatic arthritis, as well as disabling psoriasis.
Additionally, we have Phase II clinical programs underway evaluating our ifetroban product candidates in patients with cardiomyopathy associated with Duchenne Muscular Dystrophy (“DMD”), Systemic Sclerosis (“SSc”), and Aspirin-Exacerbated Respiratory Disease ("AERD"). We have also completed Phase II clinical programs with ifetroban in patients with Hepatorenal Syndrome (“HRS”) and patients with Portal Hypertension (“PH”).
We promote our approved products through our hospital and gastroenterology sales forces in the United States, which together comprised approximately 40 sales representatives and managers as of December 31, 2020.
We have both product development and commercial capabilities and believe we can leverage our existing infrastructure to support our expected growth. Our management team consists of pharmaceutical industry veterans experienced in business development, product development, regulatory, manufacturing, sales marketing and finance. Our business development team identifies, evaluates and negotiates product acquisition, licensing and co-promotion opportunities. Our product development team creates proprietary product formulations, manages our clinical studies, prepares all regulatory submissions and manages our medical call center. Our quality and manufacturing professionals oversee the manufacture, release and shipment of our products. Our marketing and sales professionals
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are responsible for our commercial activities, and we work closely with our distribution partners to ensure availability and delivery of our products.
The following is a summary of our 2020 highlights and recent developments. For more information, please see Part I, Item I, Business , of this Form 10-K.
• Early in 2020, we implemented the national launch of our Next Generation Caldolor product featuring a ready to use formulation in a pre-mixed bag, offering time and cost savings associated with its administration.
• We launched several national initiatives during 2020 to help hospitals access our acute care brands during this healthcare emergency. Our Vibativ product was used to help COVID patients who developed bacterial infections in their lungs.
• We entered into an agreement with Win Health Pharma and formed WHC Biopharmaceuticals, Pte. Ltd – a joint venture based in Singapore to acquire, develop and commercialize products for China and adjacent Asian markets.
• We announced a series of publications featuring important new data associated with our Caldolor and Vibativ brands.
• We ended the year with the initial introduction of our FDA-approved RediTrex line of injectable methotrexate products, featuring an innovative delivery system for patients with arthritis.
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. The Company managed through the COVID-19 pandemic during 2020, continuing to operate our business - keeping facilities open and our organization intact. We also maintained our ongoing compliance with the many laws and regulations that apply to us as a publicly traded, pharmaceutical company.
Throughout the pandemic, Cumberland faced the same headwinds affecting other companies that rely on hospital admissions and patient visits to drive revenue. Our business and our clinical studies were impacted as less patients sought elective surgeries and our access to medical facilities was substantially limited. During 2020, we carefully monitored our supply chain during the pandemic including the flow of raw materials into the plants that manufacture our products as well as the batches of finished product emerging from those facilities. Several of our brands were negatively impacted by the lockdowns and postponement of physician office visits and elective procedures. However, we are fortunate to have a diversified product portfolio, with other brands delivering a strong performance.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
Accounting Estimates and Judgments
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. We base our estimates on past experience and on other factors we deem reasonable given the circumstances. Past results help form the basis of our judgments about the carrying value of assets and liabilities that are not determined from other sources. Actual results could differ from these estimates. These estimates, judgments and assumptions are most critical with respect to our accounting for revenue recognition, marketable securities, inventory, intangible assets and goodwill, research and development accounting, contingent consideration liability, provision for income taxes and share-based payments.
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Revenue Recognition
We recognize revenue in accordance with the Accounting Standards Codification (ASC) Topic 606. Effective January 1, 2018, we adopted the Financial Accounting Standards Board’s (“FASB”) amended guidance in the form of Accounting Standards Update (“ASU”) No. 2014-09, "Revenue from Contracts with Customers," (ASC 606).
Our revenue is derived primarily from the product sales of our FDA approved pharmaceutical brands. Revenue from sales of products is recognized at the point where the customer obtains control of the goods and we satisfy our performance obligation, which occurs upon either shipment of the product or arrival at its destination, depending upon the shipping terms of the transaction. Payment terms typically range from 30 to 60 days from date of shipment. Our net product revenue reflects the reduction from gross product revenue for estimated allowances for chargebacks, and discounts and reflects sales related accruals for rebates, coupons, product returns, and certain administrative and service fees. Significant judgments must be made in determining the transaction price for our sales of products related to these adjustments. Other revenue, which is a component of net revenues, includes non-refundable upfront payments and milestone payments under licensing agreements along with grant and rental income. Other income was approximately 4.3% percent of net revenues in 2020, 5.8% in 2019, and 1.8% in 2018 respectively.
Our financial statements reflect accounts receivable allowances of $1.0 million and $0.8 million at December 31, 2020 and 2019, respectively, for chargebacks and early pay discounts for products.
The following table reflects our sales-related accrual activity for the periods indicated below:
2020 2019 2018
Balance, January 1 $ 4,593,167 $ 4,961,631 $ 4,140,980
Current provision 13,453,894 13,081,251 11,192,489
Actual product returns and credits issued (13,983,626) (13,449,715) (10,371,838)
Balance, December 31 $ 4,063,435 $ 4,593,167 $ 4,961,631
The allowances for chargebacks and discounts and sales related accruals for rebates, fee for service and product returns are determined on a product-by-product basis. We establish them using our 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 contractual terms with direct and indirect customers;
• Analyses of historical levels of chargebacks, discounts and returns of product;
• Communications with customers;
• Purchased information about the rate of prescriptions being written and the level of inventory remaining in the distribution channel, if known; and
• Expectations about the market for each product, including any anticipated introduction of competitive products.
Other organizations, such as managed care providers, pharmacy benefit management companies and government agencies, may receive rebates from us based on either negotiated contracts to carry our products or reimbursements for filled prescriptions. These entities are considered our indirect customers. When recognizing a sale to a wholesaler, sales revenues are reduced and accrued liabilities are increased by our estimate of the rebate that may be claimed.
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The allowances for chargebacks and accruals for rebates and product returns are the most significant estimates used in the recognition of our revenue from product sales. Of the accounts receivable allowances and our sales related accruals, our accrual for fee for services and product returns represents the majority of the balance. Sales related accrued liabilities for rebates, product returns, service fees, and administrative fees totaled $4.1 million, $4.6 million and $5.0 million as of December 31, 2020, 2019 and 2018, respectively. Of these amounts, our estimated liability for fee for services represented $1.0 million, $1.4 million and $1.8 million, respectively, while our accrual for product returns totaled $1.7 million, $1.9 million and $1.8 million, respectively. If the actual amount of cash discounts, chargebacks, rebates, and product returns differs from the amounts estimated by management, material differences may result from the amount of our revenue recognized from product sales. A change in our rebate estimate of one percentage point would have impacted net sales by approximately $0.4 million for the years ended December 31, 2020, 2019 and 2018. A change in our product return estimate of one percentage point would have impacted net sales by $0.3 million for the years ended December 31, 2020, 2019 and 2018.
Fair Value of Marketable Securities
We have historically invested a portion of our cash reserves in short-term cash investments, U.S. Treasury notes and bonds, corporate bonds and commercial paper in order to maximize our return on cash. We mark the investments to fair value at the end of each reporting period, with the adjustment being recognized in the statement of income as a component of interest income. These investments are generally valued using observable market prices by third-party pricing services, or are derived from such services' pricing models. The level of management judgment required in establishing fair value of financial instruments for which there is a quoted price in an active market is minimal. Similarly, there is little subjectivity or judgment required for instruments valued using valuation models that are standard across the industry and where all parameter inputs are quoted in active markets. Inputs to the models may include, but are not limited to, reported trades, executable bid and ask prices, broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events.
Inventories
We record amounts for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the net realizable value based upon assumptions about remaining shelf life, future demand and market conditions. The estimated inventory obsolescence amounts are calculated based upon specific review of the inventory expiration dates and the quantity on-hand at December 31, 2020 in comparison to our expected inventory usage. The amount of actual inventory obsolescence and unmarketable inventory could differ (either higher or lower) in the near term from the estimated amounts. Changes in our estimates would be recorded in our statement of operations in the period of the change.
Income Taxes
We provide for deferred taxes using the asset and liability approach. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to operating loss and tax credit carry-forwards and differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Our principal differences are related to the timing of deductibility of certain items such as depreciation, amortization and expense for options issued to nonemployees. Deferred tax assets and liabilities are measured using management’s estimate of tax rates expected to apply to taxable income in the years in which management believes those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in our results of operations in the period that includes the enactment date.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
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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.
Share-Based Payments
We recognize compensation expense for all share-based payments based on the fair value of the award on the date of grant. In addition, incremental compensation expense is recognized upon the modification of equity awards.
We issue restricted stock awards at no cost in lieu of stock options to employees, directors and consultants. Compensation expense for restricted stock granted to employees and directors is generally equal to the fair market value of the underlying common stock on the date of grant. If a sufficient disincentive for nonperformance does not exist at the date of grant, the compensation cost is remeasured at each reporting date at the then-current fair market value of the underlying common stock until the award vests.
Research and Development
We accrue for and expense research and development costs based on estimates of work performed, patient enrollment or fixed-fee-for-services. As work is performed and/or invoices are received, we adjust our estimates and accruals. To date, our accruals have not differed materially from our estimates. Total research and development costs are a function of studies being conducted and will increase or decrease based on the level of activity in any particular year.
Intangible Assets and Goodwill
Intangible assets include product rights, license agreements, other identifiable intangible assets and goodwill associated with the Vibativ acquisition. We assess the impairment of goodwill at least annually. We assess the impairment of identifiable intangible assets subject to amortization whenever events or changes in circumstances indicate the carrying value may not be recoverable. In determining the recoverability of our intangible assets, we make assumptions regarding estimated future cash flows and other factors. If the estimated undiscounted future cash flows do not exceed the carrying value of the intangible assets, we must determine the fair value of the intangible assets. If the fair value of the intangible assets is less than the carrying value, an impairment loss will be recognized in an amount equal to the difference. Fair value is determined through various valuation techniques including quoted market prices, third-party independent appraisals and discounted cash flow models, as considered necessary.
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RESULTS OF OPERATIONS
Year ended December 31, 2020 compared to year ended December 31, 2019
The following table presents the statements of operations for the years ended December 31, 2020 and 2019:
Years ended December 31,
2020 2019 Change
Net revenues $ 37,441,134 $ 34,388,295 $ 3,052,839
Costs and expenses:
Cost of products sold 8,653,020 7,421,316 1,231,704
Selling and marketing 14,765,465 15,277,740 (512,275)
Research and development 5,773,825 6,868,480 (1,094,655)
General and administrative 10,196,299 9,974,384 221,915
Amortization 4,434,120 4,134,557 299,563
Total costs and expenses 43,822,729 43,676,477 146,252
Operating income (loss) (6,381,595) (9,288,182) 2,906,587
Interest income 75,345 243,364 (168,019)
Interest expense (263,627) (246,186) (17,441)
Income (loss) before income taxes (6,569,877) (9,291,004) 2,721,127
Income tax (expense) benefit (55,902) 79,316 (135,218)
Net income (loss) from continuing operations $ (6,625,779) $ (9,211,688) $ 2,585,909
The following table summarizes net revenues for the years presented:
Years ended December 31,
2020 2019 Change
Products:
Kristalose $ 15,567,562 $ 12,895,120 $ 2,672,442
Vibativ 10,870,990 8,691,550 2,179,440
Caldolor 5,336,943 5,222,282 114,661
Acetadote 1,874,206 3,824,449 (1,950,243)
Omeclamox-Pak 257,088 837,829 (580,741)
Vaprisol 1,077,227 936,615 140,612
RediTrex 856,657 — 856,657
Other 1,600,461 1,980,450 (379,989)
Total net revenues $ 37,441,134 $ 34,388,295 $ 3,052,839
Net revenues. Net revenues for the year ended December 31, 2020 were approximately $37.4 million compared to $34.4 million for the year ended December 31, 2019, representing an increase of $3.1 million or 8.9%. As detailed in the table above, net revenue increased during the 2020 for four of our marketed products: Kristalose, Vibativ, Caldolor and Vaprisol. The improvement was led by largest product, Kristalose which delivered $2.7 million in revenue growth, followed by Vibativ, which delivered an additional $2.2 million during 2020 compared to 2019. Our newest product, RediTrex, contributed $0.9 million in incremental revenue during the year after its late 2020 soft launch.
These increases were partially offset by decreased net product sales of Acetadote and Omeclamox-Pak.
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We returned the exclusive rights to commercialize Ethyol and Totect in the United States to Clinigen effective January 1, 2020. As a result, the 2019 revenues and expenses associated with the products are combined and reclassified into discontinued operations in our financial statements. In exchange for the return of these product license rights and associated non-compete provision, Cumberland is receiving $5 million in financial consideration paid over the two-years following the return date. The first four installments totaling $3.0 million due from Clinigen was recorded during the year ended December 31, 2020, as discontinued operations. We do not incur expenses associated with these payments from Clinigen.
Kristalose revenue increased by $2.7 million, or 20.7%, compared to December 31, 2019 primarily as a result of improved sales volume for the product.
Vibativ revenue was $10.9 million compared to $8.7 million in the prior year. This $2.2 million or 25.1% increase in net revenue was a result of improved sales volume for the product.
Caldolor revenue experienced a 2.2% increase to $5.3 million during the year ended December 31, 2020 compared to $5.2 million in the same period last year. This increase in Caldolor revenue for the year ended December 31, 2020 w as the result of an increase in international shipments when compared to the prior year, which were partially offset by lower domestic shipments of the product, significantly impacted by COVID-19 and a reduction in elective surgeries.
Vaprisol revenue increased $0.1 million during the year ended December 31, 2020 compared to the prior year period due primarily to increased sales of the product.
Acetadote revenue included net sales of our branded product and our share of net sales from our Authorized Generic. For the year ended December 31, 2020, the Acetadote net revenue decreased $2.0 million compared to the prior year due to a reduction in sales volume, primarily impacting the Authorized Generic.
Omeclamox-Pak revenue decreased $0.6 million during the year ended December 31, 2020 compared to the prior year. The decrease was largely the result of decreased sales volume, which were negatively impacted by COVID-19.
Cost of products sold . Cost of products sold for the year ended December 31, 2020 were $8.7 million compared to $7.4 million in the prior year. As a percentage of net revenues, cost of products sold were 23.1% compared to 21.6% during the prior year. This change in costs of products sold as a percentage of revenue was attributable to a change in the product sales mix, particularly the increase in sales of Vibativ. The Vibativ inventory sold during the period was acquired and paid for by Cumberland as part of the acquisition of the brand during 2018. The increase in costs of product sold expense was also the result of a step up in the fair value of the inventory over the cost to Theravance, as required under purchase accounting rules.
Selling and marketing . Selling and marketing expense for the year ended December 31, 2020 were $14.8 million compared to $15.3 million in the prior year, which was a decrease of $0.5 million. This decrease was primarily a result of decreases in direct promotional spending, meeting costs and travel expenses. These decreases were partially offset by increases in salaries as well as increases in royalty costs associated with growth in Vibativ sales during the period.
Research and development . Research and development costs for the year ended December 31, 2020 were $5.8 million, compared to $6.9 million last year, representing a decrease of $1.1 million. A portion of our research and development costs is variable based on the number of trials, study sites, number of patients and the cost per patient in each of our clinical programs. We continue to fund our ongoing clinical initiatives associated with our pipeline products. During 2020, we experienced a decrease in study activity which was partially offset by increases in our annual FDA user fees.
General and administrative . General and administrative expenses for the year ended December 31, 2020 were $10.2 million compared to $10.0 million last year. The increase resulted from an increase in legal and professional fees partially offset by lower stock based compensation during the period. A portion of these increased costs were for 2019 expenses related to our acquisition of Vibativ.
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The components of the statements of operations discussed above reflect the following impacts from Vibativ:
Financial Impact of Vibativ Years ended December 31,
2020 2019
Net revenue $ 10,870,990 $ 8,691,550
Cost of products sold (1)
3,366,198 2,716,305
Royalty and operating expenses 1,952,449 1,609,564
Vibativ contribution $ 5,552,343 $ 4,365,681
(1) The Vibativ inventory included in the costs of product sold during the period was acquired and paid for by Cumberland as part of the acquisition of the brand during 2018.
Amortization. Amortization expenses represent the ratable use of our capitalized intangible assets including product and license rights, patents, trademarks and patent defense costs. Amortization for 2020 totaled approximately $4.4 million compared to $4.1 million in the prior year, which was an increase of $0.3 million over the prior year. The increase in expense was attributable to the amortization of additional product rights and capitalized patents.
Income taxes . Income taxes were an expense of $55,902 for the year ended December 31, 2020 and a benefit of $79,316 for the year ended December 31, 2019.
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Year ended December 31, 2019 compared to year ended December 31, 2018
The following table presents the statements of operations for the years ended December 31, 2019 and 2018:
Years ended December 31,
2019 2018 Change
Net revenues $ 34,388,295 $ 29,344,894 $ 5,043,401
Costs and expenses:
Cost of products sold 7,421,316 6,016,822 1,404,494
Selling and marketing 15,277,740 14,004,933 1,272,807
Research and development 6,868,480 7,575,892 (707,412)
General and administrative 9,974,384 10,150,777 (176,393)
Amortization 4,134,557 2,769,466 1,365,091
Total costs and expenses 43,676,477 40,517,890 3,158,587
Operating income (loss) (9,288,182) (11,172,996) 1,884,814
Interest income 243,364 564,484 (321,120)
Interest expense (246,186) (195,848) (50,338)
Income (loss) before income taxes (9,291,004) (10,804,360) 1,513,356
Income tax (expense) benefit 79,316 (16,636) 95,952
Net income (loss) from continuing operations $ (9,211,688) $ (10,820,996) $ 1,609,308
The following table summarizes net revenues for the years presented:
Years ended December 31,
2019 2018 Change
Products:
Kristalose $ 12,895,120 $ 12,055,625 $ 839,495
Vibativ 8,691,550 5,075,057 3,616,493
Caldolor 5,222,282 5,001,997 220,285
Acetadote 3,824,449 4,284,111 (459,662)
Omeclamox-Pak 837,829 623,297 214,532
Vaprisol 936,615 1,763,874 (827,259)
Other 1,980,450 540,933 1,439,517
Total net revenues $ 34,388,295 $ 29,344,894 $ 5,043,401
Net revenues. Net revenues for the year ended December 31, 2019 were approximately $34.4 million compared to $29.3 million for the year ended December 31, 2018, representing an increase of $5.0 million or 17.2%. Four of our products, Omeclamox-Pak, Kristalose, Caldolor and Vibativ, experienced an increase in revenue during 2019. The 17.2% improvement was led by our newest product, Vibativ, which delivered an additional $3.6 million during the full year of 2019 compared to a partial year during 2018. These increases were partially offset by decreased net product sales of Acetadote and Vaprisol.
We returned the exclusive rights to commercialize Ethyol and Totect in the United States to Clinigen effective January 1, 2020. As a result, the 2019 and 2018 revenues and expenses associated with the products are combined and reclassified into discontinued operations in our financial statements. In exchange for the return of these product license rights and associated non-compete provision, Cumberland is receiving $5 million in financial consideration
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paid over the two-years following the return date. We do not incur expenses associated with these payments from Clinigen.
Kristalose revenue increased by $0.8 million, or 7.0%, compared to December 31, 2018 primarily as a result of increased wholesale prices. The product's net revenue was also positively impacted by lower managed care rebates, resulting in improved net pricing for the product for the year ended December 31, 2019.
Caldolor revenue experienced a 4.4% increase to $5.2 million during the year ended December 31, 2019 compared to $5.0 million in during 2018. This increase in Caldolor revenue for the year ended December 31, 2019 was the result of an 11% increase in domestic shipments of the product and improved net pricing. The changes were partially offset by a reduction in international shipments of Caldolor in 2019 over 2018.
Omeclamox-Pak revenue increased $0.2 million or 34.4% during the year ended December 31, 2019 compared to the prior year. The increase was largely the result of increased sales volume partially offset by higher expired product sales returns.
Vaprisol revenue decreased $0.8 million during the year ended December 31, 2019 compared to the prior year period due primarily to decreased sales of the product. The prior year period sales were higher as a result of the arrival of a new lot of the product during April 2018 resolving temporary supply issues associated with the product.
Acetadote revenue included net sales of our branded product and our share of net sales from our Authorized Generic. For the year ended December 31, 2019, the Acetadote net revenue decreased $0.5 million or 10.7% compared to 2018 due to a reduction in sales volume as a result of generic competition.
Cost of products sold . Cost of products sold for the year ended December 31, 2019 were $7.4 million, compared to $6.0 million during 2018. As a percentage of net revenues, cost of products sold were 21.6% compared to 20.5% during 2018. The change in costs of products sold as a percentage of revenue was attributable to a change in the product sales mix during the period compared to 2018.
Selling and marketing . Selling and marketing expense for the year ended December 31, 2019 were $15.3 million, which was an increase of $1.3 million compared to 2018's expense of $14.0 million. This increase was primarily attributable to promotional spending and sales force costs, including salary and benefits for the increased sales force. The increase in the sales force and promotional spending is due largely to the addition of our newest brand, Vibativ, during the fourth quarter of 2018.
Research and development . Research and development costs for the year ended December 31, 2019 were $6.9 million, compared to $7.6 million during 2018, representing a decrease of $0.7 million. A portion of our research and development costs are variable based on the number of trials, study sites and patients involved in the development of our product candidates. The decrease was primarily the result of the FDA program fee of $1.3 million paid during 2018 associated with the successful RediTrex FDA submission.
General and administrative . General and administrative expense for the year ended December 31, 2019 was $10.0 million for 2019, compared to $10.2 million during 2018. The $0.2 million or, 1.7%, decrease from the same period for 2018 was primarily driven by a decrease in compensation and benefits, including non-cash stock based compensation and deferred compensation.
Amortization. Amortization expenses represent the ratable use of our capitalized intangible assets including product and license rights, patents, trademarks and patent defense costs. Amortization for 2019 totaled approximately $4.1 million, which was an increase of $1.4 million over 2018. The increase in expense was attributable to the amortization of additional product rights and capitalized patents, including those assets associated with the Vibativ acquisition.
Income taxes . Income tax benefit for the year ended December 31, 2019 was $79,316. As a percentage of income (loss) before income taxes, income taxes were a benefit of 0.9% for the year ended December 31, 2019 compared to income tax expense as a percentage of loss before income taxes of 0.2% for the year ended December 31, 2018.
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LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash flows provided by our operations, the proceeds from the Paycheck Protection Program loan, the amounts borrowed and available under our line of credit and the cash proceeds from our initial public offering of common stock that was completed in August 2009. We believe that our internally generated cash flows, existing working capital and our line of credit will be adequate to finance internal growth, finance business development initiatives, and fund capital expenditures for the foreseeable future.
We invest a portion of our cash reserves in marketable securities including short-term cash investments, U.S. Treasury notes and bonds, corporate bonds and commercial paper. 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.
The following table summarizes our liquidity and working capital as of the years ended December 31:
2020 2019
Cash and cash equivalents $ 24,753,796 $ 28,212,635
Marketable securities — —
Total cash, cash equivalents and marketable securities $ 24,753,796 $ 28,212,635
Working capital (current assets less current liabilities) $ 24,302,146 $ 26,012,840
Current ratio (multiple of current assets to current liabilities) 1.9 2.1
Revolving line of credit availability $ — $ 1,500,000
The following table summarizes our net changes in cash and cash equivalents for the years ended December 31:
2020 2019 2018
Cash provided by (used in):
Operating activities $ 5,415,061 $ 3,056,356 $ 3,112,737
Investing activities (1,757,789) 2,297,848 (27,724,818)
Financing activities (7,116,111) (5,080,529) 7,138,173
Net (decrease) increase in cash and
cash equivalents
$ (3,458,839) $ 273,675 $ (17,473,908)
The net $3.5 million decrease in cash and cash equivalents for the year ended December 31, 2020 was attributable to cash used by investing and financing activities partially offset by cash provided by operating activities. Cash provided by operating activities of $5.4 million included non-cash expense add backs for depreciation and amortization and share-based compensation expense totaling $5.8 million and changes in our working capital that provided net cash of $5.4 million. The cash provided by operating activities included $3.5 million provided by discontinued operations. This increase was partially offset by a net loss for the period of $6.6 million. Cash used by investing activities of $1.8 million was the result of additions to intangibles of $2.0 million, which included the payment of $1.0 million for product rights, additions to property and equipment of $0.1 million and partially offset by proceeds from the surrender of life insurance of $0.5 million. Our financing activities included a net repayment of $3.5 million under our line of credit net, $1.9 million in cash used to repurchase shares of our common stock as well as the $0.8 million used for the repurchase of a portion of CET's shares.
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As noted above, we continue to repurchase shares of our common stock, as discussed in Part II, Item 5, "Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities", of this Form 10-K.
The net $0.3 million increase in cash and cash equivalents for the year ended December 31, 2019 was attributable to cash provided by operating and investing activities offset by cash used in financing activities. Cash provided by operating activities of $3.1 million included non-cash expense add backs for depreciation and amortization and share-based compensation expense totaling $5.9 million. The cash provided by operating activities included $5.5 million provided by discontinued operations. These increases were partially offset by a net loss for the period of $3.5 million. Changes in our working capital provided net cash of $1.6 million. Cash provided by investing activities of $2.3 million included net sales of marketable securities of $8.3 million, partially offset by the $5 million payment to Theravance as part of the acquisition of Vibativ and the addition to intangibles of $0.8 million. Our financing activities included a net repayment of $1.5 million under our line of credit net and $3.5 million in cash used to repurchase shares of our common stock.
The net $17.5 million decrease in cash and cash equivalents for the year ended December 31, 2018 was attributable to cash used by investing activities offset by cash provided by operating and financing activities. Cash provided by operating activities of $3.1 million was impacted by a net loss for the period of $7.0 million. This use of operating cash was offset by non-cash expenses of depreciation and amortization and share-based compensation expense totaling $4.3 million. Changes in our working capital provided net cash of $5.2 million. The cash provided by operating activities included $4.5 million provided by discontinued operations. Cash used in investing activities included $20 million in cash paid for the acquisition of Vibativ during 2018, the use of cash to complete a net increase in marketable securities of $3.4 million, and the addition to intangibles of $3.8 million. Our financing activities included $10.2 million in net cash provided by borrowings under our line of credit net of $2.9 million in cash used to repurchase shares of our common stock.
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 did not issue any shares under this ATM during the year ended December 31, 2020.
Debt Agreement
On October 7, 2020, we entered into a Fourth Amendment (“Fourth Amendment”) to the Revolving Credit Loan Agreement with Pinnacle Bank (the “Pinnacle Agreement”). The Fourth Amendment extends the maturity date of the Pinnacle Agreement through October 1, 2022 and provides for a principal available for borrowing of up to $15 million. We also have 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. On May 10, 2019, we 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. On October 17, 2018, we entered into a second amendment (“Second Amendment”) which increased the maximum aggregate principal available for borrowing under the Pinnacle Agreement to $20.0 million. For a summary of the material terms of the Pinnacle Agreement, as amended, see Note 9 to the accompanying notes to the consolidated financial statements.
Under the Pinnacle Agreement, we were initially subject to one financial covenant, the maintenance of a Funded Debt Ratio. On August 14, 2018, we 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 Third Amendment modified 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.
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We were in compliance with the Tangible Capital Ratio financial covenant as of December 31, 2020 and we expect to maintain compliance with the Tangible Capital Ratio financial covenant in future periods.
Paycheck Protection Program
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.
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 we have used the loan amount for such qualifying expenses.
We applied for this loan after carefully considering, with our bank, the eligibility criteria to participate in this program, and determining that Cumberland met these criteria. We 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 our PPP loan, we currently do not foresee doing so. In October 2020, we submitted a request for forgiveness of the PPP loan. The request was approved by the lender, Pinnacle Bank, who then submitted it to the SBA for the SBA's review and approval.
Minimum Product Purchase Requirements
Our manufacturing and supply agreements do not require minimum annual purchase obligations.
Contractual cash obligations
The following table summarizes our contractual cash obligations as of December 31, 2020:
Payments Due by Year
Contractual obligations (1)
Total
2021 2022 2023 2024 2025 and thereafter
Line of credit (2)
$ 15,000,000 $ — $ 15,000,000 $ — $ — $ —
Estimated interest on debt (2)
782,143 547,500 234,643 — — —
Contingent consideration liability payments (3)
8,200,553 2,353,789 1,022,014 894,555 659,515 3,270,680
Operating leases 2,256,680 1,144,889 1,019,313 92,478 — —
Purchase obligations (4)
— — — — — —
Total (1)
$ 26,239,376 $ 4,046,178 $ 17,275,970 $ 987,033 $ 659,515 $ 3,270,680
1. The sum of the individual amounts may not agree due to rounding.
2. The line of credit payments represent the estimated unused line of credit payments and the amount due at maturity. The estimated interest on debt represents the interest on the principal outstanding on the line of credit. These amounts are based on the $15.0 million line of credit assuming the current $15.0 million balance outstanding on December 31, 2020 is consistently outstanding through maturity of October 2022. Interest and unused line of credit payments are due and payable quarterly in arrears.
3. The contingent consideration liability represents the fair value of the royalty payments of up to 20% of future net sales as part of the Vibativ acquisition.
4. Represents minimum purchase obligations under our manufacturing agreements.
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OFF-BALANCE SHEET ARRANGEMENTS
During 2020, 2019 and 2018, we did not engage in any off-balance sheet arrangements.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent Adopted Accounting Pronouncements
In November 2018, the FASB issued ASU No. 2018-18, “Collaboration Arrangements: Clarifying the Interaction between Topic 808 and Topic 606” (ASU 2018-18). The issuance of ASU 2014-09 raised questions about the interaction between the guidance on collaborative arrangements and revenue recognition. ASU 2018-18 addresses this uncertainty by (1) clarifying that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASU 2014-09 when the collaboration arrangement participant is a customer, (2) adding unit of account guidance to assess whether the collaboration arrangement or a part of the arrangement is with a customer and (3) precluding a company from presenting transactions with collaboration arrangement participants that are not directly related to sales to third parties together with revenue from contracts with customers. We adopted the standard effective January 1, 2020 with no impact to our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” (ASU 2017-04). The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. As a result of the revised guidance, a goodwill impairment will be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The new standard was adopted by Cumberland effective January 1, 2020 and was applied prospectively with no impact on our consolidated financial statements.
Recent Accounting Pronouncements - Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses,” which changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, companies will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, companies will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities. Companies will have to disclose additional information, including information they use to track credit quality by year of origination for most financing receivables. Companies will apply the ASU’s provisions as a cumulative-effect adjustment, if any, to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.
Related to ASU No. 2016-13 discussed above, in May 2019, the FASB issued ASU 2019-05, "Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief" which provides transition relief for ASU 2016-13 by providing entities with an alternative to irrevocably electing the fair value option for eligible financial assets measured at amortized cost upon adoption of the new credit losses standard. Certain eligibility requirements must be met and the election must be applied on an instrument-by-instrument basis. The election is not available for either available-for-sale or held-to-maturity debt securities. We 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.
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