CUMBERLAND PHARMACEUTICALS INC 10-Q

Item 1. Financial Statements (Unaudited) CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) September 30, 2022 December 31, 2021 ASSETS Current assets: Cash and cash equivalents $ 19,541,538 $ 27,040,816 Accounts receivable, net 15,232,697 6,877,346 Inventories, net 10,647,529 8,429,882 Prepaid and other current assets 3,738,842 3,339,969 Total current assets 49,160,606 45,688,013 Non-current inventories 7,497,356 9,048,567 Property and equipment, net 490,826 442,635 Intangible assets, net 29,048,043 23,954,475 Goodwill 1,932,876 882,000 Operating lease right-of-use assets 219,850 1,024,200 Other assets 2,426,996 3,419,908 Total assets $ 90,776,553 $ 84,459,798 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 11,510,756 $ 9,640,980 Operating lease current liabilities 229,605 969,677 Other current liabilities 13,565,862 8,668,303 Total current liabilities 25,306,223 19,278,960 Revolving line of credit 17,700,000 15,000,000 Operating lease non-current liabilities — 90,016 Other long-term liabilities 9,279,208 7,488,844 Total liabilities 52,285,431 41,857,820 Commitments and contingencies Equity: Shareholders’ equity: Common stock— no par value; 100,000,000 shares authorized; 14,436,583 and 14,742,754 shares issued and outstanding as of September 30, 2022 and December 31, 2021 , respectively 47,532,375 48,452,906 Retained earnings (deficit) ( 8,768,112 ) ( 5,638,600 ) Total shareholders’ equity 38,764,263 42,814,306 Noncontrolling interests ( 273,141 ) ( 212,328 ) Total equity 38,491,122 42,601,978 Total liabilities and equity $ 90,776,553 $ 84,459,798 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 1 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Net revenues $ 11,413,072 $ 8,072,540 $ 32,887,269 $ 27,665,182 Costs and expenses: Cost of products sold 2,224,443 1,328,027 6,468,212 5,486,005 Selling and marketing 4,110,397 3,800,288 13,281,511 11,709,445 Research and development 1,714,254 1,453,873 5,283,083 4,071,638 General and administrative 2,166,118 2,039,799 6,672,442 6,367,438 Amortization 1,486,448 1,013,948 4,609,146 3,354,080 Total costs and expenses 11,701,660 9,635,935 36,314,394 30,988,606 Operating income (loss) ( 288,588 ) ( 1,563,395 ) ( 3,427,125 ) ( 3,323,424 ) Interest income 21,602 7,394 52,709 19,411 Other income — — — 2,187,140 Other income - gain on insurance proceeds — — 611,330 — Interest expense ( 149,340 ) ( 20,021 ) ( 406,539 ) ( 70,297 ) Income (loss) from continuing operations before income taxes ( 416,326 ) ( 1,576,022 ) ( 3,169,625 ) ( 1,187,170 ) Income tax (expense) benefit ( 6,900 ) ( 7,458 ) ( 20,700 ) ( 22,375 ) Net income (loss) from continuing operations ( 423,226 ) ( 1,583,480 ) ( 3,190,325 ) ( 1,209,545 ) Discontinued operations — 496,787 — 1,491,004 Net income (loss) ( 423,226 ) ( 1,086,693 ) ( 3,190,325 ) 281,459 Net loss at subsidiary attributable to noncontrolling interests 14,587 31,415 60,813 58,651 Net income (loss) attributable to common shareholders $ ( 408,639 ) $ ( 1,055,278 ) $ ( 3,129,512 ) $ 340,110 Earnings (loss) per share attributable to common shareholders - Continuing operations - basic $ ( 0.03 ) $ ( 0.10 ) $ ( 0.21 ) $ ( 0.08 ) - Discontinued operations - basic — 0.03 — 0.10 $ ( 0.03 ) $ ( 0.07 ) $ ( 0.21 ) $ 0.02 - Continuing operations - diluted $ ( 0.03 ) $ ( 0.10 ) $ ( 0.21 ) $ ( 0.08 ) - Discontinued operations - diluted — 0.03 — 0.10 $ ( 0.03 ) $ ( 0.07 ) $ ( 0.21 ) $ 0.02 Weighted-average shares outstanding - basic 14,477,478 14,880,887 14,618,975 14,939,919 - diluted 14,477,478 14,880,887 14,618,975 15,139,904 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 2 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) Nine months ended September 30, 2022 2021 Cash flows from operating activities: Net income (loss) $ ( 3,190,325 ) $ 281,459 Discontinued operations — 1,491,004 Net income (loss) from continuing operations ( 3,190,325 ) ( 1,209,545 ) Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities: Depreciation and amortization expense 4,816,630 3,529,245 Share-based compensation 320,598 517,081 Decrease in non-cash contingent consideration ( 1,051,908 ) ( 632,646 ) Decrease (increase) in cash surrender value of life insurance policies over premiums paid 708,293 ( 52,070 ) Increase in noncash interest expense 7,608 33,943 Gain on forgiveness of debt — ( 2,187,140 ) Gain on receivable of life insurance policy proceeds ( 611,330 ) — Net changes in assets and liabilities affecting operating activities: Accounts receivable ( 8,184,656 ) 2,527,183 Inventories 1,338,881 2,555,393 Other current assets and other assets 4,355,396 1,627,350 Accounts payable and other current liabilities 8,778,631 ( 2,873,596 ) Other long-term liabilities ( 2,472,453 ) ( 943,439 ) Net cash provided by operating activities from continuing operations 4,815,365 2,891,759 Discontinued operations — 1,491,004 Net cash provided by operating activities 4,815,365 4,382,763 Cash flows from investing activities: Additions to property and equipment ( 255,676 ) ( 94,485 ) Settlement of patent litigation 21,757 — Life insurance policy proceeds received 877,597 — Note receivable investment funding — ( 200,000 ) Cash paid for acquisitions ( 13,500,000 ) — Additions to intangible assets ( 177,362 ) ( 180,613 ) Net cash used in investing activities ( 13,033,684 ) ( 475,098 ) Cash flows from financing activities: Borrowings on line of credit 46,700,000 45,000,000 Repayments on line of credit ( 44,000,000 ) ( 45,000,000 ) Cash payment of contingent consideration ( 1,117,576 ) ( 1,792,573 ) Repurchase of common shares ( 863,383 ) ( 1,025,657 ) Net cash provided by (used in) financing activities 719,041 ( 2,818,230 ) Net increase (decrease) in cash and cash equivalents ( 7,499,278 ) 1,089,435 Cash and cash equivalents at beginning of period $ 27,040,816 $ 24,753,796 Cash and cash equivalents at end of period $ 19,541,538 $ 25,843,231 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 3 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Condensed Consolidated Statements of Equity (Unaudited) Common stock Retained earnings (deficit) Noncontrolling interests Total equity Shares Amount Balance, December 31, 2020 14,988,429 $ 49,121,523 $ ( 2,131,013 ) $ ( 117,116 ) $ 46,873,394 Share-based compensation 187,759 162,960 — — 162,960 Repurchase of common shares ( 91,724 ) ( 303,088 ) — — ( 303,088 ) Net income (loss) — — 166,828 ( 22,167 ) 144,661 Balance, March 31, 2021 15,084,464 $ 48,981,395 $ ( 1,964,185 ) $ ( 139,283 ) $ 46,877,927 Balance, March 31, 2021 15,084,464 $ 48,981,395 $ ( 1,964,185 ) $ ( 139,283 ) $ 46,877,927 Share-based compensation — 191,954 — — 191,954 Repurchase of common shares ( 158,405 ) ( 484,965 ) — — ( 484,965 ) Net income (loss) — — 1,228,560 ( 5,069 ) 1,223,491 Balance, June 30, 2021 14,926,059 $ 48,688,384 $ ( 735,625 ) $ ( 144,352 ) $ 47,808,407 Balance, June 30, 2021 14,926,059 $ 48,688,384 $ ( 735,625 ) $ ( 144,352 ) $ 47,808,407 Share-based compensation 875 162,167 — — 162,167 Repurchase of common shares ( 76,408 ) ( 237,616 ) — — ( 237,616 ) Net loss — — ( 1,055,278 ) ( 31,415 ) ( 1,086,693 ) Balance, September 30, 2021 14,850,526 $ 48,612,935 $ ( 1,790,903 ) $ ( 175,767 ) $ 46,646,265 Common stock Retained earnings (deficit) Noncontrolling interests Total equity Shares Amount Balance, December 31, 2021 14,742,754 $ 48,452,906 $ ( 5,638,600 ) $ ( 212,328 ) $ 42,601,978 Share-based compensation 162,155 159,901 — — 159,901 Repurchase of common shares ( 174,149 ) ( 566,043 ) — — ( 566,043 ) Net loss — — ( 1,385,253 ) ( 17,180 ) ( 1,402,433 ) Balance, March 31, 2022 14,730,760 $ 48,046,764 $ ( 7,023,853 ) $ ( 229,508 ) $ 40,793,403 Balance, March 31, 2022 14,730,760 $ 48,046,764 $ ( 7,023,853 ) $ ( 229,508 ) $ 40,793,403 Share-based compensation 2,250 ( 27,753 ) — — ( 27,753 ) Repurchase of common shares ( 83,317 ) ( 196,692 ) — — ( 196,692 ) Net loss — — ( 1,335,620 ) ( 29,046 ) ( 1,364,666 ) Balance, June 30, 2022 14,649,693 $ 47,822,319 $ ( 8,359,473 ) $ ( 258,554 ) $ 39,204,292 Balance, June 30, 2022 14,649,693 $ 47,822,319 $ ( 8,359,473 ) $ ( 258,554 ) $ 39,204,292 Return of common shares ( 180,000 ) ( 399,600 ) — — ( 399,600 ) Share-based compensation — 188,449 — — 188,449 Repurchase of common shares ( 33,110 ) ( 78,793 ) — — ( 78,793 ) Net loss — — ( 408,639 ) ( 14,587 ) ( 423,226 ) Balance, September 30, 2022 14,436,583 $ 47,532,375 $ ( 8,768,112 ) $ ( 273,141 ) $ 38,491,122 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 4 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (1) ORGANIZATION AND BASIS OF PRESENTATION Cumberland Pharmaceuticals Inc. (“Cumberland,” the “Company,” or as used in the context of “we,” “us,” or “our”) is a specialty pharmaceutical company focused on the acquisition, development and commercialization of branded prescription pharmaceutical products. The Company's primary target markets are hospital acute care, oncology, gastroenterology and rheumatology. These medical specialties are characterized by relatively concentrated prescriber bases that the Company believes can be served 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, oncology and field sales forces in the United States. We are continuing to build a network of international partners to register and provide our 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 control and manufacturing professionals. The Company works closely with its hospital, field and oncology sales teams and its third-party distribution partners to make its products available in the United States. In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company have been prepared on a basis consistent with the December 31, 2021, audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly present the information set forth herein. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (the “SEC”), and certain information and disclosures have been condensed or omitted as permitted by the SEC for interim period presentation. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report on Form 10-K”). The results of operations for the three and nine months ended September 30, 2022, are not necessarily indicative of the results to be expected for the entire fiscal year or any future period. Discontinued Operations As discussed further in Note 10, during May 2019, Cumberland entered into a Dissolution Agreement ("Dissolution Agreement") with Clinigen Healthcare Limited ("Clinigen") in which the Company returned the exclusive rights to commercialize Ethyol ® and Totect ® in the United States to Clinigen. Under the terms of the Dissolution Agreement, Cumberland is no longer involved directly or indirectly with the distribution, marketing and promotion of either Ethyol or Totect or any competing products following December 31, 2019. The Company's exit from Ethyol and Totect meets the accounting criteria to be reported as discontinued operations and the discontinued operating results have been presented in the financial statements and footnotes to reflect the discontinued status of Ethyol and Totect. Refer to Note 10, for additional information. 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 its 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. 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 impacted as fewer patients sought elective surgeries and our access to medical facilities was substantially limited. During 2020, 2021 and the nine months ended September 30, 2022, we carefully monitored our supply chain, including the flow of raw materials into the plants that manufacture our products as well as the batches of finished product emerging from those facilities. Several of our brands were negatively impacted by the lockdowns and postponement of physician office visits and elective procedures. However, we are fortunate to have a diversified product portfolio, with other brands delivering a strong performance during the pandemic. 5 Cumberland relies on third-party organizations around the world to supply components, manufacture and distribute its products. The Company is aware that it may experience revenue loss, supply interruptions, time delays and incur unplanned expenses as a result of the impact of the ongoing COVID-19 pandemic. The Company continues to monitor the COVID-19 pandemic situation both in the U.S. and internationally in order to maintain its 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. Recent Accounting Guidance Recent Accounting Pronouncements - Not Yet Adopted In June 2016, the Financial Accounting Standards Board ("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 (deficit) 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 elect the fair value option for eligible financial assets measured at amortized cost upon adoption of the new credit losses standard. Certain eligibility requirements must be met and the election must be applied on an instrument-by-instrument basis. The election is not available for either available-for-sale or held-to-maturity debt securities. The Company will adopt both ASU 2016-13 and ASU 2019-05 on January 1, 2023. The adoption of ASU 2016-13 and ASU 2019-05 are not expected to have a material impact on the Company’s consolidated financial statements. Accounting Policies: Use of Estimates The preparation of the condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates under different assumptions and conditions. The Company's most significant estimates include: (1) its allowances for chargebacks and accruals for rebates and product returns, (2) the allowances for obsolescent or unmarketable inventory and (3) valuation of contingent consideration liabilities associated with business combinations. Operating Segments The Company has one operating segment which is specialty pharmaceutical products. Management has chosen to organize the Company based on the type of products sold. Operating segments are identified as components of an enterprise about which separate discrete financial information is evaluated by the chief operating decision maker, or decision-making group, in making decisions regarding resource allocation and assessing performance. The Company, which uses consolidated financial information in determining how to allocate resources and assess performance, has concluded that our specialty pharmaceutical products compete in similar economic markets and similar circumstances. Substantially all of the Company’s assets are located in the United States and total revenues are primarily attributable to U.S. customers. 6 (2) EARNINGS (LOSS) PER SHARE The following table reconciles the numerator and denominator used to calculate diluted earnings (loss) per share for the three and nine months ended September 30, 2022 and 2021: Three months ended September 30, 2022 2021 Numerator: Net income (loss) from continuing operations $ ( 423,226 ) $ ( 1,583,480 ) Discontinued operations — 496,787 Net income (loss) ( 423,226 ) ( 1,086,693 ) Net loss at subsidiary attributable to noncontrolling interest 14,587 31,415 Net income (loss) attributable to common shareholders $ ( 408,639 ) $ ( 1,055,278 ) Denominator: Weighted-average shares outstanding – basic 14,477,478 14,880,887 Dilutive effect of other securities — — Weighted-average shares outstanding – diluted 14,477,478 14,880,887 Nine months ended September 30, 2022 2021 Numerator: Net income (loss) from continuing operations $ ( 3,190,325 ) $ ( 1,209,545 ) Discontinued operations — 1,491,004 Net income (loss) ( 3,190,325 ) 281,459 Net loss at subsidiary attributable to noncontrolling interest 60,813 58,651 Net income (loss) attributable to common shareholders $ ( 3,129,512 ) $ 340,110 Denominator: Weighted-average shares outstanding – basic 14,618,975 14,939,919 Dilutive effect of other securities — 199,985 Weighted-average shares outstanding – diluted 14,618,975 15,139,904 As of September 30, 2022 and 2021, restricted stock awards and options to purchase 233,750 and 158,900 shares of common stock, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect would be antidilutive. 7 (3) REVENUES Product Revenues The Company accounts for revenues from contracts with customers under ASC 606, which became effective January 1, 2018. The Company’s net revenues consisted of the following for the three and nine months ended September 30, 2022 and 2021: Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Products: Kristalose $ 3,903,305 $ 4,012,746 $ 11,418,673 $ 12,286,729 Sancuso 3,960,652 — 10,756,411 — Vibativ 1,909,750 1,896,584 6,008,005 8,799,891 Caldolor 921,811 1,255,669 3,075,355 3,734,273 Vaprisol ( 436 ) 325,774 ( 252,059 ) 1,861,130 Acetadote 99,792 368,733 337,685 638,704 Omeclamox-Pak 35,600 22,689 31,925 ( 451,683 ) RediTrex 85,809 11,459 238,712 ( 13,291 ) Other revenue 496,789 178,886 1,272,562 809,429 Total net revenues $ 11,413,072 $ 8,072,540 $ 32,887,269 $ 27,665,182 The Omeclamox-Pak revenue for the third quarter of 2022 and 2021 was the result of Cumberland currently being out of commercial inventory of this product. The packager for our Omeclamox-Pak product encountered financial difficulties due to the impact of COVID-19. They are under new management and are in the process of a reorganization. Discussions with the packager are ongoing. In the third quarter of 2022, the amounts noted were normal adjustments by channel partners. Net revenue was positively impacted by product return adjustments. With regard to Vaprisol, we are in the process of transitioning to a new manufacturer, who was issued an FDA Form 483 in the second quarter of 2022. Once these 483 related issues are satisfactorily resolved by the manufacturing plant, we will then resubmit our application to the FDA for approval. Net revenue was negatively impacted by product return adjustments. Other Revenues The Company has agreements with international partners for commercialization of the Company's products with associated payments included in other revenues. Those agreements provide that each of the partners are responsible for seeking regulatory approvals for the product, and following approval, each partner will be responsible for the ongoing distribution and sales in the respective international territories. The Company provides a dossier for product registration and maintains responsibility for the relevant intellectual property. Cumberland is typically entitled to receive a non-refundable, up-front payment at the time each agreement is executed as consideration for the product dossier and for the rights to the distinct intellectual property rights in the respective international territory. These agreements also typically provide for additional payments upon a partner’s achievement of a defined regulatory approval and sales milestones. The Company may also be entitled to receive royalties on future sales of the products and a transfer price on supplies. The contractual payments associated with the partner’s achievement of regulatory approvals, sales milestones and royalties on future sales are recognized as revenue upon occurrence, or at such time that the Company has a high degree of confidence that the revenue would not be reversed in a subsequent period. During the three and nine months ended September 30, 2022, we recorded $ 0.1 million and $ 0.6 million, respectively, for milestone and international licensee payments as part of other revenue. Other revenues also include funding from federal grant programs including those secured from the FDA and from those secured by Cumberland Emerging Technologies Inc. ("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 federal grant programs totaled approximately $ 0.2 million and $ 0.02 million for the three months ended September 30, 2022 and 2021, respectively, and approximately $ 0.3 million each for the nine months ended September 30, 2022 and 2021. 8 (4) INVENTORIES The Company works closely with third parties to manufacture and package finished goods for sale. Based on the arrangements with the manufacturer or packager, the Company will either take title to the finished goods at the time of shipment or at the time of arrival at the Company’s warehouses. The Company then holds such goods in inventory until distribution and sale. These finished goods inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out method. The Company 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 September 30, 2022 and December 31, 2021, the Company had recognized and maintained cumulative net realizable value charges for potential obsolescence and discontinuance losses of approximately $ 1.8 million and $ 1.4 million, respectively. The Company is responsible for the purchase of the active pharmaceutical ingredient (“API”) for Kristalose and maintains the inventory at third-party packagers. As that 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 at September 30, 2022 and December 31, 2021. Consigned inventory represents Authorized Generic inventory stored with our partner until shipment. As part of the Vibativ acquisition, Cumberland acquired API and work in process inventories of $ 15.6 million that were all initially classified as non-current inventories at the date of acquisition. For the Sancuso acquisition, Cumberland acquired $ 3.0 million of work in progress non-current inventory. At September 30, 2022 and December 31, 2021, total non-current inventory, including Vibativ, Sancuso and our clinical trial drug ifetroban, was $ 7.5 million and $ 9.0 million, respectively. The Company had no Vibativ finished goods included in non-current inventory at September 30, 2022, and $ 0.5 million included at December 31, 2021. The Company also has obtained $ 0.2 million and $ 0.4 million of finished goods in non-current inventory for API related to its ifetroban clinical initiatives at September 30, 2022 and December 31, 2021, respectively. At September 30, 2022 and December 31, 2021 the Company's net inventories consisted of the following: September 30, 2022 December 31, 2021 Raw materials and work in process $ 11,738,972 $ 12,374,983 Consigned inventory 128,168 164,378 Finished goods 6,277,745 4,939,088 Total inventories 18,144,885 17,478,449 less non-current inventories ( 7,497,356 ) ( 9,048,567 ) Total inventories classified as current $ 10,647,529 $ 8,429,882 (5) LEASES Cumberland’s significant operating leases include the lease of approximately 25,500 square feet of office space in Nashville, Tennessee for its corporate headquarters. This lease expired in October 2022. The Company's operating leases also include the lease of approximately 14,200 square feet of wet laboratory and office space in Nashville, Tennessee by CET, our majority-owned subsidiary, where it operates the CET Life Sciences Center. This lease currently expires in April 2023. Operating lease liabilities are recorded as the present value of remaining lease payments not yet paid for the lease term discounted using the incremental borrowing rate associated with each lease. Operating lease right-of-use assets represent operating lease liabilities adjusted for lease incentives and initial direct costs. As Cumberland’s leases do not contain implicit borrowing rates, the incremental borrowing rates were calculated based on information available at January 1, 2019. Incremental borrowing rates reflect the Company’s estimated interest rates for collateralized borrowings over similar lease terms. The weighted-average incremental borrowing rate used to discount the present value of the remaining lease payments is 7.42 %. The weighted-average remaining lease term at September 30, 2022 is 0.4 years. 9 On November 15, 2021, Cumberland entered into a lease, pursuant to which the Company will lease approximately 16,631 rentable square feet of space (the “Leased Premise”) at the new Broadwest development located in Nashville, Tennessee with 1600 West End Avenue Partners, LLC. The Leased Premise will serve as the Company's new corporate headquarters. The initial term of the Lease is one hundred fifty-seven ( 157 ) months, with two consecutive options to renew for a period of five years each. The Broadwest lease calls for monthly base rent, operating expense and parking payments. In year 1, the base rent starts at $ 33.06 per square foot of rentable area. The lease also provides for several months of free rent plus a tenant improvement allowance. Cumberland received approval for its building permit and began construction on the Leased Premise in June 2022. On October 25, 2022, Cumberland received final building approval and a certificate of occupancy for the Leased Premise. Lease Position At September 30, 2022 and December 31, 2021, the Company's lease assets and liabilities were as follows: Right-of-Use Assets September 30, 2022 December 31, 2021 Operating lease right-of-use assets $ 219,850 $ 1,024,200 Lease Liabilities September 30, 2022 December 31, 2021 Operating lease current liabilities $ 229,605 $ 969,677 Operating lease noncurrent liabilities — 90,016 Total $ 229,605 $ 1,059,693 As of September 30, 2022, cumulative future minimum sublease income under non-cancelable operating subleases totals approximately $ 0.2 million and will be paid through the leases ending in October 2022 and April 2023. Excluding the Broadwest lease agreement, 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 Lease Liabilities at September 30, 2022 Operating Leases 2022 150,533 2023 92,477 Total lease payments 243,010 Less: Interest 13,405 Present value of lease liabilities $ 229,605 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 were as follows: Nine months ended September 30, 2022 2021 Rent expense $ 861,398 $ 910,975 Sublease income $ 424,632 $ 526,868 10 (6) SHAREHOLDERS’ EQUITY AND DEBT Share repurchases Cumberland currently has a share repurchase program to repurchase up to $ 10 million of its common stock pursuant to Rule 10b-18 of the Securities Exchange Act of 1934. In January 2019, the Company's Board of Directors established the current $ 10 million repurchase program to replace the prior authorizations. During the nine months ended September 30, 2022 and September 30, 2021, the Company repurchased 290,576 shares and 326,537 shares of common stock for approximately $ 0.8 million and $ 1.0 million, respectively. At September 30, 2022, approximately $ 3.9 million of common shares was left to repurchase under this program. Share purchases and sales During the Company's March 2022 trading window, several members of Cumberland's Board of Directors entered into share purchase agreements of the Company's stock pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934. These purchases are designed to increase ownership in the Company by the members of the Board. These purchases began in April 2022 and as of September 30, 2022, a total of 27,698 shares have been purchased through this trading plan. Share Sales In November 2017, Cumberland filed a Shelf Registration on Form S-3 with the SEC associated with the sale of up to $ 100 million in corporate securities. The Shelf Registration was declared effective in January 2018. It also included an At the Market ("ATM") feature that allowed 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. 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 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 an ATM during the nine months ended September 30, 2022 or September 30, 2021. Restricted Share Grants and Incentive Stock Options During the nine months ended September 30, 2022 and September 30, 2021, the Company issued 65,225 shares and 36,850 shares of restricted stock to employees, advisors and directors, respectively. Restricted stock issued to employees and advisors generally cliff-vests on the fourth anniversary of the date of grant and for directors on the one-year anniversary of the date of grant. During the nine months ended September 30, 2022 and 2021, the Company also issued 172,300 and 174,800 incentive stock options, respectively, to employees that cliff-vest on the fourth anniversary of the date of grant, that are set to expire in 2032 and 2031, respectively. Stock compensation expense is presented as a component of general and administrative expense in the condensed consolidated statements of operations. For the nine months ended September 30, 2022, we recorded a credit of $ 0.1 million to share-based compensation related to the forfeiture of unvested restricted stock awards. Debt Agreement On September 29, 2022, the Company entered into the Ninth Amendment to the Revolving Credit Loan Agreement with Pinnacle Bank (as amended, the "Pinnacle Agreement") to update the Funded Debt Ratio to mean the ratio of (i) Funded Debt less the amount of Unrestricted Cash in excess of $ 8,500,000 , to (ii) EBITDA, as determined at the end of each fiscal quarter on a rolling four ( 4 ) quarter basis. For the quarter ended September 30, 2022, we were in compliance with the Funded Debt Ratio financial covenant. On June 30, 2022, the Company entered into the Eighth Amendment to the Revolving Credit Loan Agreement with Pinnacle Bank permitting the Maximum Funded Debt Ratio to be calculated on a rolling four-quarter basis to be no more than 3.00 to 1.00 for the second and third quarters of 2022 and 2.50 to 1.00 for each quarter thereafter. On March 31, 2022, the Company and Pinnacle Bank entered into a Seventh Amendment to the Revolving Credit Loan Agreement to revise and update the Maximum Funded Debt Ratio financial covenant and to delete from the Pinnacle Agreement the Funded Debt to Tangible Capital Ratio financial covenant. These changes were made to more appropriately reflect the impact from the Sancuso acquisition. On December 31, 2021, the Company and Pinnacle Bank entered into the Fifth Amendment to the Revolving Credit Note and the Sixth Amendment to the Revolving Credit Loan Agreement in order to increase the principal amount of the Note from $ 15 million to $ 20 million. 11 On October 28, 2021, the Company and Pinnacle Bank entered into a Fourth Amendment to the Revolving Credit Note and Fifth Amendment to the Revolving Credit Loan Agreement to renew the Revolving Credit Loan. The original Pinnacle Agreement was dated July 2017. Beginning on August 14, 2018, and continuing until October 7, 2020, the Company and Pinnacle Bank entered into a series of amendments to extend and update the Revolving Credit Note and Revolving Credit Agreement. The Fifth Amendment extends the maturity date three years through October 1, 2024. The interest rate on the Pinnacle Agreement is based on LIBOR plus an interest rate spread. The current pricing under the Pinnacle Agreement provides for an interest rate spread of 1.75 % to 2.75 % above LIBOR with a minimum LIBOR of 0.90 %. The applicable interest rate under the Pinnacle Agreement was 5.25 % at September 30, 2022. 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. The parties have agreed on a process to determine a new interest rate benchmark at the point the LIBOR rate is expected to be discontinued over the next 12 to 24 months. As of September 30, 2022 and December 31, 2021, the Company had $ 17.7 million and $ 15.0 million, respectively, in borrowings outstanding under its revolving credit facility. Borrowings under the line of credit are collateralized by substantially all of our assets. 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 a $ 0.2 million convertible note, which was funded during the first quarter of 2021. The joint venture will seek additional future capital from additional investors and has entered into exclusive option agreements to license product candidates from both Cumberland Pharmaceuticals Inc. and Cumberland Emerging Technologies Inc. (7) INCOME TAXES As of September 30, 2022, the Company has approximately $ 56.6 million in federal net operating loss carryforwards including approximately $ 44.1 million of net operating loss carryforwards resulting from the exercise of nonqualified stock options. These have historically been used to significantly offset income tax obligations. The Company expects it will continue to pay minimal income taxes during 2022 and beyond, through the continued utilization of these net operating loss carryforwards, on any taxable income generated from our operations. The Company does not allocate any portion of its income tax expense (benefit) to discontinued operations. (8) OTHER INCOME The Company realized a $ 0.6 million gain in the second quarter of 2022 from insurance proceeds for a Company owned executive life insurance policy. (9) COLLABORATIVE AGREEMENTS Cumberland is a party to several collaborative arrangements with research institutions to identify and pursue promising pharmaceutical product candidates. The funding for these programs is primarily provided through Federal Small Business Administration (SBIR/STTR) and other grant awards. The Company has determined that these collaborative agreements, with the exception of the collaborative payment received related to RediTrex, 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. 12 (10) ADDITIONS AND RETURN OF PRODUCT RIGHTS Vibativ During November 2018, the Company closed on an agreement with Theravance Biopharma ("Theravance") to acquire the global responsibility for Vibativ including the marketing, distribution, manufacturing and regulatory activities associated with the brand. Vibativ is a patented, Food and Drug Administration ("FDA") approved injectable anti-infective for the treatment of certain serious bacterial infections including hospital-acquired and ventilator-associated bacterial pneumonia and complicated skin and skin structure infections. It addresses a range of Gram-positive bacterial pathogens, including those that are considered difficult-to-treat and multidrug-resistant. Cumberland has accounted for the transaction as a business combination in accordance with ASC 805 and the product sales are included in the results of operations subsequent to the acquisition date. The Company made an upfront payment of $ 20.0 million at the closing of the transaction and a $ 5.0 million milestone payment in early April 2019. In addition, Cumberland has agreed to pay a royalty of up to 20 % of on-going net sales of the product after the $ 2.5 million threshold is met. The future royalty payments were required to be recognized at their acquisition-date fair value as a contingent consideration liability, as part of the contingent consideration transferred in the business combination. Cumberland prepared the valuations of the contingent consideration liability utilizing significant unobservable inputs. As a result, the valuation is classified as Level 3 fair value measurement. The following table presents the changes in the fair value of the contingent consideration liability that is remeasured on a recurring basis. The contingent consideration earned and accrued in operating expenses is paid to Theravance quarterly. Balance at December 31, 2021 $ 6,515,627 Cash payment of royalty during the period ( 777,855 ) Change in fair value of contingent consideration included in operating expenses ( 1,550,241 ) Contingent consideration earned and accrued in operating expenses 631,608 Balance at September 30, 2022 $ 4,819,139 The contingent consideration liability of $ 4.8 million was accounted for as $ 1.9 million of other current liabilities and $ 3.0 million of other long-term liabilities on the condensed consolidated balance sheet as of September 30, 2022. 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 injectable 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. During December 2020, Cumberland introduced RediTrex and the launch that took place in late 2021 resulted in a $ 1.0 million milestone payment due to Nordic. 13 Effective July 12, 2022, the Company entered into an amendment to our agreement with Nordic whereby they may assume responsibility for RediTrex marketing authorization in the U.S. and the opportunity to commercialize the product in the U.S. after March 31, 2023. Cumberland will continue to distribute and support the product until then. In accordance with the terms of the amendment, Nordic has agreed to return the 180,000 restricted Cumberland shares we previously issued to Nordic which will be cancelled, refund to Cumberland the milestone payment of $ 1.0 million we made associated with the brand's U.S. approval and issue a credit note in favor of the Company in the amount of $ 1.0 million for the unpaid milestone payment due from us for launch of the product line. The companies will cooperate on any transition and Cumberland will receive a long-term royalty on any Nordic sales of the product. Sancuso Acquisition On January 3, 2022, Cumberland acquired the U.S. rights to the FDA-approved oncology-supportive care medicine Sancuso from Kyowa Kirin, Inc., the U.S. affiliate of Japan-based Kyowa Kirin Co., Ltd. Sancuso is the first and only FDA-approved prescription patch for the prevention of nausea and vomiting in patients receiving certain types of chemotherapy treatment. The active drug in Sancuso, granisetron, slowly dissolves in the thin layer of adhesive that sticks to the patient’s skin and is released into their bloodstream over several days, working continuously to prevent chemotherapy-induced nausea and vomiting (“CINV”). It is applied 24 to 48 hours before receiving chemotherapy and can prevent CINV for up to five consecutive days. Alternative oral treatments must be taken several times (day and night) to deliver the same therapeutic doses. Cumberland acquired U.S. rights to Sancuso and assumed full commercial responsibility for the product in the U.S. – including its marketing, promotion, distribution, manufacturing and medical support activities. Cumberland has accounted for the transaction as a business combination in accordance with ASC 805 and the product sales are included in the results of operations subsequent to the acquisition date. The Company made an upfront payment of $ 13.5 million at the closing of the transaction. The Agreement calls for milestone payments of up to $ 3.5 million based on the attainment of various approvals and sales performance. The Company believes that $ 1.5 million of the milestone payments will be earned and paid. In addition, Cumberland has agreed to pay a royalty of up to 10 % of on-going net sales of the product. The future royalty payments were required to be recognized at their acquisition-date fair value as a contingent consideration liability, as part of the contingent consideration transferred in the business combination. Cumberland has prepared a preliminary valuation of the contingent consideration liability utilizing significant unobservable inputs. As a result, the valuation is classified as Level 3 fair value measurement. The acquisition was funded by cash and the Company's revolving credit facility. The Company is working with an outside consultant firm to finalize the Sancuso valuation of the transaction which will be completed later this year. The estimates of fair value for the more significant assets and liabilities assumed were as follows: prepaid expenses $ 0.3 million, inventory $ 5.2 million, goodwill $ 1.0 million, intangible assets $ 12.1 million, milestone payable $ 1.2 million and contingent liability $ 3.9 million. The following table presents the changes in the fair value of the contingent consideration liability that is remeasured on a recurring basis. Balance at January 3, 2022 $ 3,946,716 Cash payment of royalty during the period ( 339,721 ) Change in fair value of contingent consideration included in operating expenses 498,333 Contingent consideration earned and accrued in operating expenses 430,317 Balance at September 30, 2022 $ 4,535,645 The contingent consideration liability earned and accrued in operating expenses is paid to Kyowa Kirin quarterly. The contingent consideration liability of $ 4.5 million was accounted for as $ 1.9 million of current liabilities and $ 2.6 million of other long-term liabilities on the condensed consolidated balance sheet as of September 30, 2022. 14 Ethyol and Totect In 2016, Cumberland entered into an agreement with 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. Early in 2019, Cumberland announced a strategic review of the Company's brands, capabilities, and international partners. This review followed an accelerated business development initiative, which resulted in a series of transactions. During May 2019, Cumberland entered into the Dissolution Agreement with Clinigen in which the Company returned the exclusive rights to commercialize Ethyol and Totect in the United States to Clinigen. Under the final terms of the Dissolution Agreement, Cumberland was no longer responsible for the distribution, marketing and promotion of either Ethyol or Totect 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 received $ 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 2020 and the final four installments totaling $ 2.0 million during 2021 , as discontinued operations. The exit from Ethyol and Totect met 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 dissolution payments from Clinigen are reflected as revenue from discontinued operations. The Company did not incur expenses associated with these payments from Clinigen. Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Revenues $ — $ 496,787 $ — $ 1,491,004 Income from discontinued operations $ — $ 496,787 $ — $ 1,491,004 15