Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial position and results of operations should be read together with our audited consolidated financial statements and related notes appearing elsewhere in this Form 10-K. This discussion and analysis may contain forward-looking statements that involve risks and uncertainties – please refer to the section entitled, “Special Note Regarding Forward-Looking Statements,” contained in Part I, Item 1A, “Risk Factors,” of this Form 10-K. You should review the “Risk Factors” section of this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.
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EXECUTIVE SUMMARY
We are a specialty pharmaceutical company focused on the acquisition, development and commercialization of branded prescription pharmaceutical products. We are dedicated to providing innovative products that improve the quality of care for patients and address poorly met medical needs.
Our commercial portfolio includes eight branded products approved for marketing by the U.S. Food and Drug Administration (“FDA”) - Acetadote ® , Caldolor ® , Kristalose ® , Omeclamox ® -Pak, RediTrex ® , Sancuso ® , Vaprisol ® and Vibativ ® .
In addition to these commercial brands, we have Phase II clinical programs underway evaluating our ifetroban product candidates for 1) patients with cardiomyopathy associated with Duchenne Muscular Dystrophy , a fatal, genetic neuromuscular disease, 2) Systemic Sclerosis or scleroderma, a debilitating autoimmune disorder characterized by fibrosis of the skin and internal organs and 3) Aspirin-Exacerbated Respiratory Disease , a severe form of asthma.
Our primary target markets are hospital acute care, gastroenterology, rheumatology and oncology. These medical specialties are characterized by relatively concentrated prescriber bases that we believe can be served effectively by small, targeted sales forces. We promote our approved products through our hospital, field and oncology sales divisions in the United States and are establishing a network of international partners to register and provide our medicines to patients in their countries.
We have established the capabilities needed to acquire, develop and commercialize branded pharmaceuticals in the U.S. and believe we can leverage this existing infrastructure to support our expected growth.
Our management team consists of pharmaceutical industry veterans with significant experience in their areas of responsibility. Our business development team identifies, evaluates, and negotiates product acquisition, licensing and co-promotion agreements. Our product development team creates proprietary formulations, manages our clinical studies, prepares our FDA submissions and staffs our medical call center. Our quality and manufacturing professionals oversee the manufacturing, release and shipment of our products. Our marketing and sales organization is responsible for our commercial activities, and we work closely with our distribution partners to ensure the availability of our products.
The following is a summary of our 2021 highlights and recent developments. For more information, please see Part I, Item I, Business , of this Form 10-K.
• Agreement to acquire the U.S. rights to Sancuso ® (granisetron transdermal patch), an FDA-approved oncology supportive care medicine.
• FDA approval of expanded labeling for our Caldolor ® product (intravenously delivered ibuprofen), for use prior to surgery.
• Commencement of the national launch of our RediTrex ® product line (prefilled methotrexate syringes).
• Agreement to relocate our corporate headquarters to the new Broadwest campus in the West End/Vanderbilt corridor in Nashville, with a move planned for late 2022.
• Extension of our line of credit with Pinnacle Bank for a new three-year term, and expansion of the facility for up to $20 million.
• Renewal of our At-the-Market facility, for up to $19 million in equity financing.
• Continuation of our share repurchase initiative along with a group of our Board members purchasing shares through trading plans in the market, in order to add to their holdings in the company.
• Publication of a series of study results and patient case studies in support of several of our brands.
• The release of our second annual Sustainability Report, which details the company’s activities pertaining to its environmental, social and governance (ESG) matters.
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COVID-19 Pandemic
In early 2020, the U.S. declared a health care emergency following the outbreak of SARS-CoV-2, a novel strain of coronavirus that causes COVID-19, a respiratory illness. The company has managed through the resulting pandemic, which included stay-at-home orders, the emergence of new variants, compliance with differing federal, state and local guidelines, among other challenges, to continue to operate our business – keeping facilities open and our organization intact. We moved quickly to ensure the health and safety of our team. We also maintained our ongoing compliance with the many laws and regulations that apply to us as a publicly traded pharmaceutical company.
Throughout the pandemic, Cumberland has faced the same challenges affecting other companies that rely on hospital admissions and patient visits to drive revenue. Our clinical studies were also impacted, as fewer patients sought elective surgeries and our access to medical facilities was substantially limited. We carefully monitored our supply chain, including the flow of raw materials into and the batches of finished products emerging from the facilities that manufacture our products.
Several of our brands were negatively impacted by the lockdowns and postponement of physician office visits and elective procedures. However, we are fortunate to have a diversified product portfolio that includes other brands that have delivered a strong performance during the pandemic.
Despite the challenges of operating during a pandemic, Cumberland has remained committed to our mission of providing innovative products that improve the quality of care for patients. We continued to build our portfolio of innovative and differentiated products through a multifaceted strategy that includes the development of new candidates and acquisition of established brands. Our resulting, diversified product line has enabled us to weather external challenges, while our team has remained responsive to the evolving medical market. We are prepared for and look forward to future opportunities to carry out our mission. Overall, we have been able to deliver our products while addressing the interests of our shareholders, employees, partners and community.
ESG Report
In July 2021, we released our second annual Sustainability Report, which details Cumberland’s activities pertaining to our environmental, social and governance (“ESG”) matters. After issuing our inaugural ESG Report the prior year, we remain committed to sustainability and to maintaining transparency of our corporate operations. We hold ourselves to the highest standards of ethical practices and understand the importance of recognizing and addressing our impact on our constituents, the community and the environment.
The Sustainability Report notes that during that year we provided nearly 2.5 million patient doses of our products, safely disposed of over 4,000 pounds of expired and damaged products, and had no product recalls. We also had no Company brands listed on the FDA’s MedWatch Safety Alerts for Human Medical Products, no Company product issues identified by the FDA’s Adverse Event Reporting System and no clinical trials terminated due to failure to practice good clinical standards.
The Sustainability Report also highlights our investment in our employees through our continuing education programs, employee development initiatives and employee recognition awards. We reported that women represented 46% of Cumberland’s workforce – and 18% of our employees were minorities.
Cybersecurity
The Company has taken appropriate steps to monitor an adequate level of cybersecurity. The Company is insured against cyber attacks and has appropriate detection and mitigation controls in place.
We were incorporated in 1999 and have been headquartered in Nashville, Tennessee since our inception. The Company’s common shares are listed on the Nasdaq stock exchange, our website address is www.cumberlandpharma.com and our various filings are available to the public at www.sec.gov.
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CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
Accounting Estimates and Judgments
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. We base our estimates on past experience and on other factors we deem reasonable given the circumstances. Past results help form the basis of our judgments about the carrying value of assets and liabilities that are not determined from other sources. Actual results could differ from these estimates. These estimates, judgments and assumptions are most critical with respect to our accounting for revenue recognition, inventory, intangible assets and goodwill, research and development accounting, contingent consideration liability, provision for income taxes and share-based payments.
Revenue Recognition
We recognize revenue in accordance with the Accounting Standards Codification (ASC) Topic 606. Effective January 1, 2018, we adopted the Financial Accounting Standards Board’s (“FASB”) amended guidance in the form of Accounting Standards Update (“ASU”) No. 2014-09, "Revenue from Contracts with Customers," (ASC 606).
Our revenue is derived primarily from the product sales of our FDA approved pharmaceutical brands. Revenue from sales of products is recognized at the point where the customer obtains control of the goods and we satisfy our performance obligation, which occurs upon either shipment of the product or arrival at its destination, depending upon the shipping terms of the transaction. Payment terms typically range from 30 to 60 days from date of shipment. Our net product revenue reflects the reduction from gross product revenue for estimated allowances for chargebacks, and discounts and reflects sales related accruals for rebates, coupons, product returns, and certain administrative and service fees. Significant judgments must be made in determining the transaction price for our sales of products related to these adjustments. Other revenue, which is a component of net revenues, includes non-refundable upfront payments and milestone payments under licensing agreements along with grant and rental income. Other income was approximately 2.6% percent of net revenues in 2021, 4.3% in 2020, and 5.8% in 2019 respectively.
Our financial statements reflect accounts receivable allowances of $0.3 million and $1.0 million at December 31, 2021 and 2020, respectively, for chargebacks and early pay discounts for products.
The following table reflects our sales-related accrual activity for the periods indicated below:
2021 2020 2019
Balance, January 1 $ 4,063,435 $ 4,593,167 $ 4,961,631
Current provision 12,127,410 13,453,894 13,081,251
Actual product returns and credits issued (12,510,168) (13,983,626) (13,449,715)
Balance, December 31 $ 3,680,677 $ 4,063,435 $ 4,593,167
The allowances for chargebacks and discounts and sales related accruals for rebates, fee for service and product returns are determined on a product-by-product basis. We establish them using our best estimate at the time of sale based on:
• Each product’s historical experience adjusted to reflect known changes in the factors that impact such allowances;
• The contractual terms with direct and indirect customers;
• Analyses of historical levels of chargebacks, discounts and returns of product;
• Communications with customers;
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• Purchased information about the rate of prescriptions being written and the level of inventory remaining in the distribution channel, if known; and
• Expectations about the market for each product, including any anticipated introduction of competitive products.
Other organizations, such as managed care providers, pharmacy benefit management companies and government agencies, may receive rebates from us based on either negotiated contracts to carry our products or reimbursements for filled prescriptions. These entities are considered our indirect customers. When recognizing a sale to a wholesaler, sales revenues are reduced and accrued liabilities are increased by our estimate of the rebate that may be claimed.
The allowances for chargebacks and accruals for rebates and product returns are the most significant estimates used in the recognition of our revenue from product sales. Of the accounts receivable allowances and our sales related accruals, our accrual for fee for services and product returns represents the majority of the balance. Sales related accrued liabilities for rebates, product returns, service fees, and administrative fees totaled $3.7 million, $4.1 million and $4.6 million as of December 31, 2021, 2020 and 2019, respectively. Of these amounts, our estimated liability for fee for services represented $1.0 million, $1.0 million and $1.4 million, respectively, while our accrual for product returns totaled $1.9 million, $1.7 million and $1.9 million, respectively. If the actual amount of cash discounts, chargebacks, rebates, and product returns differs from the amounts estimated by management, material differences may result from the amount of our revenue recognized from product sales. A change in our rebate estimate of one percentage point would have impacted net sales by approximately $0.4 million for the years ended December 31, 2021, 2020 and 2019. A change in our product return estimate of one percentage point would have impacted net sales by $0.4 million for the years ended December 31, 2021, and 2020 and $0.3 million for the year ended December 31, 2019.
Inventories
We record amounts for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the net realizable value based upon assumptions about remaining shelf life, future demand and market conditions. The estimated inventory obsolescence amounts are calculated based upon specific review of the inventory expiration dates and the quantity on-hand at December 31, 2021, in comparison to our expected inventory usage. The amount of actual inventory obsolescence and unmarketable inventory could differ (either higher or lower) in the near term from the estimated amounts. Changes in our estimates would be recorded in our statement of operations in the period of the change.
Non-current inventories consist of API which typically has an extended life and selected finished good products with extended life longer than one year.
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Income Taxes
We provide for deferred taxes using the asset and liability approach. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to operating loss and tax credit carry-forwards and differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Our principal differences are related to the timing of deductibility of certain items such as depreciation, amortization and expense for options issued to nonemployees. Deferred tax assets and liabilities are measured using management’s estimate of tax rates expected to apply to taxable income in the years in which management believes those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in our results of operations in the period that includes the enactment date.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
The Company’s accounting policy with respect to interest and penalties arising from income tax settlements is to recognize them as part of the provision for income taxes.
Share-Based Payments
We recognize compensation expense for all share-based payments based on the fair value of the award on the date of grant. In addition, incremental compensation expense is recognized upon the modification of equity awards.
We issue restricted stock and incentive stock option awards to employees, directors and consultants. Compensation expense for restricted equity awards granted to employees and directors is generally equal to the fair market value of the underlying common stock on the date of grant. If a sufficient disincentive for nonperformance does not exist at the date of grant, the compensation cost is remeasured at each reporting date at the then-current fair market value of the underlying common stock until the award vests.
Research and Development
We accrue for and expense research and development costs based on estimates of work performed, patient enrollment or fixed-fee-for-services. As work is performed and/or invoices are received, we adjust our estimates and accruals. To date, our accruals have not differed materially from our estimates. Total research and development costs are a function of studies being conducted and will increase or decrease based on the level of activity in any particular year.
Intangible Assets and Goodwill
Intangible assets include product rights, license agreements, other identifiable intangible assets and goodwill associated with the Vibativ acquisition. We assess the impairment of goodwill at least annually. We assess the impairment of identifiable intangible assets subject to amortization whenever events or changes in circumstances indicate the carrying value may not be recoverable. In determining the recoverability of our intangible assets, we make assumptions regarding estimated future cash flows and other factors. If the estimated undiscounted future cash flows do not exceed the carrying value of the intangible assets, we must determine the fair value of the intangible assets. If the fair value of the intangible assets is less than the carrying value, an impairment loss will be recognized in an amount equal to the difference. Fair value is determined through various valuation techniques including quoted market prices, third-party independent appraisals and discounted cash flow models, as considered necessary.
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RESULTS OF OPERATIONS
Year ended December 31, 2021 compared to year ended December 31, 2020
The following table presents the statements of operations for the years ended December 31, 2021 and 2020:
Years ended December 31,
2021 2020 Change
Net revenues $ 35,985,043 $ 37,441,134 $ (1,456,091)
Costs and expenses:
Cost of products sold 8,811,248 8,653,020 158,228
Selling and marketing 15,015,424 14,765,465 249,959
Research and development 5,684,465 5,773,825 (89,360)
General and administrative 9,780,026 10,196,299 (416,273)
Amortization 4,371,300 4,434,120 (62,820)
Total costs and expenses 43,662,463 43,822,729 (160,266)
Operating income (loss) (7,677,420) (6,381,595) (1,295,825)
Interest income 26,081 75,345 (49,264)
Other income 2,187,140 — 2,187,140
Interest expense (98,031) (263,627) 165,596
Income (loss) before income taxes (5,562,230) (6,569,877) 1,007,647
Income tax (expense) benefit (34,891) (55,902) 21,011
Net income (loss) from continuing operations $ (5,597,121) $ (6,625,779) $ 1,028,658
The following table summarizes net revenues for the years presented:
Years ended December 31,
2021 2020 Change
Products:
Kristalose $ 15,993,658 $ 15,567,562 $ 426,096
Vibativ 11,704,062 10,870,990 833,072
Caldolor 4,970,301 5,336,943 (366,642)
Acetadote 850,993 1,874,206 (1,023,213)
Omeclamox-Pak (388,657) 257,088 (645,745)
Vaprisol 1,859,581 1,077,227 782,354
RediTrex 55,321 856,657 (801,336)
Other 939,784 1,600,461 (660,677)
Total net revenues $ 35,985,043 $ 37,441,134 $ (1,456,091)
Net revenues. Net revenues for the year ended December 31, 2021 were approximately $36.0 million compared to $37.4 million for the year ended December 31, 2020, representing a decrease of $1.5 million or 3.9%. As detailed in the table above, net revenue increased during the 2021 period for three of our marketed products: Kristalose, Vibativ and Vaprisol. The improvement was led by Vibativ which delivered $0.8 million in revenue growth, followed by Vaprisol, which delivered an additional $0.8 million during 2021 compared to 2020. Our largest product, Kristalose, contributed $0.4 million in incremental revenue.
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These increases were offset by decreased net sales of Caldolor, Acetadote, Omeclamox-Pak and RediTrex.
We returned the exclusive rights to commercialize Ethyol and Totect in the United States to Clinigen effective January 1, 2020. In exchange for the return of these product license rights and associated non-compete provision, Cumberland received $5 million in financial consideration paid over the two-years following the return date. The final four installments totaling $2.0 million due from Clinigen were recorded during the year ended December 31, 2021, as discontinued operations. We do not incur expenses associated with these payments from Clinigen.
Kristalose revenue increased by $0.4 million, or 2.7%, compared to December 31, 2020 primarily as a result of improved sales volume for the product.
Vibativ revenue was $11.7 million compared to $10.9 million in the prior year. This $0.8 million or 7.7% increase in net revenue was a result of improved sales volume for the product.
Caldolor revenue experienced a 6.9% decrease to $5.0 million during the year ended December 31, 2021 compared to $5.3 million in the same period last year. This decrease in Caldolor revenue for the year ended December 31, 2021 w as the result of lower domestic shipments of the product, significantly impacted by COVID-19 and a reduction in elective surgeries.
Vaprisol revenue increased $0.8 million during the year ended December 31, 2021 compared to the prior year period due primarily to increased sales of the product.
Acetadote revenue included net sales of our branded product and our share of net sales from our Authorized Generic. For the year ended December 31, 2021, the Acetadote net revenue decreased $1.0 million compared to the prior year due to a reduction in sales volume, primarily impacting the Authorized Generic.
Omeclamox-Pak revenue decreased $0.6 million during the year ended December 31, 2021 compared to the prior year. The decrease was due to ownership changes at our packager which resulted in a tempoary out of stock situation.
Reditrex revenue decreased $0.8 million in 2021 compared to 2020. Our wholesale customers initially stocked the product in Q420, but we delayed the launch until October 2021 due to pandemic delays and supply issues.
Cost of products sold . Cost of products sold for the year ended December 31, 2021 were $8.8 million compared to $8.7 million in the prior year. As a percentage of net revenues, cost of products sold were 24.5% compared to 23.1% during the prior year. This change in costs of products sold as a percentage of revenue was attributable to a change in the product sales mix, particularly the increase in sales of Vibativ. The Vibativ inventory sold during the period was acquired and paid for by Cumberland as part of the acquisition of the brand during 2018. The increase in costs of product sold expense was due to the write off of expired inventory.
Selling and marketing . Selling and marketing expense for the year ended December 31, 2021 were $15.0 million compared to $14.8 million in the prior year, which was an increase of $0.2 million. This increase was primarily a result of increases in direct promotional spending.
Research and development . Research and development costs for the year ended December 31, 2021 were $5.7 million, compared to $5.8 million last year, representing a decrease of $0.1 million. A portion of our research and development costs is variable based on the number of trials, study sites, number of patients and the cost per patient in each of our clinical programs. We continue to fund our ongoing clinical initiatives associated with our pipeline products. During 2021, we experienced a decrease in study activity which was partially offset by increases in our annual FDA user fees.
General and administrative . General and administrative expenses for the year ended December 31, 2021 were $9.8 million compared to $10.2 million in the prior year. The decrease resulted from a decrease in legal and professional fees as well as lower stock based compensation during the period partially offset by corporate bonuses.
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The components of the statements of operations discussed above reflect the following impacts from Vibativ:
Financial Impact of Vibativ Years ended December 31,
2021 2020
Net revenue $ 11,704,062 $ 10,870,990
Cost of products sold (1)
4,814,464 3,366,201
Royalty and operating expenses 2,011,458 1,952,348
Vibativ contribution $ 4,878,140 $ 5,552,441
(1) The Vibativ inventory included in the costs of product sold during the period was acquired and paid for by Cumberland as part of the acquisition of the brand during 2018.
Amortization. Amortization expenses represent the ratable use of our capitalized intangible assets including product and license rights, patents, trademarks and patent defense costs. Amortization for 2021 totaled approximately $4.4 million consistent with the prior year.
Income taxes . Income taxes totaled $34,891 for the year ended December 31, 2021 and $55,902 for the year ended December 31, 2020.
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Year ended December 31, 2020 compared to year ended December 31, 2019
The following table presents the statements of operations for the years ended December 31, 2020 and 2019:
Years ended December 31,
2020 2019 Change
Net revenues $ 37,441,134 $ 34,388,295 $ 3,052,839
Costs and expenses:
Cost of products sold 8,653,020 7,421,316 1,231,704
Selling and marketing 14,765,465 15,277,740 (512,275)
Research and development 5,773,825 6,868,480 (1,094,655)
General and administrative 10,196,299 9,974,384 221,915
Amortization 4,434,120 4,134,557 299,563
Total costs and expenses 43,822,729 43,676,477 146,252
Operating income (loss) (6,381,595) (9,288,182) 2,906,587
Interest income 75,345 243,364 (168,019)
Interest expense (263,627) (246,186) (17,441)
Income (loss) before income taxes (6,569,877) (9,291,004) 2,721,127
Income tax (expense) benefit (55,902) 79,316 (135,218)
Net income (loss) from continuing operations $ (6,625,779) $ (9,211,688) $ 2,585,909
The following table summarizes net revenues for the years presented:
Years ended December 31,
2020 2019 Change
Products:
Kristalose $ 15,567,562 $ 12,895,120 $ 2,672,442
Vibativ 10,870,990 8,691,550 2,179,440
Caldolor 5,336,943 5,222,282 114,661
Acetadote 1,874,206 3,824,449 (1,950,243)
Omeclamox-Pak 257,088 837,829 (580,741)
Vaprisol 1,077,227 936,615 140,612
RediTrex 856,657 — 856,657
Other 1,600,461 1,980,450 (379,989)
Total net revenues $ 37,441,134 $ 34,388,295 $ 3,052,839
Net revenues. Net revenues for the year ended December 31, 2020 were approximately $37.4 million compared to $34.4 million for the year ended December 31, 2019, representing an increase of $3.1 million or 8.9%. As detailed in the table above, net revenue increased during the 2020 period for four of our marketed products: Kristalose, Vibativ, Caldolor and Vaprisol. The improvement was led by largest product, Kristalose which delivered $2.7 million in revenue growth, followed by Vibativ, which delivered an additional $2.2 million during 2020 compared to 2019. Our newest product, at the time, RediTrex, contributed $0.9 million in incremental revenue during the year.
These increases were partially offset by decreased net product sales of Acetadote and Omeclamox-Pak.
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We returned the exclusive rights to commercialize Ethyol and Totect in the United States to Clinigen effective January 1, 2020. As a result, the 2019 revenues and expenses associated with the products are combined and reclassified into discontinued operations in our financial statements. In exchange for the return of these product license rights and associated non-compete provision, Cumberland is receiving $5 million in financial consideration paid over the two-years following the return date. The first four installments totaling $3.0 million due from Clinigen were recorded during the year ended December 31, 2020, as discontinued operations. We do not incur expenses associated with these payments from Clinigen.
Kristalose revenue increased by $2.7 million, or 20.7%, compared to December 31, 2019 primarily as a result of improved sales volume for the product.
Vibativ revenue was $10.9 million compared to $8.7 million in the prior year. This $2.2 million or 25.1% increase in net revenue was a result of improved sales volume for the product.
Caldolor revenue experienced a 2.2% increase to $5.3 million during the year ended December 31, 2020 compared to $5.2 million in the same period in the prior year. This increase in Caldolor revenue for the year ended December 31, 2020 w as the result of an increase in international shipments when compared to the prior year, which were partially offset by lower domestic shipments of the product, significantly impacted by COVID-19 and a reduction in elective surgeries.
Vaprisol revenue increased $0.1 million during the year ended December 31, 2020 compared to the prior year period due primarily to increased sales of the product.
Acetadote revenue included net sales of our branded product and our share of net sales from our Authorized Generic. For the year ended December 31, 2020, the Acetadote net revenue decreased $2.0 million compared to the prior year due to a reduction in sales volume, primarily impacting the Authorized Generic.
Omeclamox-Pak revenue decreased $0.6 million during the year ended December 31, 2020 compared to the prior year. The decrease was largely the result of decreased sales volume, which were negatively impacted by COVID-19.
Cost of products sold . Cost of products sold for the year ended December 31, 2020 were $8.7 million compared to $7.4 million in the prior year. As a percentage of net revenues, cost of products sold were 23.1% compared to 21.6% during the prior year. This change in costs of products sold as a percentage of revenue was attributable to a change in the product sales mix, particularly the increase in sales of Vibativ. The Vibativ inventory sold during the period was acquired and paid for by Cumberland as part of the acquisition of the brand during 2018. The increase in costs of product sold expense was also the result of a step up in the fair value of the inventory over the cost to Theravance, as required under purchase accounting rules.
Selling and marketing . Selling and marketing expense for the year ended December 31, 2020 were $14.8 million compared to $15.3 million in the prior year, which was a decrease of $0.5 million. This decrease was primarily a result of decreases in direct promotional spending, meeting costs and travel expenses. These decreases were partially offset by increases in salaries as well as increases in royalty costs associated with growth in Vibativ sales during the period.
Research and development . Research and development costs for the year ended December 31, 2020 were $5.8 million, compared to $6.9 million in the prior year, representing a decrease of $1.1 million. A portion of our research and development costs is variable based on the number of trials, study sites, number of patients and the cost per patient in each of our clinical programs. We continue to fund our ongoing clinical initiatives associated with our pipeline products. During 2020, we experienced a decrease in study activity which was partially offset by increases in our annual FDA user fees.
General and administrative . General and administrative expenses for the year ended December 31, 2020 were $10.2 million compared to $10.0 million in the prior year. The increase resulted from an increase in legal and professional fees partially offset by lower stock based compensation during the period.
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The components of the statements of operations discussed above reflect the following impacts from Vibativ:
Financial Impact of Vibativ Years ended December 31,
2020 2019
Net revenue $ 10,870,990 $ 8,691,550
Cost of products sold (1)
3,366,201 2,716,305
Royalty and operating expenses 1,952,348 1,609,564
Vibativ contribution $ 5,552,441 $ 4,365,681
(1) The Vibativ inventory included in the costs of product sold during the period was acquired and paid for by Cumberland as part of the acquisition of the brand during 2018.
Amortization. Amortization expenses represent the ratable use of our capitalized intangible assets including product and license rights, patents, trademarks and patent defense costs. Amortization for 2020 totaled approximately $4.4 million compared to $4.1 million in the prior year. The increase in expense was attributable to the amortization of additional product rights and capitalized patents.
Income taxes . Income taxes totaled $55,902 for the year ended December 31, 2020 and were an income tax benefit of $79,316 for the year ended December 31, 2019.
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LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash flows provided by our operations, the amounts borrowed and available under our line of credit and the cash proceeds from our initial public offering of common stock that was completed in August 2009. We believe that our internally generated cash flows, existing working capital and our line of credit will be adequate to finance internal growth, finance business development initiatives, and fund capital expenditures for the foreseeable future.
At December 31, 2021 and December 31, 2020, all our investments had original maturities of less than ninety days and as a result were classified as cash equivalents.
The following table summarizes our liquidity and working capital as of the years ended December 31:
2021 2020
Cash and cash equivalents $ 27,040,816 $ 24,753,796
Total cash and cash equivalents $ 27,040,816 $ 24,753,796
Working capital (current assets less current liabilities) $ 26,409,053 $ 24,302,146
Current ratio (multiple of current assets to current liabilities) 2.4 1.9
Revolving line of credit availability $ 5,000,000 $ —
The following table summarizes our net changes in cash and cash equivalents for the years ended December 31:
2021 2020 2019
Cash provided by (used in):
Operating activities $ 6,342,443 $ 5,415,061 $ 3,056,356
Investing activities (501,893) (1,757,789) 2,297,848
Financing activities (3,553,530) (7,116,111) (5,080,529)
Net (decrease) increase in cash and
cash equivalents
$ 2,287,020 $ (3,458,839) $ 273,675
The net $2.3 million increase in cash and cash equivalents for the year ended December 31, 2021 was attributable to cash provided by operating activities partially offset by cash used by investing and financing activities. Cash provided by operating activities of $6.3 million includes a reduction of inventory of $4.8 million, most of which was Vibativ related, and cash payments received of $2.0 million provided by discontinued operations. Cash used by investing activities of $0.5 million was the result of additions to intangibles of $0.3 million, additions to property and equipment of $0.1 million and the payment of $0.2 million to the WHC joint venture. Our financing activities included payments of $2.2 million of contingent consideration for Vibativ and $1.4 million in cash used to repurchase shares of our common stock.
As noted above, we continue to repurchase shares of our common stock, as discussed in Part II, Item 5, "Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities", of this Form 10-K.
The net $3.5 million decrease in cash and cash equivalents for the year ended December 31, 2020 was attributable to cash used by investing and financing activities partially offset by cash provided by operating activities. Cash provided by operating activities of $5.4 million included non-cash expense add backs for depreciation and amortization and share-based compensation expense totaling $5.8 million and changes in our
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working capital that provided net cash of $5.4 million. The cash provided by operating activities included $3.5 million provided by discontinued operations. This increase was partially offset by a net loss for the period of $6.6 million. Cash used by investing activities of $1.8 million was the result of additions to intangibles of $2.0 million, which included the payment of $1.0 million for product rights, additions to property and equipment of $0.1 million and partially offset by proceeds from the surrender of life insurance of $0.5 million. Our financing activities included a net repayment of $3.5 million under our line of credit net, $1.9 million in cash used to repurchase shares of our common stock as well as the $0.8 million used for the repurchase of a portion of CET's shares.
The net $0.3 million increase in cash and cash equivalents for the year ended December 31, 2019 was attributable to cash provided by operating and investing activities offset by cash used in financing activities. Cash provided by operating activities of $3.1 million included non-cash expense add backs for depreciation and amortization and share-based compensation expense totaling $5.9 million. The cash provided by operating activities included $5.5 million provided by discontinued operations. These increases were partially offset by a net loss for the period of $3.5 million. Changes in our working capital provided net cash of $1.6 million. Cash provided by investing activities of $2.3 million included net sales of marketable securities of $8.3 million, partially offset by the $5 million payment to Theravance as part of the acquisition of Vibativ and the addition to intangibles of $0.8 million. Our financing activities included a net repayment of $1.5 million under our line of credit net and $3.5 million in cash used to repurchase shares of our common stock.
Shelf Registration
In November 2017, the Company filed its Shelf Registration on Form S-3 with the SEC associated with the sale of up to $100 million in corporate securities. The Shelf Registration was declared effective in January 2018. It also included an At the Market ("ATM") feature that allows the Company to sell common shares at market prices, along with an agreement with B. Riley FBR Inc. to support such a placement of shares. The Company filed an updated Form S-3 with the SEC in December 2020, which was declared effective in January 2021. The Company intends to continue an ATM feature through B. Riley FBR, Inc. that would allow the Company to issue shares of its common stock. The Company did not issue any shares under this ATM during the year ended December 31, 2021.
On December 27, 2021, the Company filed a related prospectus supplement in connection with the sale and issuance of shares having an aggregate gross sales price of up to $19 million. The Company amended the At the Market Sales Agreement on December 27, 2021, in order to allow the Company to continue using its ATM feature to sell shares at market prices. The Company intends to continue an ATM feature through B. Riley FBR, Inc. which allows the Company to issue shares of its common stock.
Debt Agreement
On December 31, 2021, the Company entered into a Fifth Amendment (“Fifth Amendment”) to the Revolving Credit Note and Sixth Amendment to Revolving Credit Loan Agreement with Pinnacle Bank (the Pinnacle Agreement). The Fifth Amendment increased the principal amount by $5 million to $20 million. On October 28, 2021, the Company entered into a Fourth Amendment to the Revolving Credit Note and Fifth Amendment to Revolving Credit Loan Agreement with Pinnacle Bank. Among other terms, the Fourth Amendment extended the maturity date to October 1, 2024.
Under the Pinnacle Agreement, we were initially subject to one financial covenant, the maintenance of a Funded Debt Ratio. On August 14, 2018, we amended the Pinnacle Agreement ("First Amendment") to replace the single financial covenant with the maintenance of either the Funded Debt Ratio or a Tangible Capital Ratio, as defined in the First Amendment. The Third Amendment modified the definition of the Funded Debt Ratio and the compliance target of the Tangible Capital Ratio. Both Third Amendment modifications were related to the Vibativ transaction. We were in compliance with the Tangible Capital Ratio financial covenant as of December 31, 2021 and we expect to maintain compliance with the Tangible Capital Ratio financial covenant in future periods.
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Paycheck Protection Program
On April 20, 2020, Cumberland received the funding of a loan from Pinnacle Bank in the aggregate amount of $2,187,140 pursuant to the Paycheck Protection Program (the “PPP”) under the Federal Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which was enacted March 27, 2020.
Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act, including qualifying payroll costs, covered rent payments, and covered utilities. From the date of funding we have used the loan amount for such qualifying expenses.
Cumberland 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 recorded the $2,187,140 as a deferred income liability, which was included as a component of other current liabilities on the condensed consolidated balance sheet at December 31, 2020.
In October 2020, Cumberland submitted a request for the loan’s forgiveness. On June 11, 2021, the Company received a formal notice from the SBA that the full amount of the loan was forgiven. The Company accounted for the forgiveness of the PPP loan under IAS 20 and recorded the $2,187,140 as other income.
Minimum Product Purchase Requirements
Our manufacturing and supply agreements do not require minimum annual purchase obligations.
Contractual cash obligations
The following table summarizes our contractual cash obligations as of December 31, 2021:
Payments Due by Year
Contractual obligations (1)
Total
2022 2023 2024 2025 2026 and thereafter
Line of credit (2)
$ 15,000,000 $ — $ — $ 15,000,000 $ — $ —
Estimated interest on debt (2)
1,505,625 547,500 547,500 410,625 — —
Vibativ contingent consideration liability payments (3)
6,515,627 2,353,789 727,489 636,761 469,455 2,328,133
Sancuso upfront purchase payment 13,500,000 13,500,000 — — — —
Sancuso contingent consideration liability payments (4)
5,814,448 1,071,480 1,746,534 1,200,082 375,267 1,421,085
Operating leases (5)
1,111,791 1,019,313 92,478 — — —
Total (1)
$ 43,447,491 $ 18,492,082 $ 3,114,001 $ 17,247,468 $ 844,722 $ 3,749,218
1. The sum of the individual amounts may not agree due to rounding.
2. The line of credit payments represent the estimated unused line of credit payments and the amount due at maturity. The estimated interest on debt represents the interest on the principal outstanding on the line of credit. These amounts are based on the $15.0 million line of credit assuming the current $15.0 million balance outstanding on December 31, 2021 is consistently outstanding through maturity of October 2024. Interest and unused line of credit payments are due and payable quarterly in arrears.
3. The contingent consideration liability represents the fair value of the royalty payments of up to 20% of future net sales as part of the Vibativ acquisition.
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4. The contingent consideration liability represents the fair value of the royalty payments of up to 10% of future net sales as part of the Sancuso acquisition.
5. The Broadwest contractual cash obligation will begin upon commencement in Q4 2022.
OFF-BALANCE SHEET ARRANGEMENTS
During 2021, 2020 and 2019, we did not engage in any off-balance sheet arrangements.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements - Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses,” which changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, companies will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, companies will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities. Companies will have to disclose additional information, including information they use to track credit quality by year of origination for most financing receivables. Companies will apply the ASU’s provisions as a cumulative-effect adjustment, if any, to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.
Related to ASU No. 2016-13 discussed above, in May 2019, the FASB issued ASU 2019-05, "Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief" which provides transition relief for ASU 2016-13 by providing entities with an alternative to irrevocably electing the fair value option for eligible financial assets measured at amortized cost upon adoption of the new credit losses standard. Certain eligibility requirements must be met and the election must be applied on an instrument-by-instrument basis. The election is not available for either available-for-sale or held-to-maturity debt securities. We will adopt both ASU 2016-13 and ASU 2019-05 on January 1, 2023. The adoption of ASU 2016-13 and ASU 2019-05 are not expected to have a material impact on the Company’s consolidated financial statements.
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