CUMBERLAND PHARMACEUTICALS INC 10-K

Item 9A. Controls and Procedures. 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. During our fourth quarter of 2020, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f)). 74 Item 9B. Other Information. Form 8-K, Item 5.02(e). Compensatory Arrangements of Certain Officers On March 10, 2021, the Company entered into new employment agreements with each of A.J. Kazimi, our Chief Executive Officer (the “ Kazimi Employment Agreement ”), Martin Cearnal, our Executive Vice President and Chief Commercial Officer (the “ Cearnal Employment Agreement ”), Leo Pavliv, our Executive Vice President, Operations and Chief Development Officer (the “ Pavliv Employment Agreement ”), James Herman, our Senior Vice President, National Accounts and Chief Compliance Officer (the “ Herman Employment Agreement ,” and Michael Bonner, our Senior Director, Finance and Accounting and Chief Financial Officer (the “ Bonner Employment Agreement ”), and together with the Kazimi Employment Agreement, the Cearnal Employment Agreement, the Pavliv Employment Agreement, and the Herman Employment Agreement, the “ Employment Agreements ”). The Employment Agreements were effective as of January 1, 2021. Employment Agreements Each Employment Agreement provides for a salary for services performed, a potential annual bonus and a grant of restricted common shares pursuant to a restricted stock agreement. Under the terms of each Employment Agreement, employment is at-will and may be terminated by the Company at any time, with or without notice and with or without cause. Similarly, each of Mr. Kazimi, Mr. Cearnal, Mr. Pavliv, Mr. Bonner, and Mr. Herman may terminate his respective employment with us at any time, with or without notice. The Employment Agreements do not provide for any severance payments in the event employment is terminated for cause nor any severance benefits in the event employment is terminated as a result of death or permanent disability. The Employment Agreements include non-competition, non-solicitation and non-disclosure covenants on the part of employees. The Employment Agreements impose obligations regarding confidential information and state that any discoveries or improvements conceived, developed or otherwise made by the employees, or with others, are deemed our sole property. The Employment Agreements do not contain any termination or change in control provisions. Kazimi Employment Agreement Pursuant to the Kazimi Employment Agreement, Mr. Kazimi will serve as the Company’s Chief Executive Officer and will receive a base salary of $610,132. The foregoing descriptions of the Kazimi Employment Agreement are qualified in their entirety by reference to the Kazimi Employment Agreement, which is included as Exhibit 10.11 to this Annual Report on Form 10-K and are incorporated by reference into this Item. The foregoing description of the Kazimi Employment Agreement does not purport to be complete and is qualified in its entirety by reference to such exhibit. Cearnal Employment Agreement Pursuant to the Cearnal Employment Agreement, Mr. Cearnal will serve as the Company’s Executive Vice President and Chief Commercial Officer and will receive a base salary of $336,500. The foregoing descriptions of the Cearnal Employment Agreement are qualified in their entirety by reference to the Cearnal Employment Agreement, which is included as Exhibit 10.12 to this Annual Report on Form 10-K and are incorporated by reference into this Item. The foregoing description of the Cearnal Employment Agreement does not purport to be complete and is qualified in its entirety by reference to such exhibit. Pavliv Employment Agreement Pursuant to the Pavliv Employment Agreement, Mr. Pavliv will serve as the Company’s Executive Vice President, Operations and Chief Development Officer and will receive a base salary of $437,500. The foregoing descriptions of the Pavliv Employment Agreement are qualified in their entirety by reference to the Pavliv Employment Agreement, which is included as Exhibit 10.13 to this Annual Report on Form 10-K and are incorporated by reference into this Item. The foregoing description of the Pavliv Employment Agreement does not purport to be complete and is qualified in its entirety by reference to such exhibit. 75 Herman Employment Agreement Pursuant to the Herman Employment Agreement, Mr. Herman will serve as the Company’s Senior Vice President, National Accounts and Chief Compliance Officer and will receive a base salary of $270,000. The foregoing descriptions of the Herman Employment Agreement are qualified in their entirety by reference to the Herman Employment Agreement, which is included as Exhibit 10.15 to this Annual Report on Form 10-K and are incorporated by reference into this Item. The foregoing description of the Herman Employment Agreement does not purport to be complete and is qualified in its entirety by reference to such exhibit. Bonner Employment Agreement Pursuant to the Bonner Employment Agreement, Mr. Bonner will serve as the Company’s Senior Director, Finance and Accounting and Chief Financial Officer and will receive a base salary of $220,000. The foregoing descriptions of the Bonner Employment Agreement are qualified in their entirety by reference to the Bonner Employment Agreement, which is included as Exhibit 10.14 to this Annual Report on Form 10-K and are incorporated by reference into this Item. The foregoing description of the Bonner Employment Agreement does not purport to be complete and is qualified in its entirety by reference to such exhibit. PART III The information called for by Part III of Form 10-K (Item 10 – Directors, Executive Officers and Corporate Governance, Item 11 – Executive Compensation, Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, Item 13 – Certain Relationships and Related Transactions, and Director Independence, Item 14 – Principal Accounting Fees and Services), is incorporated by reference from our proxy statement related to our 2021 annual meeting of shareholders, which is expected to be filed with the SEC on or around March 12, 2021. 76 PART IV Item 15. Exhibits, Financial Statement Schedules. a. Documents filed as part of this report: 1. Financial Statements Page Number Management’s Report on Internal Control over Financial Reporting F- 1 Report of Independent Registered Public Accounting Firm – Consolidated Financial Statements F- 2 Consolidated Balance Sheets F- 5 Consolidated Statements of Operations F- 6 Consolidated Statements of Cash Flows F- 7 Consolidated Statements of Equity F- 9 Notes to the Consolidated Financial Statements F- 10 (2) Financial Statement Schedule Valuation and Qualifying Accounts F- 40 b. Exhibits Exhibit Number Description 3.1 Third Amended and Restated Charter of Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit to Amendment No. 19 of the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on July 17, 2009 3.2 Second Amended and Restated Bylaws of Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit to Amendment No. 19 of the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on July 17, 2009 4.1 Specimen Common Stock Certificate of Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit to Amendment No. 5 of the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on August 6, 2007 4.2 Preferred Stock Terms, Rights, and Provisions, incorporated herein by reference to the corresponding exhibit to Registrant's Registration Statement Form S-3 (File No. 333-221402) as filed with the SEC on December 19, 2017 4.3 Form of Senior Indenture, incorporated herein by reference to the corresponding exhibit to Registrant's Registration Statement Form S-3 (File No. 333-221402) as filed with the SEC on November 7, 2017 4.4 Form of Subordinated Indenture, incorporated herein by reference to the corresponding exhibit to Registrant's Registration Statement Form S-3 (File No. 333-221402) as filed with the SEC on November 7, 2017 77 4.5# Form of Option Agreement under 1999 Stock Option Plan of Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on May 1, 2007 4.6.1# Form of Incentive Stock Option Agreement under the Amended and Restated 2007 Long-Term Incentive Compensation Plan of Cumberland Pharmaceuticals Inc. incorporated herein by reference to the corresponding exhibit to the Registrant’s Annual Report on Form 10-K (File No. 001-33637) as filed with the SEC on March 12, 2013 4.6.2# Form of Non-Statutory Stock Option Agreement under the Amended and Restated 2007 Long-Term Incentive Compensation Plan of Cumberland Pharmaceuticals Inc. incorporated herein by reference to the corresponding exhibit to the Registrant’s Annual Report on Form 10-K (File No. 001-33637) as filed with the SEC on March 12, 2013 4.7# Form of Non-Statutory Stock Option Agreement under the Amended and Restated 2007 Directors’ Compensation Plan of Cumberland Pharmaceuticals Inc. incorporated herein by reference to the corresponding exhibit to the Registrant’s Annual Report on Form 10-K (File No. 001-33637) as filed with the SEC on March 12, 2013 4.8 Warrant to Purchase Common Stock of Cumberland Pharmaceuticals Inc., issued to Bank of America, N.A. on July 22, 2009, incorporated herein by reference to the corresponding exhibit to the Registrant’s Annual Report on Form 10-K (File No. 001-33637) as filed with the SEC on March 19, 2010 4.9 Form of Senior Indenture, incorporated herein by reference to the corresponding exhibit to Registrant's Registration Statement Form S-3 (File No. 333-184091) as filed with the SEC on September 25, 2012. 4.10 Form of Subordinated Indenture, incorporated herein by reference to the corresponding exhibit to Registrant's Registration Statement Form S-3 (File No. 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. and Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit of the Registrant’s Current Report on Form 8-K (File No. 001-33637) as filed with the SEC on August 13, 2010 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 o n Form 8-K (File No. 001-33637) as filed with the SEC on June 3, 2013 10.10† License Agreement, dated May 28, 1999, by and between Vanderbilt University and Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit to Amendment No. 3 of the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on July 11, 2007 10.11# Employment Agreement dated March 8, 2021, effective as of January 1, 2021, by and between A.J. Kazimi and Cumberland Pharmaceuticals Inc. 10 .12# Employment Agreement dated March 8 , 2021, effective as of January 1, 2021, by and between Martin E. Cearnal and Cumberland Pharmaceuticals Inc. 10.13# Employment Agreement dated March 8 , 2021, effective as of January 1, 2021, by and between Leo B. Pavliv and Cumberland Pharmaceuticals Inc. 10.14# Employment Agreement dated March 8 , 2021, effective as of January 1, 2021, by and between Michael P. Bonner and Cumberland Pharmaceuticals Inc. 10.15# Employment Agreement dated March 8, 2021, effective as of January 1, 2021, by and between James L. Herman and Cumberland Pharmaceuticals Inc. 78 10.17# 1999 Stock Option Plan of Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on May 1, 2007 10.18# Amended and Restated 2007 Long-Term Incentive Compensation Plan of Cumberland Pharmaceuticals Inc., incorporated herein by reference to Appendix A of the Registrant’s Schedule 14A as filed with the SEC on March 12, 2012 and approved by the Registrant's shareholders on April 17, 2012 10.19# Amended and Restated 2007 Directors’ Incentive Plan of Cumberland Pharmaceuticals Inc., incorporated herein by reference to Appendix B of the Registrant's Schedule 14A as filed with the SEC on March 12, 2012 and approved by the Registrant's shareholders on April 17, 2012 10.20 Form of Indemnification Agreement between Cumberland Pharmaceuticals Inc. and all members of its Board of Directors, incorporated herein by reference to the corresponding exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on May 1, 2007 10.21† Lease Agreement, dated September 10, 2005, by and between Nashville Hines Development, LLC and Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit to Amendment No. 3 of the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on July 11, 2007 10.21.1† First Amendment to Office Lease Agreement, dated April 25, 2008, by and between 2525 West End, LLC (successor in interest to Nashville Hines Development LLC) and Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit to Amendment No. 10 of the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on May 21, 2008 10.21.2† Second Amendment to Office Lease Agreement, dated March 2, 2010, by and between 2525 West End, LLC (successor in interest to Nashville Hines Development LLC) and Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33637) as filed with the SEC on May 17, 2010 10.21.3† Third Amendment to Office Lease Agreement, dated September 29, 2015, by and between 2525 West End, LLC (successor in interest to Nashville Hines Development LLC) and Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit to the Registrant's Quarterly Report on Form 10-Q (File No. 001-33637) as filed with the SEC on November 6, 2015 10.23† Amended and Restated Lease Agreement, dated November 11, 2004, by and between The Gateway to Nashville LLC and Cumberland Emerging Technologies, Inc., incorporated herein by reference to the corresponding exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on May 1, 2007 10.24 First Amendment to Amended and Restated Lease Agreement, dated August 23, 2005, by and between The Gateway to Nashville LLC and Cumberland Emerging Technologies, Inc., incorporated herein by reference to the corresponding exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on May 1, 2007 10.24.1 Second Amendment to Amended and Restated Lease Agreement, dated January 9, 2006, by and between The Gateway to Nashville LLC and Cumberland Emerging Technologies, Inc., incorporated herein by reference to the corresponding exhibit to Amendment No. 10 of the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on May 21, 2008 10.24.2† Third Amendment to Amended and Restated Lease Agreement, dated July 3, 2012, by and between The Gateway to Nashville LLC and Cumberland Emerging Technologies, Inc., incorporated herein by reference to the corresponding exhibit to the Registrant's Quarterly Report on Form 10-Q (File No. 001-33637) as filed with the SEC on August 9, 2012 79 10.25† License and Supply Agreement, dated November 16, 2015, by and between Cumberland Pharmaceuticals Inc. and Gastro-Entero Logic, LLC incorporated herein by reference to the corresponding exhibit of the Registrant's Annual Report on Form 10-K (File No. 001-33637) as filed with the SEC on March 14, 2016 10.28† Asset Purchase and Royalty Agreement for Kristalose dated November 15, 2011 by and between Mylan Inc. and Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit of the Registrant’s Current Report on Form 8-K (File No. 001-33637) as filed with the SEC on November 22, 2011 10.30# Supplemental Executive Retirement and Savings Plan, incorporated herein by reference to the corresponding exhibit to the Registrant's Current Report on Form 8-K (File No. 001-33637) as filed with the SEC on May 24, 2012 10.31† Settlement Agreement, dated November 9, 2012, by and between Cumberland Pharmaceuticals Inc., Paddock Laboratories, LLC and Perrigo Company incorporated herein by reference to the corresponding exhibit to the Registrant’s Annual Report on Form 10-K (File No. 001-33637) as filed with the SEC on March 12, 2013 10.32† License and Supply Agreement, dated November 9, 2012, by and between Cumberland Pharmaceuticals Inc., Paddock Laboratories, LLC and Perrigo Company incorporated herein by reference to the corresponding exhibit to the Registrant’s Annual Report on Form 10-K (File No. 001-33637) as filed with the SEC on March 12, 2013 10.34 Revolving Credit Loan Agreement, dated July 31, 2017, by and between Cumberland Pharmaceuticals Inc. and Pinnacle Bank incorporated herein by reference to the corresponding exhibit to the Registrant's Quarterly Report on Form 10-Q (File No. 001-33637) as filed with the SEC on November 8, 2017 10.35 Amendment to Revolving Credit Loan Agreement, by and between Pinnacle Bank and Cumberland Pharmaceuticals Inc., dated August 14, 2018, incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report Form 10-Q (File No. 001-33637) as filed with the SEC on August 14, 2018 10.36 First Amendment to Revolving Credit Note and Second Amendment to Revolving Credit Loan Agreement, dated as of October 17, 2018, by and between Cumberland Pharmaceuticals Inc. and Pinnacle Bank, incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 001-33637) as filed with the SEC on October 19, 2018 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 80 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. 333-142535) as filed with the SEC on May 1, 2007 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. 31.2 Certification of Chief Financial 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. 32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. # Indicates a management contract or compensatory plan. † Confidential treatment has been granted for portions of this exhibit. These portions have been omitted from the Registration Statement and submitted separately to the Securities and Exchange Commission. †† Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from the Registration Statement and submitted separately to the Securities and Exchange Commission. 81 Item 16. Form 10-K Summary Registrants may voluntarily include a summary of information required by Form 10-K under this Item 16. The Company has elected not to include such summary information. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 12, 2021. Cumberland Pharmaceuticals, Inc. /s/ A. J. Kazimi By: A. J. Kazimi Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ A. J. Kazimi Chairman and CEO March 12, 2021 A. J. Kazimi (Principal Executive Officer and Director) /s/ Michael P. Bonner Senior Director and CFO March 12, 2021 Michael P. Bonner (Principal Financial and Accounting Officer /s/ Martin E. Cearnal Director March 12, 2021 Martin E. Cearnal /s/ Gordon R. Bernard Director March 12, 2021 Gordon R. Bernard /s/ Jonathan I. Griggs Director March 12, 2021 Jonathan I. Griggs /s/ James R. Jones Director March 12, 2021 James R. Jones /s/ Joey A. Jacobs Director March 12, 2021 Joey A. Jacobs /s/ Caroline R. Young Director March 12, 2021 Caroline R. Young /s/ Kenneth J. Krogulski Director March 12, 2021 Kenneth J. Krogulski /s/ Joseph C. Galante Director March 12, 2021 Joseph C. Galante 82 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Cumberland Pharmaceuticals Inc. and its subsidiaries (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting. Cumberland Pharmaceuticals Inc.’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Cumberland Pharmaceuticals Inc.’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013) . Based on its assessment, management has concluded that, as of December 31, 2020, the Company’s internal control over financial reporting was effective based on those criteria. /s/ A. J. Kazimi A. J. Kazimi Chief Executive Officer March 12, 2021 /s/ Michael Bonner Michael Bonner Chief Financial Officer March 12, 2021 F-1 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, F-2 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. /s/ BKD, LLP We have served as the Company's auditor since 2020. Nashville, Tennessee March 12, 2021 F-3 Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Cumberland Pharmaceuticals Inc. Nashville, Tennessee Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Cumberland Pharmaceuticals Inc. (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 These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. 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 audits 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 consolidated 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 audits 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 audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ BDO USA, LLP We served as the Company's auditor from 2017 to 2020. Nashville, Tennessee 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. F-4 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2020 and 2019 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 24,753,796 $ 28,212,635 Accounts receivable, net 12,377,713 7,859,006 Inventories, net 10,638,157 8,871,254 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 Non-current inventories 11,656,742 15,554,992 Property and equipment, net 574,169 747,796 Intangible assets, net 28,118,316 30,920,324 Goodwill 882,000 882,000 Deferred tax assets, net — 21,802 Operating lease right-of-use assets 2,028,148 2,960,569 Other assets 3,234,338 3,298,725 Total assets $ 96,463,305 $ 104,549,283 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 13,396,286 $ 9,993,578 Operating lease current liabilities 1,016,779 920,431 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 non-current liabilities 1,059,693 2,076,472 Other long-term liabilities 7,862,772 8,737,323 Total liabilities 49,589,911 53,464,030 Commitments and contingencies Equity: Shareholders’ equity: Common stock – no par value; 100,000,000 shares authorized; 14,988,429 and 15,263,555 shares issued and outstanding as of December 31, 2020 and 2019, respectively 49,121,523 49,914,478 Retained earnings (deficit) ( 2,131,013 ) 1,208,395 Total shareholders’ equity 46,990,510 51,122,873 Noncontrolling interests ( 117,116 ) ( 37,620 ) Total equity 46,873,394 51,085,253 Total liabilities and equity $ 96,463,305 $ 104,549,283 See accompanying notes to consolidated financial statements. F-5 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 2020, 2019 and 2018 2020 2019 2018 Revenues: Net product revenue $ 35,840,673 $ 32,407,845 $ 28,803,961 Other revenue 1,600,461 1,980,450 540,933 Net revenues 37,441,134 34,388,295 29,344,894 Costs and expenses: Cost of products sold 8,653,020 7,421,316 6,016,822 Selling and marketing 14,765,465 15,277,740 14,004,933 Research and development 5,773,825 6,868,480 7,575,892 General and administrative 10,196,299 9,974,384 10,150,777 Amortization 4,434,120 4,134,557 2,769,466 Total costs and expenses 43,822,729 43,676,477 40,517,890 Operating income (loss) ( 6,381,595 ) ( 9,288,182 ) ( 11,172,996 ) Interest income 75,345 243,364 564,484 Interest expense ( 263,627 ) ( 246,186 ) ( 195,848 ) Income (loss) before income taxes ( 6,569,877 ) ( 9,291,004 ) ( 10,804,360 ) 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 ) 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 ) 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 ) Weighted-average common shares outstanding: Basic 15,162,184 15,396,098 15,614,052 Diluted 15,162,184 15,396,098 15,614,052 See accompanying notes to consolidated financial statements. F-6 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2020, 2019 and 2018 2020 2019 2018 Cash flows from operating activities: Net income (loss) $ ( 3,418,904 ) $ ( 3,546,511 ) $ ( 7,038,772 ) 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 Deferred tax expense 21,802 65,408 81,886 Share-based compensation 1,046,516 1,485,898 1,364,698 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 Noncash investment gains — ( 26,315 ) ( 168,440 ) Net changes in assets and liabilities affecting operating activities: Accounts receivable ( 4,518,707 ) ( 1,399,012 ) ( 47,288 ) Inventories 2,131,347 1,106,175 528,153 Other current assets and other assets 1,210,489 ( 615,199 ) 676,750 Accounts payable and other current liabilities 6,569,002 3,221,780 4,153,287 Other long-term liabilities ( 1,859,330 ) ( 729,820 ) ( 159,558 ) 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: Additions to property and equipment ( 140,817 ) ( 246,202 ) ( 455,569 ) 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 ) Proceeds from sale of marketable securities — 20,062,132 16,122,376 Purchases of marketable securities — ( 11,745,138 ) ( 19,572,139 ) Net cash provided by (used in) investing activities ( 1,757,789 ) 2,297,848 ( 27,724,818 ) F-7 2020 2019 2018 Cash flows from financing activities: Borrowings on line of credit 59,000,000 76,000,000 56,000,000 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 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 Net increase (decrease) in cash and cash equivalents ( 3,458,839 ) 273,675 ( 17,473,908 ) Cash and cash equivalents, beginning of year 28,212,635 27,938,960 45,412,868 Cash and cash equivalents, end of year $ 24,753,796 $ 28,212,635 $ 27,938,960 Supplemental disclosure of cash flow information: Net cash paid (refunded) during the year for: Interest $ 215,991 $ 198,661 $ 95,965 Income taxes ( 91,486 ) 16,694 15,441 Noncash investing and financing activities: 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 — Vesting of shares related to RediTrex approval — 862,200 — Repurchase of subsidiary shares from noncontrolling interests — ( 800,000 ) — Additions to intangible assets from final purchase price allocation — 148,000 — See accompanying notes to consolidated financial statements F-8 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Consolidated Statements of Equity Years ended December 31, 2020, 2019 and 2018 Cumberland Pharmaceuticals Inc. Shareholders Common stock Retained earnings (deficit) Non-controlling interest Total equity Shares Amount 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 Repurchase of common shares ( 443,041 ) ( 2,877,935 ) — — ( 2,877,935 ) Balance, December 31, 2018 15,481,497 $ 51,098,613 $ 4,746,154 $ ( 274,266 ) $ 55,570,501 Net income (loss) — — ( 3,537,759 ) ( 8,752 ) ( 3,546,511 ) Repurchase of subsidiary shares to noncontrolling interest — ( 685,805 ) — ( 114,195 ) ( 800,000 ) Sale of subsidiary shares to noncontrolling interest — 640,407 — 359,593 1,000,000 Vesting of common stock 180,000 862,200 — — 862,200 Share-based compensation 225,536 1,485,898 — — 1,485,898 Repurchase of common shares ( 623,478 ) ( 3,486,835 ) — — ( 3,486,835 ) 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 F-9 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Organization Cumberland Pharmaceuticals Inc. (“Cumberland,” the “Company,” or as used in the context of “we,” “us,” or “our”) is a specialty pharmaceutical company focused on the acquisition, development and commercialization of branded prescription products. The Company's primary target markets are hospital acute care, 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. Cumberland is dedicated to providing innovative products that improve quality of care for patients and address unmet or poorly met medical needs. The Company promotes its approved products through its hospital and field sales forces in the United States and is establishing a network of international partners to bring its medicines to patients in their countries. Cumberland focuses its resources on maximizing the commercial potential of its products, as well as developing new product candidates, and has both internal development and commercial capabilities. The Company’s products are manufactured by third parties, which are overseen by Cumberland’s quality and manufacturing professionals. The Company works closely with its third-party distribution partners to make its products available in the United States. In order to build a pipeline of early-stage product candidates, the Company formed a subsidiary, Cumberland Emerging Technologies, Inc. ("CET"), which teams with universities and other research organizations to help advance scientific discoveries from the laboratory to the marketplace. In 2014, the Company organized equity financing to recapitalize and strengthen the financial position of CET including an investment of approximately $ 1.0 million from Gloria Pharmaceuticals Co., Ltd. (“Gloria”). As a result, Gloria received shares in CET and joined the CET ownership group. In April, 2019, CET entered into an agreement with HongKong WinHealth Pharma Group Co. Limited (WinHealth) whereby WinHealth made a $ 1.0 million investment through the purchase of shares of CET stock. As part of the agreement, WinHealth obtained a Board position at CET and the first opportunity to license CET products for the Chinese market. In connection with WinHealth's investment in CET, Cumberland also made an additional $ 1.0 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 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 %. As noted above, the ownership interests of CET includes WinHealth and Cumberland, while the remaining interest is owned by Vanderbilt University and the Tennessee Technology Development Corporation. The operating results of CET allocated to noncontrolling interests in the consolidated statements of operations were $ 79,496 , $ 8,752 and $ 75,704 for the years ended December 31, 2020, 2019 and 2018, respectively. Effective January 1, 2007, the Company formed a wholly-owned subsidiary, Cumberland Pharma Sales Corp. ("CPSC"). CPSC is the subsidiary that employs the Company's hospital and field sales force personnel. F-10 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (2) Significant Accounting Policies Principles of Consolidation The consolidated financial statements of the Company are stated in U.S. dollars and are prepared using U.S. generally accepted accounting principles. 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 The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates under different assumptions and conditions. The Company's most significant estimates include: (1) its allowances for chargebacks and accruals for rebates and product returns (2) the allowances for obsolescent or unmarketable inventory and (3) valuation of contingent consideration liability associated with business combinations. F-11 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Segment Reporting The Company has one operating segment which is specialty pharmaceutical products. Management has chosen to organize the Company based on the type of products sold. Operating segments are identified as components of an enterprise about which separate discrete financial information is evaluated by the chief operating decision maker, or decision-making group, in making decisions regarding resource allocation and assessing performance. The Company, which uses consolidated financial information in determining how to allocate resources and assess performance, evaluated that our specialty pharmaceutical products compete in similar economic markets and similar circumstances. Substantially all of the Company’s assets are located in the United States. Total revenues are primarily attributable to U.S. customers. Net revenues from customers outside the United States were approximately $ 2.4 million, $ 1.5 million and $ 2.1 million for the years ended December 31, 2020, 2019 and 2018, respectively. Fair Value of Financial Instruments Fair value of financial assets and liabilities is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company's fair value measurements follow the appropriate rules as well as the fair value hierarchy that prioritizes the information used to develop the measurements. It applies whenever other guidance requires (or permits) assets or liabilities to be measured at fair value and gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). A summary of the fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels is described below: Level 1 - Quoted prices for identical instruments in active markets. Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Level 3 - Significant inputs to the valuation model are unobservable. We maintain policies and procedures to value instruments using the best and most relevant data available. 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, 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. 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. The Company has no marketable securities in which the fair value is determined based on Level 3. The level of management judgment required in evaluating fair value for Level 1 investments is minimal. Similarly, there is little subjectivity or judgment required for Level 2 investments valued using valuation models that are standard across the industry and whose parameter inputs are quoted in active markets. Inputs to the models may include, but are not limited to, reported trades, executable bid and ask prices, broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. 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). F-12 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. Consistent with Level 3 fair value measurements, there are significant inputs to the valuation model that are unobservable. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with original maturities of three months or less. As of December 31, 2020 and 2019, cash equivalents consist primarily of money market funds as well as trading securities with original maturities of less than ninety days. Marketable Securities The Company invests in marketable debt securities in order to maximize its return on cash. Marketable securities consist of short-term cash investments, U.S. Treasury notes and bonds, corporate bonds, and commercial paper. At the time of purchase, the Company classifies marketable securities as either trading securities or available-for-sale securities, depending on the intent at that time. As of December 31, 2020 and 2019, marketable securities were comprised solely of trading securities. Trading securities are carried at fair value with unrealized gains and losses recognized as a component of interest income in the consolidated statements of operations. 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 and cash discounts. The Company reviews each customer balance to assess collection status. The majority of the Company’s products are distributed through independent pharmaceutical wholesalers. 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 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 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. Inventories The Company works closely with third parties to manufacture and package finished goods for sale. Based on the customer relationship with the manufacturer or packager, the Company will either take title to finished goods at the time of shipment or at the time of arrival from the manufacturer. The Company then warehouses such goods until distribution and sale. Inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out method. The Company continually evaluates 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 F-13 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 Prepaid and other current assets consist of deferred offering costs, prepaid insurance premiums, prepaid consulting services, deposits and annual fees paid to the U.S. Food and Drug Administration ("FDA"). 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. 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 Property and equipment, including leasehold improvements, are stated at cost. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the initial lease term plus renewal options, if reasonably assured, or the remaining useful life of the asset. Upon retirement or disposal of assets, any gain or loss is reflected as a component of operating income (loss) in the consolidated statement of operations. Improvements that extend an asset’s useful life are capitalized. Repairs and maintenance costs are expensed as incurred. Intangible Assets and Goodwill The Company’s intangible assets and goodwill consist of capitalized costs related to product and license rights, patents, trademarks and goodwill obtained in the Vibativ acquisition. Goodwill is not amortized for financial reporting purposes, but is subject to impairment analysis at least annually. The cost of acquiring product and license rights are capitalized at fair value at the date of acquisition for products that are approved by the FDA for commercial use. These costs are amortized ratably over the estimated economic life of the product. 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 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. If there are any changes made to the useful life of the product and license rights, the costs associated with such a change, if any, will be capitalized and amortized over the revised useful life. 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 F-14 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES 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. Amortization expense is recognized ratably over the following periods: Product rights Estimated economic life License rights Term of license agreement Patents Life of patent Impairment of Long-Lived Assets Long-lived assets, such as property and equipment, operating lease right-of-use assets and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If events or circumstances arise that require a long-lived asset to be tested for potential impairment, the Company first compares undiscounted cash flows expected to be generated by the asset to its carrying value. If the carrying amount of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment charge is recognized to the extent that the carrying value exceeds the fair value. Fair value is determined through various valuation techniques including quoted market prices, third-party independent appraisals and discounted cash flow models. Goodwill and other indefinite lived intangible assets that are not subject to amortization are tested at least annually for impairment. The impairment analysis for goodwill requires a comparison of fair value to the carrying value of the reporting unit. The Company's goodwill was acquired in November 2018 with the Vibativ acquisition. As a result, the Vibativ component of the Company is the reporting unit evaluated for goodwill impairment. Cumberland determined the fair value of the reporting unit through current and future estimated revenue and profitability of the product. 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. Ltd. 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 Effective January 1, 2018, the Company 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). Net Product Revenue Revenues from product sales are recognized in the amount that reflects the consideration that we expect to receive for these goods. Depending upon the shipping terms of the transaction, the revenue is recognized at the point where the customer obtains control of the goods and we satisfy our performance obligation. This occurs upon either shipment of the product or arrival at its ship to destination. Payment terms typically range from 30 to 60 days from date of shipment. The Company’s net product revenue reflects the reduction from gross product revenue for estimated allowances for chargebacks, discounts and damaged goods, 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. F-15 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Sales Rebates and Discounts 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. 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 the Company. In conjunction with recognizing a sale to a wholesaler, sales revenues are reduced and accrued liabilities are increased by the Company’s estimate of the rebate that may be claimed. Sales Returns Consistent with industry practice, the Company maintains a return policy that allows customers to return product within a specified period prior to and subsequent to the expiration date. The Company’s estimate of the provision for returns is based upon historical experience, expiration date by product as well as any other factor expected to impact future returns. Any changes in the assumptions used to estimate the provision for returns are recognized in the period those assumptions are changed. Other Revenues Other revenues primarily consist of income from grant funding programs, licensing agreements, leases and contract services. Revenue related to grants is recognized when all conditions related to such grants have been met. All other revenue is recognized when earned. Cost of Products Sold Cost of products sold consists principally of the cost to acquire each unit of product sold, including in-bound freight expense as well as any adjustment in the net realizable value of inventory acquired in acquisitions. Cost of products sold also includes expenses associated with the reduction in the net realizable value of slow-moving or expired product. Selling and Marketing Expense Selling and marketing expense consists primarily of expenses relating to the advertising, promotion, distribution and sale of products, including royalty expense, salaries and related costs. Distribution Costs Distribution costs are expensed as incurred and are included as a component of selling and marketing expenses in the consolidated statements of operations. Distribution costs were as follows for the years ended December 31: 2020 2019 2018 Distribution costs $ 890,686 $ 613,637 $ 457,814 F-16 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Advertising Costs Advertising costs are expensed as incurred and are included as a component of selling and marketing expenses in the consolidated statements of operations. Advertising costs were as follows for the years ended December 31: 2020 2019 2018 Advertising costs $ 2,379,424 $ 2,594,630 $ 2,005,113 Research and Development Research and development costs are expensed in the period incurred. Research and development costs are comprised mainly of clinical trial expenses, salaries, wages and other related costs such as materials and supplies. Research and development expense includes activities performed by third-party providers participating in the Company’s clinical studies. The Company accounts for these costs based on estimates of work performed, patients enrolled or fixed fees for services over the period of time the clinical trials are performed. Income Taxes The Company provides for deferred taxes using the asset and liability approach. Under this method, deferred tax assets and liabilities are recognized for future tax consequences attributable to operating loss and tax credit carryforwards, as well as differences between the carrying amounts of existing assets and liabilities and their respective tax bases. The Company’s principal differences are related to the timing of deductibility of certain items, such as inventory, depreciation, amortization and share-based compensation. Deferred tax assets and liabilities are measured using enacted statutory tax rates that are expected to apply to taxable income in the years such temporary differences are anticipated to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of enactment. The Company only recognizes income tax benefits associated with an income tax position in which it is “more likely than not” that the position would be sustained upon examination by the taxing authorities. In assessing the realizability of deferred tax assets, management considers whether 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 existing temporary differences, projected future taxable income and tax planning strategies in making this assessment. 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. Earnings (Loss) per Share Basic earnings (loss) per share is calculated by dividing net income (loss) attributable to common shareholders by the weighted-average number of shares outstanding. 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. Share-Based Payments The Company recognizes compensation cost for all share-based payments issued, modified, repurchased or canceled. Depending on the nature of the vesting provisions, restricted stock awards are measured using either the fair value on the grant date or the fair value of common stock on the date the vesting provisions lapse. 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. F-17 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. 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 November 2018, the FASB issued ASU No. 2018-18, “Collaboration Arrangements: Clarifying the Interaction between Topic 808 and Topic 606” (ASU 2018-18). The issuance of ASU 2014-09 raised questions about the interaction between the guidance on collaborative arrangements and revenue recognition. ASU 2018-18 addresses this uncertainty by (1) clarifying that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASU 2014-09 when the collaboration arrangement participant is a customer, (2) adding unit of account guidance to assess whether the collaboration arrangement or a part of the arrangement is with a customer and (3) precluding a company from presenting transactions with collaboration arrangement participants that are not directly related to sales to third parties together with revenue from contracts with customers. Cumberland adopted the standard effective January 1, 2020 with no impact on the Company's consolidated financial statements. In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” (ASU 2017-04). The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. As a result of the revised guidance, a goodwill impairment will be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The new standard was adopted by Cumberland effective January 1, 2020 and was applied prospectively with no impact on the Company's consolidated financial statements. Recent Accounting Pronouncements - Not Yet Adopted In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses,” which changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, companies will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, companies will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities. Companies will have to disclose additional information, including information they use to track credit quality by year of origination for most financing receivables. Companies will apply the ASU’s provisions as a F-18 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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 ® RediTrex In November 2016, the Company announced an agreement with the Nordic Group B.V. ("Nordic") to acquire the exclusive U.S. rights to Nordic’s injectable methotrexate product line designed for the treatment of active rheumatoid arthritis, juvenile idiopathic arthritis, severe psoriatic arthritis, and severe disabling psoriasis. As consideration for the license Cumberland paid a deposit of $ 100,000 at closing. The Company provided $ 0.9 million in consideration through a grant of 180,000 restricted shares of Cumberland common stock to be vested upon the FDA approval of the first Nordic product. Cumberland also agreed to provide Nordic a series of payments tied to the products’ FDA approval, launch and achievement of certain sales milestones. Under the terms of the agreement, Cumberland is responsible for the product registration and commercialization in the U.S. Nordic is responsible for product manufacturing and supply. On November 27, 2019, Cumberland received FDA approval for the first Nordic injectible product and authorization to market them under the RediTrex brand name. The 180,000 shares of restricted Cumberland common stock previously provided to Nordic vested upon approval and were valued at $ 0.9 million on the vesting date. The FDA approval also resulted 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. Vibativ During November 2018, the Company closed on an agreement with Theravance Biopharma ("Theravance") to acquire the global responsibility for Vibativ including the marketing, distribution, manufacturing and regulatory activities associated with the brand. Vibativ is a patented, FDA approved injectable anti-infective for the treatment of certain serious bacterial infections including hospital-acquired and ventilator-associated bacterial pneumonia and complicated skin and skin structure infections. It addresses a range of Gram-positive bacterial pathogens, including those that are considered difficult-to-treat and multidrug-resistant. Cumberland acquired Vibativ to further add to its product offerings, increase its net revenue and positively contribute to the Company's operating results. 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. In addition, F-19 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. The following table summarizes the initial payments and consideration for the business combination: Consideration: Cash paid at closing $ 20,000,000 Cash payment during early 2019 5,000,000 Fair value of contingent consideration - net sales royalty 9,182,000 Total consideration $ 34,182,000 The contingent consideration liability represents the future net sales royalty payments discussed above. Cumberland prepared the valuations of the contingent consideration liability and the intangible assets utilizing significant unobservable inputs. As a result, the valuations are classified as Level 3 fair value measurements. The following table presents the changes in the 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. Contingent consideration liability Balance at November 12, 2018 $ 9,034,000 Change in fair value of contingent consideration included in operating expenses ( 40,000 ) Contingent consideration earned and accrued in operating expenses 508,000 Balance at December 31, 2018 $ 9,502,000 Adjustment to initial fair value of the contingent consideration liability 148,000 Cash payment of royalty during the period ( 1,033,108 ) Change in fair value of contingent consideration included in operating expenses ( 804,167 ) Contingent consideration earned and accrued in operating expenses 820,864 Balance at December 31, 2019 $ 8,633,589 Cash payment of royalty during the period ( 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 F-20 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) The following table summarizes the allocation of the fair values of the assets acquired as of the acquisition date for Vibativ: Finished goods inventory $ 6,624,000 Work in process - unlabeled vials 3,970,000 Work in process - validation vials 1,827,000 Raw materials 9,129,000 Total inventory $ 21,550,000 Intellectual property amortizable intangible assets $ 11,750,000 Goodwill 882,000 Total intangibles and goodwill 12,632,000 Total assets acquired $ 34,182,000 The 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. Consistent with Level 3 fair value measurements, there are significant inputs to the valuation model that are unobservable. The current portion of the contingent consideration liability is $ 3.3 million and the non-current portion is $ 4.9 million, as of December 31, 2020. (4) Revenues Product Revenues The Company’s net product revenues consisted of the following for the years ended December 31: 2020 2019 2018 Products: 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 Vaprisol 1,077,227 936,615 1,763,874 RediTrex 856,657 — — Total net product revenues $ 35,840,673 $ 32,407,845 $ 28,803,961 Other Revenues During 2019, Cumberland executed a License and Distribution agreement with HongKong WinHealth Pharma Group Co. Limited (“WinHealth”) for our Caldolor and Acetadote brands in China and Hong Kong. In conjunction with these new arrangements, the Company terminated a previous License and Distribution agreement with Gloria Pharmaceuticals Co ("Gloria Pharmaceuticals") for the two brands. In addition, we also signed a new License and Distribution agreement with DB Pharm Korea Co., Ltd. (“DB Pharm”) for Vibativ in South Korea. 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. F-21 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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 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 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 The Company's net inventories consisted of the following as of December 31: 2020 2019 Raw materials and work in process $ 16,223,162 $ 19,345,723 Consigned inventory 128,005 416,468 Finished goods, net of reserve 5,943,732 4,664,055 Total inventories 22,294,899 24,426,246 less non-current inventories ( 11,656,742 ) ( 15,554,992 ) Total inventories classified as current $ 10,638,157 $ 8,871,254 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. F-22 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES 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. As the API is consumed in production, the value of the API is transferred from raw materials to finished goods. API for the Company's Vaprisol brand is also included in the raw materials inventory total at December 31, 2020 and 2019. 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 $ 15.6 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 Property and equipment consisted of the following at December 31: Range of useful lives 2020 2019 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 equipment, gross 4,131,256 4,142,125 Less: accumulated depreciation and amortization ( 3,557,087 ) ( 3,394,329 ) Total property and equipment, net $ 574,169 $ 747,796 Depreciation expense, including amortization expense related to leasehold improvements, is included in general and administrative expense in the consolidated statements of operations. Depreciation expense was as follows for the years ended December 31: 2020 2019 2018 Depreciation expense $ 314,444 $ 269,619 $ 213,237 F-23 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (7) Intangible Assets and Goodwill Intangible assets and Goodwill consisted of the following at December 31: 2020 2019 Product and license rights $ 38,543,542 $ 37,400,742 Less: accumulated amortization ( 14,709,824 ) ( 11,499,141 ) Total product and license rights 23,833,718 25,901,601 Patents 10,306,922 9,882,511 Less: accumulated amortization ( 6,312,460 ) ( 5,127,878 ) Total patents 3,994,462 4,754,633 Trademarks 338,011 273,110 Less: accumulated amortization ( 47,875 ) ( 9,020 ) Total trademarks 290,136 264,090 Total intangible assets $ 28,118,316 $ 30,920,324 Goodwill $ 882,000 $ 882,000 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. The agreement requires the Company to provide unvested restricted shares of Cumberland common stock and make a series of payments tied to the products’ FDA approval, launch and achievement of certain sales milestones. 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, 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. This resulted in amortizable intangible assets related to the product rights of $ 11.8 million and goodwill of $ 0.9 million. The intangible assets are being amortized through November 2028, the expected useful life of the acquired asset. The $ 0.1 million increase in goodwill during 2019 was a result of changes in the purchase price allocation during the measurement period. During 2020 and 2019, the Company recorded an additional $ 0.5 million and $ 0.7 million, respectively, in intangible assets for patents, trademarks and capitalized patent costs, including amounts incurred in the protection of the Company's intellectual property. These costs will be amortized over the remaining expected useful life of the associated patents. Amortization expense related to product and license rights, trademarks and patents were as follows for the years ended December 31: 2020 2019 2018 Amortization expense $ 4,434,120 $ 4,134,557 $ 2,769,466 F-24 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) The expected amortization expense for the Company's current balance of intangible assets are as follows: Year ending December 31: 2021 $ 4,338,247 2022 3,691,293 2023 3,629,001 2024 3,629,001 2025 and thereafter 12,830,774 $ 28,118,316 (8) Other Current and Other Long-term Liabilities Other current liabilities consisted of the following at December 31: Other current liabilities 2020 2019 Rebates, product returns, administrative fees and service fees $ 4,072,151 $ 4,593,167 Employee wages and benefits 998,064 1,295,905 Current portion of accrued contingent consideration 2,787,741 2,374,776 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 Total other current liabilities $ 11,254,381 $ 11,084,869 Other long-term liabilities 2020 2019 Non-current portion of accrued contingent consideration $ 4,855,363 $ 6,258,813 Deferred compensation 2,702,772 2,278,164 Other 304,637 200,346 Total other long-term liabilities $ 7,862,772 $ 8,737,323 F-25 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (9) Debt 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. Under the Pinnacle Agreement, Cumberland was initially subject to one financial covenant, the maintenance of a Funded Debt Ratio, as such term is defined in the agreement and determined on a quarterly basis. On August 14, 2018, the Company amended the Pinnacle Agreement ("First Amendment") to replace the single financial covenant with the maintenance of either the Funded Debt Ratio or a Tangible Capital Ratio, as defined in the First Amendment. The Company was in compliance with the Tangible Capital Ratio financial covenant as of 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. On October 17, 2018, the Company entered into a second amendment (“Second Amendment”) which increased the maximum aggregate principal available for borrowing under the Pinnacle Agreement to $ 20.0 million. The Company had $ 15.0 million in borrowings under the Pinnacle Agreement at December 31, 2020 and $ 18.5 million at December 31, 2019. The interest rate on the Pinnacle Agreement is based on LIBOR plus an interest rate spread. 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. Interest and the unused line fee are payable quarterly. Borrowings under the line of credit are collateralized by substantially all of our assets. F-26 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 (a) Initial Public Offering On August 10, 2009 , the Company completed its initial public offering of 5,000,000 shares of common stock at a price of $ 17.00 per share, raising gross proceeds of $ 85.0 million. After deducting underwriting discounts of approximately $ 6.0 million and offering costs incurred of approximately $ 4.2 million, the net proceeds to the Company were approximately $ 74.8 million. Contemporaneously with the offering, each outstanding share of preferred stock was automatically converted into two million shares of common stock. (b) Preferred Stock The Company is authorized to issue 20,000,000 shares of preferred stock. The Board of Directors is authorized to divide these shares into classes or series, and to fix and determine the relative rights, preferences, qualifications and limitations of the shares of any class or series so established. At December 31, 2020 and 2019, there was no preferred stock outstanding. (c) Common Stock 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. There were no option exercise transactions during 2020, 2019 and 2018. F-27 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. (d) Warrants 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. As of December 31, 2020, there were no outstanding warrants. (e) Share Repurchases The Company currently has a share repurchase program to repurchase up to $ 10 million of its common stock pursuant to Rule 10b-18 of the Securities Act. In January 2019, the Company's Board of Directors established the current $ 10 million repurchase program to replace the prior authorizations. The Company repurchased 503,626 shares, 623,478 shares and 443,041 shares of common stock for approximately $ 1.8 million, $ 3.5 million, and $ 2.9 million during the years ended December 31, 2020, 2019 and 2018, respectively. There remains $ 6.2 million available under the current repurchase program available for share repurchases at December 31, 2020. (f) Cumberland Emerging Technologies In April 2019, Cumberland Emerging Technologies ("CET"), our majority-owned subsidiary, entered into an agreement whereby Hongkong WinHealth Pharma Group Ltd. ("WinHealth") made a $ 1 million investment in CET through the purchase of shares of its common stock. As part of the agreement, WinHealth obtained the rights to name an individual for appointment to the CET Board of Directors as well as the first opportunity to license CET products for the Chinese market. In connection with WinHealth's investment in CET, during 2019, Cumberland also made an additional $ 1 million investment in CET. Cumberland purchased additional CET shares through contribution of $ 0.3 million in cash and a conversion of $ 0.7 million in intercompany loans payable. Upon completion of the additional investment by WinHealth and Cumberland, Gloria Pharmaceuticals returned its shares in CET in exchange for consideration of $ 0.8 million that was funded during 2020. After the additional investment, the Company’s ownership in CET is 85 %. As CET is a consolidated subsidiary, the Company reports the operating results of CET and allocates the noncontrolling interests to the non-majority partners. (g) Cumberland Foundation In December 2017, the Company formed the Cumberland Pharma Foundation (the "Foundation") to serve as a vehicle to facilitate the ongoing philanthropic endeavors of Cumberland Pharmaceuticals Inc. The Foundation was formed as a nonprofit corporation designed to qualify as a tax-exempt organization pursuant to Section 501(a) of the Internal Revenue Code. The Foundation’s Board of Directors is comprised of Cumberland Pharmaceuticals executives who are responsible for overseeing the Foundation’s ongoing activities including charitable contributions. In 2018, Cumberland provided a grant of 50,000 shares of the Company's common stock to the Foundation. The shares will address the ongoing financial needs of the organization, with most of the shares expected to be held for the opportunity to realize long term appreciation to support the Foundation’s future. 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 F-28 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES 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. On November 27, 2019, Cumberland received approval from the FDA for the pre-filled syringe of the Methotrexate product. With this approval, Nordic's 180,000 shares of Cumberland's common stock became vested. The value of these shares at the date of approval was $ 0.9 million. (11) Earnings (Loss) Per Share The following table shows the computation of the numerator and the denominator used to calculate diluted earnings (loss) per share for the years ended December 31: 2020 2019 2018 Numerator: 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 ) Denominator: Weighted-average shares outstanding – basic 15,162,184 15,396,098 15,614,052 Dilutive effect of restricted stock and stock options — — — Weighted-average shares outstanding – diluted 15,162,184 15,396,098 15,614,052 The Company's anti-dilutive restricted shares and stock options outstanding were as follows for the years ended December 31: 2020 2019 2018 Anti-dilutive shares and options 197,610 4,000 41,650 F-29 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (12) Income Taxes The components of the Company's net deferred tax assets at December 31 are as follows: 2020 2019 Deferred Tax Assets Net operating loss and tax credits $ 16,961,650 $ 16,964,685 Property and equipment and intangibles 227,056 227,072 Allowance for accounts receivable 249,483 257,564 Reserve for expired product 438,235 469,466 Inventory 100,362 35,227 Deferred charges 952,711 845,765 Cumulative compensation costs incurred on deductible equity awards 928,638 1,047,149 Total deferred tax assets 19,858,135 19,846,928 Deferred Tax Liabilities Intangible assets ( 662,014 ) ( 1,313,965 ) Net deferred tax assets, before valuation allowance 19,196,121 18,532,963 Less: deferred tax asset valuation allowance ( 19,196,121 ) ( 18,511,161 ) Net deferred tax assets $ — $ 21,802 The following table summarizes the amount and year of expiration of the Company's federal and state net operating loss carryforwards as of December 31, 2020: Years of expiration Federal State 2021 $ — $ 4,342,464 2022 - 2029 — 45,045,442 2030 44,153,819 458,802 2031 - 2039 7,534,351 9,829,212 Indefinite Period 4,796,324 263,861 Total federal and state net operating loss carryforwards $ 56,484,494 $ 59,939,781 F-30 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Income tax (expense) benefit includes the following components for the years ended December 31: 2020 2019 2018 Current: Federal $ 21,802 $ 65,408 $ — State and other ( 55,902 ) 79,316 ( 16,636 ) Total current income tax (expense) benefit ( 34,100 ) 144,724 ( 16,636 ) Deferred: Federal ( 21,802 ) ( 65,408 ) — State — — — Total deferred income tax (expense) benefit ( 21,802 ) ( 65,408 ) — Total income tax (expense) benefit $ ( 55,902 ) $ 79,316 $ ( 16,636 ) The Company’s effective income tax rate for 2020, 2019 and 2018 reconciles with the federal statutory tax rate as follows: 2020 2019 2018 Federal tax expense at statutory rate 21 % 21 % 21 % State income tax expense (net of federal income tax benefit) 4 % 4 % 4 % Permanent differences associated with general business credits 6 % 7 % 1 % Change in valuation allowance ( 23 ) % ( 31 ) % ( 25 ) % Other permanent differences ( 7 ) % 1 % ( 1 ) % Other ( 3 ) % — % — % Net income tax expense ( 2 ) % 2 % — % 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. F-31 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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 2040 97,244 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. The Company is no longer subject to U.S. federal tax examinations for tax years before 2017, and with few exceptions, the Company is not subject to examination by state tax authorities for tax years which ended before 2017. Loss carryforwards and credit carryforwards generated or utilized in years earlier than 2017 remain subject to examination and adjustment. During 2012, the 2009 federal tax return was examined by the Internal Revenue Service with no significant findings or adjustments. The Company has no unrecognized tax benefits in 2020, 2019 and 2018. (13) Stock-Based Compensation Plans The Company has grants outstanding under three equity compensation plans, with two of the plans available for future grants of equity compensation awards to employees, consultants and directors. All of the equity plans were approved by shareholders. The 2007 Long-Term Incentive Compensation Plan (the "2007 Plan") and the 2007 Directors’ Incentive Plan (the "Directors’ Plan") superseded the 1999 Stock Option Plan. The 2007 Plan and the Directors’ Plan provide for the issuance of stock options, stock appreciation rights and restricted stock. Vesting is determined on a grant-by-grant basis in accordance with the terms of the plans and the related grant agreements. The Company has reserved 2.4 million shares of common stock for issuance under the 2007 Plan and 250,000 shares for issuance under the Directors’ Plan. The exercise price of stock options is generally 100 % of the fair market value of the underlying common stock on the grant date. The maximum contractual term of stock options is ten years from the date of grant, except for incentive stock options granted to 10% shareholders, which is five years . During 2011, the Company began issuing shares of restricted stock with no exercise price to employees and directors. Restricted stock issued to employees generally cliff-vests on the fourth anniversary of the date of grant. Restricted stock issued to directors vests on the one year anniversary of the date of grant. Stock compensation expense is presented as a component of general and administrative expense in the consolidated statements of operations. Stock compensation expense consisted of the following for the years ended December 31: 2020 2019 2018 Share-based compensation - employees $ 1,050,179 $ 1,481,016 $ 1,244,606 Share-based compensation - nonemployees ( 3,663 ) 4,882 120,092 Total share-based compensation $ 1,046,516 $ 1,485,898 $ 1,364,698 F-32 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES 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 Stock option activity for 2020 and 2019 was as follows: Number of shares Weighted-average exercise price per share Weighted- average remaining contractual term (years) Aggregate intrinsic value Outstanding, December 31, 2018 5,800 $ 13.00 0.9 $ — Options granted — — Options exercised — — Options forfeited or expired ( 5,800 ) 13.00 Outstanding, December 31, 2019 — — — — Options granted — — Options exercised — — Options forfeited or expired — — Outstanding, December 31, 2020 — — — — Exercisable at December 31, 2020 — $ — — $ — The Company did not grant any stock options and there were no options exercised during 2020, 2019 and 2018. As such, there was no intrinsic value of options or weighted-average fair value of options exercised for the periods. Restricted Stock Awards Restricted stock activity was as follows: Number of shares Weighted- average grant-date fair value Nonvested, December 31, 2018 833,741 $ 6.09 Shares granted 229,669 5.95 Shares vested ( 225,536 ) 6.71 Shares forfeited ( 22,925 ) 6.20 Nonvested, December 31, 2019 814,949 5.88 Shares granted 231,091 3.56 Shares vested ( 228,500 ) 4.62 Shares forfeited ( 38,125 ) 5.87 Nonvested, December 31, 2020 779,415 $ 5.56 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. The restricted stock grants are included in the diluted weighted shares outstanding computation until they cliff-vest. Once vested they are included in the basic weighted shares outstanding computation. F-33 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (14) Employee Benefit Plans The Company sponsors an employee benefit plan that was established on January 1, 2006, the Cumberland Pharmaceuticals 401(k) Plan (the "Plan"), under Section 401(k) of the Internal Revenue Code of 1986, as amended, for the benefit of all employees over the age of 21 , having been employed by the Company for at least six months . The Plan provides that participants may contribute up to the maximum amount of their compensation as set forth by the Internal Revenue Service each year. Employee contributions are invested in various investment funds based upon elections made by the employees. During 2020, 2019 and 2018, the Company contributed approximately $ 50,000 in each year to the Plan as an employer match of participant contributions. In 2012 and 2013, the Company established non-qualified unfunded deferred compensation plans that allow participants to defer receipt of a portion of their compensation. The liability under the plans, reflected in other long term liabilities in the consolidated balance sheet, was $ 2.7 million and $ 2.3 million as of December 31, 2020 and 2019, respectively. The Company had assets consisting of company-owned life insurance contracts generally designated to pay benefits of the deferred compensation plans reflected in other assets in the consolidated balance sheet of $ 2.9 million and $ 3.1 million as of December 31, 2020 and 2019, respectively. (15) Leases The Company is obligated under long-term real estate leases for corporate office space that was extended during the third quarter of 2015. Prior to this extension, the lease would have expired in October 2016, the lease is now set to expire in October 2022. In addition, the research lab space at CET, under an agreement amended in July 2012, is leased through April 2023, with an option to extend the lease through April 2028. The Company also subleases a portion of the space under these leases. Rent expense is recognized over the expected term of the lease, including renewal option periods, if applicable, on a straight-line basis as a component of general and administrative expense. Rent expense and sublease income as follows for the years ended December 31: 2020 2019 2018 Rent expense $ 1,166,411 $ 1,246,143 $ 1,136,610 Sublease income $ 680,627 $ 688,020 $ 662,358 In March 2016, the FASB issued ASU 2016-02. ASU 2016-02’s core principle is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information. The primary effect of adopting ASU 2016-02 to the Company was to record right-of-use assets and obligations for the leases currently classified as operating leases. The Company’s significant operating leases include the lease of approximately 25,500 square feet of office space in Nashville, Tennessee for its corporate headquarters. This lease currently expires in October 2022. The operating leases also include the lease of approximately 14,200 square feet of wet laboratory and office space in Nashville, Tennessee by CET, our majority-owned subsidiary, where it operates the CET Life Sciences Center. This lease currently expires in April 2023. 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. F-34 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. Operating lease right-of-use assets represent operating lease liabilities adjusted for lease incentives and initial direct costs. As the Company’s leases do not contain implicit borrowing rates, the incremental borrowing rates were calculated based on information available at January 1, 2019. Incremental borrowing rates reflect the Company’s estimated interest rates for collateralized borrowings over similar lease terms. The weighted-average remaining lease term is 2.0 years and the weighted-average incremental borrowing rate used to discount the present value of the remaining lease payments is 7.42 %. Lease Position 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 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: Maturity of Leases Liabilities at December 31, 2020 Operating Leases 2021 $ 1,144,889 2022 1,019,313 2023 92,478 After 2023 — Total lease payments 2,256,680 Less: Interest ( 180,208 ) Present value of lease liabilities $ 2,076,472 (16) Fair Value of Financial Instruments 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: F-35 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 Commercial Paper — — — — $ 2,119,607 $ 2,119,607 Total fair value of marketable securities $ — $ — $ — $ — $ 2,119,607 $ 2,119,607 The fair values of all other financial instruments outstanding as of December 31, 2020 and 2019 approximate their carrying values. There were no changes to the valuation techniques for the Level 2 marketable securities during 2020 or 2019. (17) Market Concentrations The Company is focused on the acquisition, development and commercialization of branded prescription products. The Company’s principal financial instruments subject to potential concentration of credit risk are accounts receivable, which are unsecured, and cash equivalents. The Company’s cash equivalents consist primarily of money market funds. Certain bank deposits may be in excess of the insurance limits provided by the Federal Deposit Insurance Corporation. The Company’s primary customers are wholesale pharmaceutical distributors in the U.S. Total revenues by customer for each customer representing 10% or more of consolidated revenues are summarized below for the years ended December 31: 2020 2019 2018 Customer 1 25 % 31 % 28 % Customer 2 25 % 28 % 25 % Customer 3 21 % 17 % 26 % *: less than 10% of total The Company’s accounts receivable, net of allowances, due from the customers representing 10% or more of consolidated revenue was 60 % and 59 % at December 31, 2020 and 2019, respectively. (18) Manufacturing and Supply Agreements The Company utilizes one or two primary suppliers to manufacture each of its products and product candidates. Although there are a limited number of manufacturers of pharmaceutical products, the Company believes it could utilize other suppliers to manufacture its prescription products on comparable terms. A change in suppliers, problems with its third-party manufacturing operations or related production capacity, or contract disputes with suppliers could cause a delay in manufacturing or shipment of finished goods and possible loss of sales, which could adversely affect operating results. (19) Employment Agreements The Company has entered into employment agreements with all its full-time employees. 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. F-36 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (20) Discontinued Operations In 2016, Cumberland entered into an agreement with Clinigen Group Plc ("Clinigen") for the rights and responsibilities associated with the commercialization of Ethyol in the United States. In 2017, the Company entered into another agreement with Clinigen for the rights and responsibilities associated with the commercialization of Totect in the United States. Ethyol and Totect are collectively referred to herein as the "Products." Early in 2019, Cumberland announced a strategic review the Company's brands, capabilities, and international partners. This review followed an accelerated business development initiative, which resulted in a series of transactions. 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. 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. December 31, 2019, as the transition date, was the final day Cumberland was responsible for the Products. Cumberland was responsible for the Products through December 31, 2019 and beginning on January 1, 2020, the Products' rights transitioned back to Clinigen. 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. F-37 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 2020 2019 Accounts receivable $ — $ 1,922,457 Inventory — 540,267 Current assets associated with discontinued operations $ — $ 2,462,724 2020 2019 Accounts payable $ — $ 1,918,868 Other current liabilities — 232,489 Current liabilities associated with discontinued operations $ — $ 2,151,357 (21) Commitments and Contingencies Commitments In connection with the acquisition of certain Kristalose assets during 2011, the Company was required to make quarterly payments based on a percentage of Kristalose net sales through November 2018. The payments were treated as consideration for the assets acquired and were capitalized. They are being amortized over the remaining expected useful life of the acquired asset, currently through 2026. In connection with its licensing agreements for Caldolor, the Company is required to pay royalties based on net sales over the life of the product. Royalty expense is recognized as a component of selling and marketing expense in the period that revenue is recognized. In connection with its licensing agreements for Ethyol and Totect, the Company was required to pay royalties based on net sales. The royalty expense was recognized as a component of selling and marketing expense in the period the associated revenue was recognized through the end of the licensing period, December 31, 2019. In connection with the acquisition of Vibativ, the Company is required to pay royalties based on net sales of the product. At the purchase date, Cumberland recorded the fair value of this liability and will continue to evaluate the liability each period and the royalty expense is recognized as a component of selling and marketing expense in the period that the change in fair value is recognized. Legal Matters Cumberland has a number of Patents issued through the United States Patent and Trademark Office (the “USPTO”) including U.S. Patent number 8,148,356 (the “356 Acetadote Patent”) which is assigned to the Company. The claims of the 356 Acetadote Patent encompass the new Acetadote formulation and include composition of matter claims. Following its issuance, the 356 Acetadote Patent was listed in the FDA Orange Book. 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 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. In the opinion of management, the liability associated with these matters, will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. F-38 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (22) Quarterly Financial Information (Unaudited) The following table sets forth the unaudited operating results for each fiscal quarter of 2020 and 2019: First Quarter Second Quarter Third Quarter Fourth Quarter Total 2020: Net revenues $ 8,330,734 $ 9,598,177 $ 9,250,689 $ 10,261,534 $ 37,441,134 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 ) 2019: Net revenues $ 8,729,860 $ 9,417,443 $ 6,935,439 $ 9,305,553 $ 34,388,295 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 ) (1) Due to the nature of interim earnings per share calculations, the sum of the quarterly earnings (loss) per share amounts may not equal the reported earnings (loss) per share for the full year. F-39 Schedule II CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 31, 2020, 2019 and 2018 Description Balance at beginning of period Charged to costs and expenses Charged to other accounts Deductions Balance at end of period Allowance for uncollectible amounts, cash discounts, chargebacks, and credits issued for damaged products: For the years ended December 31: 2018 $ 326,697 $ 4,610,899 $ — $ ( 4,133,176 ) (1) $ 804,420 2019 804,420 5,915,066 — ( 5,927,435 ) (1) 792,051 2020 792,051 4,940,313 — ( 4,747,687 ) (1) 984,677 Valuation allowance for deferred tax assets: For the years ended December 31: 2018 $ 15,632,235 $ 1,749,817 $ — $ — $ 17,382,052 2019 17,382,052 1,129,109 — — 18,511,161 2020 18,511,161 684,960 — — 19,196,121 (1) Composed of actual returns and credits for chargebacks and cash discounts. F-40