CUMBERLAND PHARMACEUTICALS INC 10-K

Item 9A. Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer, with the participation of other members of management, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of December 31, 2022. Based on such evaluations, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective (at the reasonable assurance level) to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management’s report on internal control over financial reporting is included on page F-1 of this annual report on Form 10-K, and incorporated herein by reference. During our fourth quarter of 2022, there were no changes in 72 our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f)) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information. None. Item 9C: Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. PART III The information called for by Part III of Form 10-K (Item 10 – Directors, Executive Officers and Corporate Governance, Item 11 – Executive Compensation, Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, Item 13 – Certain Relationships and Related Transactions, and Director Independence, Item 14 – Principal Accountant Fees and Services), is incorporated by reference from our proxy statement related to our 2023 annual meeting of shareholders, which is expected to be filed with the SEC on or around March 13, 2023. 73 PART IV Item 15. Exhibits, Financial Statement Schedules. a. Documents filed as part of this report: 1. Financial Statements Page Number Management’s Report on Internal Control over Financial Reporting F-1 Reports of Independent Registered Public Accounting Firm – Consolidated Financial Statements - FORVIS , LLP (form er ly BKD, LLP) ; Nashville, TN PCAOB ID: 686 F-2 Consolidated Balance Sheets F- 5 Consolidated Statements of Operations F- 6 Consolidated Statements of Cash Flows F- 7 Consolidated Statements of Equity F- 9 Notes to Consolidated Financial Statements F- 10 (2) Financial Statement Schedule Valuation and Qualifying Accounts F- 42 b. Exhibits Exhibit Number Description 1.1 At Market Issuance Sales Agreement, dated November 7, 2017, by and between Cumberland Pharmaceuticals Inc. and B. Riley FBR, Inc., incorporated herein by reference to the corresponding Exhibit 1.1 of our Registration Statement on Form S-3 (File No. 333-221402) as filed with the SEC on November 7, 2017. 1.2 Amendment No. 1 to At Market Issuance Sales Agreement, dated December 27, 2021, by and between Cumberland Pharmaceuticals Inc. and B. Riley Securities, Inc., incorporated herein by reference to the corresponding exhibit 1.2 of the Registrant’s Form 8-K (File No. 001-33637) as filed with the SEC on December 27, 2021 2.1 Asset Purchase Agreement, dated December 31, 2021, by and between Cumberland Pharmaceuticals Inc. and Kyowa Kirin, Inc., incorporated herein by reference to the corresponding exhibit 2.1 of the Registrant’s Form 8-K (File No. 001- 001-33637) as filed with the SEC on January 6, 2022 3.1 Third Amended and Restated Charter of Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit to Amendment No. 19 of the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on July 17, 2009 3.2 Second Amended and Restated Bylaws of Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit to Amendment No. 19 of the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on July 17, 2009 74 4.1 Specimen Common Stock Certificate of Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit to Amendment No. 5 of the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on August 6, 2007 4.2 Preferred Stock Terms, Rights, and Provisions, incorporated herein by reference to the corresponding exhibit to Registrant's Registration Statement Form S-3 (File No. 333-221402) as filed with the SEC on December 19, 2017 4.3 Form of Senior Indenture, incorporated herein by reference to the corresponding exhibit to Registrant's Registration Statement Form S-3 (File No. 333-221402) as filed with the SEC on November 7, 2017 4.4 Form of Subordinated Indenture, incorporated herein by reference to the corresponding exhibit to Registrant's Registration Statement Form S-3 (File No. 333-221402) as filed with the SEC on November 7, 2017 4.5# Form of Option Agreement under 1999 Stock Option Plan of Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on May 1, 2007 4.6.1# Form of Incentive Stock Option Agreement under the Amended and Restated 2007 Long-Term Incentive Compensation Plan of Cumberland Pharmaceuticals Inc. incorporated herein by reference to the corresponding exhibit to the Registrant’s Annual Report on Form 10-K (File No. 001-33637) as filed with the SEC on March 12, 2013 4.6.2# Form of Non-Statutory Stock Option Agreement under the Amended and Restated 2007 Long-Term Incentive Compensation Plan of Cumberland Pharmaceuticals Inc. incorporated herein by reference to the corresponding exhibit to the Registrant’s Annual Report on Form 10-K (File No. 001-33637) as filed with the SEC on March 12, 2013 4.7# Form of Non-Statutory Stock Option Agreement under the Amended and Restated 2007 Directors’ Compensation Plan of Cumberland Pharmaceuticals Inc. incorporated herein by reference to the corresponding exhibit to the Registrant’s Annual Report on Form 10-K (File No. 001-33637) as filed with the SEC on March 12, 2013 4.8 Warrant to Purchase Common Stock of Cumberland Pharmaceuticals Inc., issued to Bank of America, N.A. on July 22, 2009, incorporated herein by reference to the corresponding exhibit to the Registrant’s Annual Report on Form 10-K (File No. 001-33637) as filed with the SEC on March 19, 2010 4.9 Form of Senior Indenture, incorporated herein by reference to the corresponding exhibit to Registrant's Registration Statement Form S-3 (File No. 333-184091) as filed with the SEC on September 25, 2012. 4.10 Form of Subordinated Indenture, incorporated herein by reference to the corresponding exhibit to Registrant's Registration Statement Form S-3 (File No. 333-184091) as filed with the SEC on September 25, 2012 4.11 Description of Cumberland Pharmaceutical's Common Stock 10.7† Exclusive Distribution Agreement, effective as of July 1, 2010, by and between Cardinal Health 105, Inc. and Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit of the Registrant’s Current Report on Form 8-K (File No. 001-33637) as filed with the SEC on August 13, 2010 10.7.1† First Amendment to Exclusive Distribution Agreement, dated March 31, 2013, by and between Cardinal Health 105, Inc. and Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit of the Registrant's Current Report on Form 8-K (File No. 001-33637) as filed with the SEC on June 3, 2013 10.10† License Agreement, dated May 28, 1999, by and between Vanderbilt University and Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit to Amendment No. 3 of the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on July 11, 2007 75 Registrant's Quarterly Report on Form 10-Q (File No. 001-33637) as filed with the SEC on May13, 2022 10.11# Employment Agreement dated March 7 , 202 2 , effective as of January 1, 202 2 , by and between A.J. Kazimi and Cumberland Pharmaceuticals Inc. , inco rporated herein by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33637) as filed with the SEC on May 13, 2022 10.14# Employment Agreement dated March 7, 2022, effective as of January 1, 2022, by and between John M. Hamm and Cumberland Pharmaceuticals Inc., incorporated herein by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33637) as filed with the SEC on May 13, 2022 10.15# Employment Agreement dated March 7 , 202 2 , effective as of January 1, 2021, by and between James L. Herman and Cumberland Pharmaceuticals Inc. , incorporated herein by reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33637) as filed with the SEC on May 13, 2022 10.17# 1999 Stock Option Plan of Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on May 1, 2007 10.18# Amended and Restated 2007 Long-Term Incentive Compensation Plan of Cumberland Pharmaceuticals Inc., incorporated herein by reference to Appendix A of the Registrant’s Schedule 14A as filed with the SEC on March 12, 2012 and approved by the Registrant's shareholders on April 17, 2012 10.19# Amended and Restated 2007 Directors’ Incentive Plan of Cumberland Pharmaceuticals Inc., incorporated herein by reference to Appendix B of the Registrant's Schedule 14A as filed with the SEC on March 12, 2012 and approved by the Registrant's shareholders on April 17, 2012 10.20 Form of Indemnification Agreement between Cumberland Pharmaceuticals Inc. and all members of its Board of Directors, incorporated herein by reference to the corresponding exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on May 1, 2007 10.23† Amended and Restated Lease Agreement, dated November 11, 2004, by and between The Gateway to Nashville LLC and Cumberland Emerging Technologies, Inc., incorporated herein by reference to the corresponding exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on May 1, 2007 10.24 First Amendment to Amended and Restated Lease Agreement, dated August 23, 2005, by and between The Gateway to Nashville LLC and Cumberland Emerging Technologies, Inc., incorporated herein by reference to the corresponding exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on May 1, 2007 10.24.1 Second Amendment to Amended and Restated Lease Agreement, dated January 9, 2006, by and between The Gateway to Nashville LLC and Cumberland Emerging Technologies, Inc., incorporated herein by reference to the corresponding exhibit to Amendment No. 10 of the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on May 21, 2008 10.24.2† Third Amendment to Amended and Restated Lease Agreement, dated July 3, 2012, by and between The Gateway to Nashville LLC and Cumberland Emerging Technologies, Inc., incorporated herein by reference to the corresponding exhibit to the Registrant's Quarterly Report on Form 10-Q (File No. 001-33637) as filed with the SEC on August 9, 2012 10.25† License and Supply Agreement, dated November 16, 2015, by and between Cumberland Pharmaceuticals Inc. and Gastro-Entero Logic, LLC incorporated herein by reference to the corresponding exhibit of the Registrant's Annual Report on Form 10-K (File No. 001-33637) as filed with the SEC on March 14, 2016 10.28† Asset Purchase and Royalty Agreement for Kristalose dated November 15, 2011 by and between Mylan Inc. and Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit of the Registrant’s Current Report on Form 8-K (File No. 001-33637) as filed with the SEC on November 22, 2011 76 10.30# Supplemental Executive Retirement and Savings Plan, incorporated herein by reference to the corresponding exhibit to the Registrant's Current Report on Form 8-K (File No. 001-33637) as filed with the SEC on May 24, 2012 10.31† Settlement Agreement, dated November 9, 2012, by and between Cumberland Pharmaceuticals Inc., Paddock Laboratories, LLC and Perrigo Company incorporated herein by reference to the corresponding exhibit to the Registrant’s Annual Report on Form 10-K (File No. 001-33637) as filed with the SEC on March 12, 2013 10.32† License and Supply Agreement, dated November 9, 2012, by and between Cumberland Pharmaceuticals Inc., Paddock Laboratories, LLC and Perrigo Company incorporated herein by reference to the corresponding exhibit to the Registrant’s Annual Report on Form 10-K (File No. 001-33637) as filed with the SEC on March 12, 2013 10.34 Revolving Credit Loan Agreement, dated July 31, 2017, by and between Cumberland Pharmaceuticals Inc. and Pinnacle Bank incorporated herein by reference to the corresponding exhibit to the Registrant's Quarterly Report on Form 10-Q (File No. 001-33637) as filed with the SEC on November 8, 2017 10.35 Amendment to Revolving Credit Loan Agreement, by and between Pinnacle Bank and Cumberland Pharmaceuticals Inc., dated August 14, 2018, incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report Form 10-Q (File No. 001-33637) as filed with the SEC on August 14, 2018 10.36 First Amendment to Revolving Credit Note and Second Amendment to Revolving Credit Loan Agreement, dated as of October 17, 2018, by and between Cumberland Pharmaceuticals Inc. and Pinnacle Bank, incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 001-33637) as filed with the SEC on October 19, 2018 10.37 Second Amendment to Revolving Credit Note and Third Amendment to Revolving Credit Loan Agreement, dated as of May 10, 2019, by and between Cumberland Pharmaceuticals Inc. and Pinnacle Bank, incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q (File No. 001-336371) as filed with the SEC on May 15, 2019. 10.38# Amendment Number 2 to the Amended and Restated 2007 Long-Term Incentive Plan, incorporated herein by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33637) as filed with the SEC on August 14, 2020 10.39# Amendment Number 2 to the Amended and Restated 2007 Directors’ Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33637) as filed with the SEC on August 14, 2020 10.41 Third Amendment to Revolving Credit Note and Fourth Amendment to Revolving Credit Loan Agreement, dated as of October 7, 2020, by and between Cumberland Pharmaceuticals Inc. and Pinnacle Bank, incorporated herein by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33637) as filed with the SEC on November 13, 2020 10.42 Fourth Amendment to Revolving Credit Note and Fifth Amendment to Revolving Credit Loan Agreement, dated as of October 28, 2021, by and between Cumberland Pharmaceuticals Inc. and Pinnacle Bank, incorporated herein by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33637) as filed with the SEC on November 12, 2021 10.43 Fifth Amendment to the Revolving Credit Note and Sixth Amendment to Revolving Credit Loan Agreement, dated as of December 31, 2021, by and between Cumberland Pharmaceuticals Inc. and Pinnacle Bank, incorporated herein by reference to the corresponding exhibit of the Registrant’s Annual Report on Form 10-K (File No. 001-33637) as filed with the SEC on March 11, 2022 77 10.44 Lease Agreement, dated November 15, 2021, by and between Cumberland Pharmaceuticals Inc. and 1600 West End Avenue Partners, LLC., incorporated herein by reference to the corresponding exhibit of the Registrant’s Annual Report on Form 10-K (File No. 001-33637) as filed with the SEC on March 11, 2022 10.45 Seventh Amendment to Revolving Credit Loan Agreement, dated as of March 31, 2022, by and between Cumberland Pharmaceuticals Inc. and Pinnacle Bank, incorporated herein by reference to Exhibit 10.5 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33637) as filed with the SEC on May 13, 2022 10.46 Eighth Amendment to Revolving Credit Loan Agreement, dated as of June 30, 2022, by and between Cumberland Pharmaceuticals Inc. and Pinnacle Bank., incorporated herein by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33637) as filed with the SEC on August 12, 2022 10.47 Ninth Amendment to Revolving Credit Loan Agreement, dated as of September 29, 2022, by and between Cumberland Pharmaceuticals Inc. and Pinnacle Bank., incorporated herein by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33637) as filed with the SEC on November 14, 2022 21 Subsidiaries of Cumberland Pharmaceuticals Inc., incorporated herein by reference to the corresponding exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-142535) as filed with the SEC on May 1, 2007 23.1 Consent of FORVIS , LLP 31.1 Certification of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1** Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS INLINE XBRL INSTANCE DOCUMENT - THE INSTANCE DOCUMENT DOES NOT APPEAR IN THE INTERACTIVE DATA FILE BECAUSE ITS XBRL TAGS ARE EMBEDDED WITHIN THE INLINE XBRL DOCUMENT. 101.SCH INLINE XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT 101.CAL INLINE XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT 101.DEF INLINE XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT 101.LAB INLINE XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT 101.PRE INLINE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT 104 Cover Page Interactive Data File (embedded within the Inline XBRL document). 78 # Indicates a management contract or compensatory plan. † Confidential treatment has been granted for portions of this exhibit. These portions have been omitted from the Registration Statement and submitted separately to the Securities and Exchange Commission. †† Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from the Registration Statement and submitted separately to the Securities and Exchange Commission. * Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the U.S. Securities and Exchange Commission upon request, provided, however, that the parties may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended for any document so furnished. ** Furnished herewith. 79 Item 16. Form 10-K Summary Registrants may voluntarily include a summary of information required by Form 10-K under this Item 16. The Company has elected not to include such summary information. 80 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 13, 2023. Cumberland Pharmaceuticals, Inc. /s/ A. J. Kazimi By: A. J. Kazimi Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ A. J. Kazimi Chairman and CEO March 13, 2023 A. J. Kazimi (Principal Executive Officer and Director) /s/ John M. Hamm Senior Director and CFO March 13, 2023 John M. Hamm (Principal Financial and Accounting Officer /s/ Gordon R. Bernard Director March 13, 2023 Gordon R. Bernard /s/ James R. Jones Director March 13, 2023 James R. Jones /s/ Caroline R. Young Director March 13, 2023 Caroline R. Young /s/ Kenneth J. Krogulski Director March 13, 2023 Kenneth J. Krogulski /s/ Joseph C. Galante Director March 13, 2023 Joseph C. Galante /s/ Martin S. Brown, Jr. Director March 13, 2023 Martin S. Brown, Jr. 81 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Cumberland Pharmaceuticals Inc. and its subsidiaries (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013) . Based on its assessment, management has concluded that, as of December 31, 2022, the Company’s internal control over financial reporting was effective based on those criteria. /s/ A. J. Kazimi A. J. Kazimi Chief Executive Officer March 13, 2023 /s/ John M. Hamm John M. Hamm Chief Financial Officer March 13, 2023 F-1 Report of Independent Registered Public Accounting Firm To the Shareholders, Board of Directors and Audit Committee Cumberland Pharmaceuticals Inc. Nashville, Tennessee Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Cumberland Pharmaceuticals Inc. (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, equity, and cash flows for each of the years in the two-year period ended December 31, 2022, and the related notes and schedule (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022 , in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Customer Allowances for Chargebacks, Discounts and Damaged Goods, and Accruals for Rebates, Coupons, Product Returns, and Certain Fees As described in Note 2 to the consolidated financial statements, the allowances against accounts receivable and accrued liabilities for chargebacks, discounts, service fees and expired product returns are determined on a product-by-product basis and established by management as the Company’s best estimate at the time of sale based on each F-2 product’s historical experience adjusted to reflect known changes in the factors that impact such allowances. These allowances are established based on the contractual terms with direct and indirect customers and analyses of historical levels of chargebacks, discounts and returns of expired product. As of December 31, 2022, allowances in accounts receivable for chargebacks, cash discounts, and damaged goods were $0.6 million and the estimated liability for rebates, coupons, product returns, and certain fees were $8.3 million. These provisions are recognized concurrently with the sales of products. Provisions for chargebacks involve estimates of usage by retailers and other indirect buyers with varying contract prices for multiple wholesalers. The provision for chargebacks varies in relation to changes in sales volume, product mix, pricing, and the level of inventory at the wholesalers. Provisions are calculated using historical chargeback experience, and/or expected chargeback levels for new products and anticipated pricing changes. Provisions for rebates are recognized based on contractual obligations in place at the time of sales with consideration given to relevant factors that may affect the payment, as well as historical experience for estimated market activity. Provisions for product returns are calculated based on the expiration dates of products sold, the window where customers are permitted to return products, and the history of returns for individual products in relation to the sales volume for each product. We identified the customer allowances for chargebacks, discounts, and damaged goods and accruals for rebates, coupons, product returns, and certain fees as a critical audit matter. The principal consideration for our determination was the significant measurement uncertainty involved in developing the reserves. Management exercises judgment in computing the amount of sales subject to the allowances and tracks the amount of allowances taken over time. All of this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions, which includes the assumption that historical activity is a good predictor of future allowance activity and modifications made to calculations based on more recent history. The primary procedures we performed to address this critical audit matter included: • Tested management’s process for calculating the allowances, including a look back analysis of prior year reserves compared to actual experience in the current year. • Tested the completeness and accuracy of underlying data used to estimate the accrual by agreeing sales data used in the calculations to reports that were reconciled to the consolidated financial statements, reconciling various allowance percentages to signed customer contracts, and tracing allowance amounts used by various customers during the year to supporting documentation. • Evaluated the reasonableness of significant assumptions used by management in the computation of selected allowances, including comparison to historical results and considering recent changes in factors that could influence the future allowances to be claimed, such as changes in the shelf life of the products. • Tested the clerical accuracy of individual customer allowances computed by management and agreeing the total of all estimated allowances to the respective accounts on the consolidated financial statements. • Developed an independent expectation of the reserve balance for certain allowances and comparing that to the balance recorded on the December 31, 2022, consolidated balance sheet. • Compared actual activity for chargebacks, discounts, and damaged goods and rebates, coupons, product returns, and certain fees reported after December 31, 2022, to estimated reserves and accruals on the December 31, 2022, consolidated balance sheet. Valuation of Contingent Consideration, Acquired Intangible Assets and Inventory Associated with Business Combinations As described in Note 3 to the consolidated financial statements, the Company 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. during the year ended December 31, 2022, resulting in the expansion of the Company’s product offerings. This acquisition resulted in additional goodwill of $0.03 million, additional intangible assets of $14.1 million, and contingent liabilities of $5.1 million being recognized on the Company’s consolidated balance F-3 sheet. As part of this acquisition, management assessed that the acquisition qualified as a business combination and all identifiable assets and liabilities acquired were recorded at fair value as part of the purchase price allocation as of the asset date. The identification and valuation of such acquired assets and assumed liabilities requires management to exercise significant judgment and consider the use of outside vendors to estimate the fair value allocations. We identified the consummated acquisition and the valuation of acquired assets and assumed liabilities as a critical audit matter. Our principal consideration for this determination included high degree of audit effort, including utilizing individuals with specialized skills, in evaluating management's significant assumptions including its forecasts of future performance of the component, discount rates and other inputs into the model used in computing the fair value of the intangible asset, acquired inventory and contingent consideration liability. The primary procedures we performed to address this critical audit matter included: • We obtained an understanding of management’s process for determining the fair value measurements of the contingent consideration, acquired intangible assets and inventory, including reviewing the executed Asset Purchase Agreement documents to gain an understanding of the underlying terms of the consummated acquisition. • Evaluated forward-looking assumptions, such as forecasted revenue and earnings used by management by performing procedures that included, but not limited to, comparisons to industry and historical performance data, and sensitivity analysis to assess their reasonableness. • Utilizing a valuation specialist, we evaluated the significant assumptions and methods utilized in developing the fair value of the contingent consideration, acquired intangible assets, and inventory including: ◦ Evaluated the reasonableness of the Company’s third-party valuation models and methodologies, expected cash flow calculations, and reviewed significant assumptions. ◦ Developed an independent calculation of the discount rates used and compared our rates to those used by management. ◦ Prepared an independent calculation of the fair value of the contingent consideration and the intangible assets to test the accuracy of management’s valuation models. • Reviewing and evaluating the adequacy of the disclosures made in the Company’s SEC filings. /s/ FORVIS, LLP (Formerly, BKD, LLP) We have served as the Company's auditor since 2020. Nashville, Tennessee March 13, 2023 F-4 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2022 and 2021 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 19,757,970 $ 27,040,816 Accounts receivable, net 13,163,681 6,877,346 Inventories, net 9,863,581 8,429,882 Prepaid and other current assets 3,084,978 3,339,969 Total current assets 45,870,210 45,688,013 Non-current inventories 7,527,167 9,048,567 Property and equipment, net 284,039 442,635 Intangible assets, net 30,590,678 23,954,475 Goodwill 914,000 882,000 Operating lease right-of-use assets 5,218,403 1,024,200 Other assets 2,520,661 3,419,908 Total assets $ 92,925,158 $ 84,459,798 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 10,819,011 $ 9,640,980 Operating lease current liabilities 172,910 969,677 Other current liabilities 17,587,911 8,668,303 Total current liabilities 28,579,832 19,278,960 Revolving line of credit 16,200,000 15,000,000 Operating lease non-current liabilities 4,586,301 90,016 Other long-term liabilities 7,585,019 7,488,844 Total liabilities 56,951,152 41,857,820 Commitments and contingencies Equity: Shareholders’ equity: Common stock – no par value; 100,000,000 shares authorized; 14,366,316 and 14,742,754 shares issued and outstanding as of December 31, 2022 and 2021, respectively 47,474,973 48,452,906 Retained earnings (deficit) ( 11,208,841 ) ( 5,638,600 ) Total shareholders’ equity 36,266,132 42,814,306 Noncontrolling interests ( 292,126 ) ( 212,328 ) Total equity 35,974,006 42,601,978 Total liabilities and equity $ 92,925,158 $ 84,459,798 See accompanying notes to consolidated financial statements. F-5 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 2022 and 2021 2022 2021 Revenues: Net product revenue $ 40,681,182 $ 35,045,259 Other revenue 1,329,767 939,784 Net revenues 42,010,949 35,985,043 Costs and expenses: Cost of products sold 9,118,521 8,811,248 Selling and marketing 16,660,945 15,015,424 Research and development 6,688,924 5,684,465 General and administrative 10,180,120 9,780,026 Amortization 5,067,368 4,371,300 Total costs and expenses 47,715,878 43,662,463 Operating income (loss) ( 5,704,929 ) ( 7,677,420 ) Interest income 98,405 26,081 Other income — 2,187,140 Other income - gain on insurance proceeds 611,330 — Interest expense ( 585,995 ) ( 98,031 ) Income (loss) before income taxes ( 5,581,189 ) ( 5,562,230 ) Income tax (expense) benefit ( 68,850 ) ( 34,891 ) Net income (loss) from continuing operations ( 5,650,039 ) ( 5,597,121 ) Discontinued operations net of tax — 1,994,322 Net income (loss) ( 5,650,039 ) ( 3,602,799 ) Net loss at subsidiary attributable to noncontrolling interests 79,798 95,212 Net income (loss) attributable to common shareholders $ ( 5,570,241 ) $ ( 3,507,587 ) Earnings (loss) per share attributable to common shareholders: -Continuing operations-basic $ ( 0.38 ) $ ( 0.37 ) -Discontinued operations-basic — 0.13 Basic $ ( 0.38 ) $ ( 0.24 ) -Continuing operations-diluted $ ( 0.38 ) $ ( 0.37 ) -Discontinued operations-diluted — 0.13 Diluted $ ( 0.38 ) $ ( 0.24 ) Weighted-average common shares outstanding: Basic 14,563,592 14,904,834 Diluted 14,563,592 14,904,834 See accompanying notes to consolidated financial statements. F-6 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2022 and 2021 2022 2021 Cash flows from operating activities: Net income (loss) $ ( 5,650,039 ) $ ( 3,602,799 ) Discontinued operations — 1,994,322 Net income (loss) from continuing operations ( 5,650,039 ) ( 5,597,121 ) Adjustments to reconcile net income (loss) to net cash flows provided by operating activities: Depreciation and amortization expense 5,328,113 4,606,366 Deferred tax expense — — Share-based compensation 447,503 741,867 Decrease in non-cash contingent consideration ( 2,088,296 ) ( 1,147,750 ) Decrease (Increase) in cash surrender value of life insurance policies over premiums paid 613,657 ( 282,207 ) Noncash interest expense 11,237 34,053 Noncash gain on RediTrex transaction ( 37,882 ) — Gain on receipt of life insurance policies ( 611,330 ) — Gain on forgiveness of debt — ( 2,187,140 ) Net changes in assets and liabilities affecting operating activities: Accounts receivable ( 6,115,640 ) 5,500,367 Inventories 911,078 4,816,450 Other current assets and other assets 689,260 ( 35,568 ) Accounts payable and other current liabilities 14,536,076 ( 757,591 ) Other long-term liabilities 419,659 ( 1,343,605 ) Net cash provided by operating activities from continuing operations 8,453,396 4,348,121 Discontinued operations — 1,994,322 Net cash provided by operating activities 8,453,396 6,342,443 Cash flows from investing activities: Additions to property and equipment ( 102,148 ) ( 103,532 ) Additions to intangible assets ( 1,971,662 ) ( 250,930 ) Return of RediTrex 1,000,000 — Proceeds from surrender of life insurance policies — 85,944 Premiums paid for life insurance policies — ( 33,375 ) Life insurance policy proceeds received 877,597 — Settlement of patent litigation 21,757 — Cash paid for acquisition ( 13,500,000 ) — Note receivable investment funding — ( 200,000 ) Net cash used in investing activities ( 13,674,456 ) ( 501,893 ) F-7 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2022 and 2021 2022 2021 Cash flows from financing activities: Borrowings on line of credit 52,900,000 59,000,000 Payments on line of credit ( 51,700,000 ) ( 59,000,000 ) Payments made in connection with repurchase of common shares ( 1,053,042 ) ( 1,386,849 ) Cash settlement of contingent consideration ( 2,208,744 ) ( 2,166,681 ) Net cash used in financing activities ( 2,061,786 ) ( 3,553,530 ) Net increase (decrease) in cash and cash equivalents ( 7,282,846 ) 2,287,020 Cash and cash equivalents, beginning of year 27,040,816 24,753,796 Cash and cash equivalents, end of year $ 19,757,970 $ 27,040,816 Supplemental disclosure of cash flow information: Net cash paid during the year for: Interest $ 523,161 $ 63,978 Income taxes 3,300 ( 327 ) Noncash investing and financing activities: Change in unpaid invoices for intangible asset additions $ ( 1,803,403 ) $ ( 43,471 ) Change in unpaid invoices for offering costs ( 94,689 ) ( 90,512 ) Recognition of operating lease assets and liabilities through adoption of ASC 842 4,590,978 — RediTrex forgiveness of milestone payable ( 1,000,000 ) — Return of shares related to RediTrex 399,600 — See accompanying notes to consolidated financial statements F-8 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Consolidated Statements of Equity Years ended December 31, 2022 and 2021 Cumberland Pharmaceuticals Inc. Shareholders Common stock Retained earnings (deficit) Non-controlling interest Total equity Shares Amount Balance, December 31, 2020 14,988,429 $ 49,121,523 $ ( 2,131,013 ) $ ( 117,116 ) $ 46,873,394 Net income (loss) — — ( 3,507,587 ) ( 95,212 ) ( 3,602,799 ) Share-based compensation 192,684 741,867 — — 741,867 Repurchase of common shares ( 438,359 ) ( 1,410,484 ) — — ( 1,410,484 ) Balance, December 31, 2021 14,742,754 $ 48,452,906 $ ( 5,638,600 ) $ ( 212,328 ) $ 42,601,978 Net income (loss) — $ — $ ( 5,570,241 ) $ ( 79,798 ) $ ( 5,650,039 ) Return of common stock - Methotrexate ( 180,000 ) ( 399,600 ) — — ( 399,600 ) Share-based compensation 171,655 447,503 — — 447,503 Repurchase of common shares ( 367,793 ) ( 1,025,836 ) — — ( 1,025,836 ) Balance, December 31, 2022 14,366,616 $ 47,474,973 $ ( 11,208,841 ) $ ( 292,126 ) $ 35,974,006 See accompanying notes to consolidated financial statements F-9 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Organization Cumberland Pharmaceuticals Inc. (“Cumberland,” the “Company,” or as used in the context of “we,” “us,” or “our”) is a specialty pharmaceutical company focused on the acquisition, development and commercialization of branded prescription products. The Company's primary target markets are hospital acute care, gastroenterology and oncology. These medical specialties are characterized by relatively concentrated prescriber bases that the Company believes can be penetrated effectively by small, targeted sales forces. Cumberland is dedicated to providing innovative products that improve quality of care for patients and address unmet or poorly met medical needs. The Company promotes its approved products through its hospital, field and oncology sales forces in the United States and is establishing a network of international partners to bring its medicines to patients in their countries. Cumberland focuses its resources on maximizing the commercial potential of its products, as well as developing new product candidates, and has both internal development and commercial capabilities. The Company’s products are manufactured by third parties, which are overseen by Cumberland’s quality and manufacturing professionals. The Company works closely with its third-party distribution partners to make its products available in the United States. In order to build a pipeline of early-stage product candidates, the Company formed a subsidiary, Cumberland Emerging Technologies, Inc. ("CET"), which teams with universities and other research organizations to help advance scientific discoveries from the laboratory to the marketplace. In 2014, the Company organized equity financing to recapitalize and strengthen the financial position of CET including an investment of approximately $ 1.0 million from Gloria Pharmaceuticals Co., Ltd. (“Gloria”). As a result, Gloria received shares in CET and joined the CET ownership group. In April, 2019, CET entered into an agreement with HongKong WinHealth Pharma Group Co. Limited ("WinHealth") whereby WinHealth made a $ 1.0 million investment through the purchase of shares of CET stock. As part of the agreement, WinHealth obtained a Board position at CET and the first opportunity to license CET products for the Chinese market. In connection with WinHealth's investment in CET, Cumberland also made an additional $ 1.0 million investment in CET. Cumberland purchased additional CET shares through contribution of $ 0.3 million in cash and a conversion of $ 0.7 million in intercompany loans payable. Upon completion of the additional investment by WinHealth and Cumberland, Gloria Pharmaceuticals returned its shares in CET in exchange for $ 0.8 million that was funded during 2020. The Company's ownership in CET is now 85 % while the remaining interest is owned by WinHealth, Vanderbilt University and the Tennessee Technology Development Corporation. The operating results of CET allocated to noncontrolling interests in the consolidated statements of operations were $ 79,798 and $ 95,212 for the years ended December 31, 2022 and 2021, respectively. Effective January 1, 2007, the Company formed a wholly-owned subsidiary, Cumberland Pharma Sales Corp. ("CPSC"). CPSC is the subsidiary that employs the Company's hospital and field sales force personnel. In December 2017, the Company formed the Cumberland Pharma Foundation (the "Foundation") to serve as a vehicle to facilitate the ongoing philanthropic endeavors of Cumberland Pharmaceuticals Inc. The Foundation was formed as a nonprofit corporation designed to qualify as a tax-exempt organization pursuant to Section 501(a) of the Internal Revenue Code. The Foundation’s Board of Directors is comprised of Cumberland Pharmaceuticals executives who are responsible for overseeing the Foundation’s ongoing activities including charitable contributions. F-10 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) In 2018, Cumberland provided a grant of 50,000 shares of the Company's common stock to the Foundation. The shares will address the ongoing financial needs of the Foundation. The organization also plans to hold a portion of the shares for long-term appreciation. The Foundation maintains separate financial statements and its ongoing operations will not impact the financial statements of Cumberland Pharmaceuticals. Initial annual grants by the Foundation have been and are expected to remain consistent with the historic level of contributions made by Cumberland Pharmaceuticals. During 2019, Cumberland Pharmaceuticals committed approximately $ 50,000 in cash contributions that were paid to the Foundation during 2020. Likewise, during 2020, the Company committed approximately $ 25,000 in cash contributions paid to the Foundation during 2021. In 2022, the Company made a $ 25,000 cash contribution to the Foundation. (2) Significant Accounting Policies Principles of Consolidation The consolidated financial statements of the Company are stated in U.S. dollars and are prepared using U.S. generally accepted accounting principles. These financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. COVID-19 Pandemic In 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 COVID-19 pandemic, continuing 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 faced the same challenges affecting other companies that rely on hospital admissions and patient visits to drive revenue. Our business and our clinical studies were 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 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. Overall, we have been able to continue the delivery of our products while addressing the interests of our shareholders, employees, partners and community. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates under different assumptions and conditions. The Company's most significant estimates include: (1) its allowances for chargebacks and accruals for rebates and product returns (2) the allowances for obsolescent or unmarketable inventory and (3) valuation of contingent consideration liability associated with business combinations. F-11 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Segment Reporting The Company has one operating segment which is specialty pharmaceutical products. Management has chosen to organize the Company based on the type of products sold. Operating segments are identified as components of an enterprise about which separate discrete financial information is evaluated by the chief operating decision maker, or decision-making group, in making decisions regarding resource allocation and assessing performance. The Company, which uses consolidated financial information in determining how to allocate resources and assess performance, evaluated that our specialty pharmaceutical products compete in similar economic markets and similar circumstances. Substantially all of the Company’s assets are located in the United States. Total revenues are primarily attributable to U.S. customers. Net revenues from customers outside the United States were approximately $ 1.5 million and $ 2.2 million for the years ended December 31, 2022 and 2021, respectively. Fair Value of Financial Instruments Fair value of financial assets and liabilities is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company's fair value measurements follow the appropriate rules as well as the fair value hierarchy that prioritizes the information used to develop the measurements. It applies whenever other guidance requires (or permits) assets or liabilities to be measured at fair value and gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). A summary of the fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels is described below: Level 1 - Quoted prices for identical instruments in active markets. Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Level 3 - Significant inputs to the valuation model are unobservable. We maintain policies and procedures to value instruments using the best and most relevant data available. The following section describes the valuation methodologies we use to measure different financial instruments at fair value on a recurring basis. The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, contingent consideration liability and a revolving line of credit. The carrying values for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their short-term nature. The revolving line of credit has a variable interest rate, which approximates the current market rate. The Company's contingent consideration liability is a Level 3 fair value measurement that is updated on a recurring basis at each reporting period using a valuation model. Consistent with Level 3 fair value measurements, there are significant inputs to the valuation model that are unobservable. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with original maturities of three months or less. As of December 31, 2022 and 2021, cash equivalents consist primarily of money market funds. F-12 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Accounts Receivable Trade accounts receivable are recorded at the invoiced amount. The Company records allowances for amounts that could become uncollectible in the future based on historical experience, as well as amounts related to chargebacks and cash discounts. The Company reviews each customer balance to assess collection status. The majority of the Company’s products are distributed through independent pharmaceutical wholesalers. The allowances against accounts receivable for chargebacks and discounts are determined on a product-by-product basis, and established by management as the Company’s best estimate at the time of sale based on each product’s historical experience adjusted to reflect known changes in the factors that impact such allowances. These allowances are established based on the contractual terms with direct and indirect customers and analyses of historical levels of chargebacks and discounts. The allowances in accounts receivable for chargebacks and cash discounts were $ 0.6 million at December 31, 2022 and $ 0.3 million at December 31, 2021. Other organizations, such as managed care providers, pharmacy benefit management companies and government agencies, may receive rebates from the Company based on either negotiated contracts to carry the Company’s products or reimbursements for filled prescriptions. These entities are considered indirect customers of the Company. In conjunction with recognizing a sale to a wholesaler, revenues are reduced and accrued liabilities are increased by the Company’s estimate of the rebate that may be claimed. Cash discounts are reductions to invoiced amounts offered to customers for payment within a specified period of time from the date of the invoice. Inventories The Company works closely with third parties to manufacture and package finished goods for sale. Based on the customer relationship with the manufacturer or packager, the Company will either take title to finished goods at the time of shipment or at the time of arrival from the manufacturer. The Company then warehouses such goods until distribution and sale at third party facilities located in the U.S. and international locations. Periodic inventory counts are made by the warehouse teams and by the Company on a regular basis. In addition, the Company re-tests API inventory prior to use to confirm product expiration. Inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out method. The Company continually evaluates inventories for potential losses due to expired, short-dated or slow-moving inventory by comparing sales history and sales projections to the inventory on hand. When evidence indicates the carrying value of a product may not be recoverable, a charge is recorded to reduce the inventory to its current net realizable value. The Company classifies the Vibativ inventories and ifetroban inventories that it does not expect to sell within one year as non-current inventories. Prepaid and Other Current Assets Prepaid and other current assets consist of deferred offering costs, prepaid insurance premiums, prepaid consulting services, deposits and annual fees paid to the U.S. Food and Drug Administration ("FDA"). The Company expenses all prepaid and other current asset amounts as used or over the period of benefit primarily on a straight-line basis, as applicable. In November 2017, the Company filed its Shelf Registration on Form S-3 with the SEC associated with the sale of up to $ 100 million in corporate securities. The Shelf Registration was declared effective in January 2018. It also included an At the Market ("ATM") feature that allows the Company to sell common shares at market prices, along with an agreement with B. Riley FBR Inc. to support such a placement of shares. The Company filed an updated Form S-3 with the SEC in December 2020, which was declared effective in January 2021. 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. F-13 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) The Company intends to continue an ATM feature through B. Riley FBR, Inc. that would allow the Company to issue shares of its common stock. The Company has recorded deferred offering costs for payments directly related to the current Shelf Registration on Form S-3 that was completed during December 2021. These costs consist of legal and accounting fees that the Company has capitalized. Deferred costs associated with the Shelf Registration will be reclassified to additional paid in capital on a pro-rata basis as the Company completes sales of shares under the Shelf Registration. The Company did not issue any shares under this ATM during the year ended December 31, 2022. Property and Equipment Property and equipment, including leasehold improvements, are stated at cost. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the initial lease term plus renewal options, if reasonably assured, or the remaining useful life of the asset. Upon retirement or disposal of assets, any gain or loss is reflected as a component of operating income (loss) in the consolidated statement of operations. Improvements that extend an asset’s useful life are capitalized. Repairs and maintenance costs are expensed as incurred. Intangible Assets and Goodwill The Company’s intangible assets and goodwill consist of capitalized costs related to product and license rights, patents, trademarks and goodwill obtained in the Vibativ and Sancuso acquisitions. Goodwill is not amortized for financial reporting purposes, but is subject to impairment analysis at least annually. The cost of acquiring product and license rights are capitalized at fair value at the date of acquisition for products that are approved by the FDA for commercial use. These costs are amortized ratably over the estimated economic life of the product. The economic life is estimated based upon several factors. This includes the term of the license agreement, the patent life or market exclusivity of the product and as well as management's expectations of continued involvement with the product and the assessment of future sales, the future periods under which the product will be sold and the profitability of the product. This estimate is evaluated on a regular basis during the amortization period and adjusted if appropriate. If there are any changes made to the useful life of the product and license rights, the costs associated with such a change, if any, will be capitalized and amortized over the revised useful life. Capitalized patent costs consist of outside legal costs associated with obtaining and protecting patents on products that have been approved for marketing by the FDA. If it becomes probable that a patent will not be issued or a patent has been declared invalid, related costs associated with the patent application are expensed at the time such determination is made. All costs associated with obtaining patents for products that have not been approved for marketing by the FDA are expensed as incurred. Amortization expense is recognized ratably over the following periods: Product rights Estimated economic life License rights Term of license agreement Patents Life of patent F-14 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Impairment of Long-Lived Assets Long-lived assets, such as property and equipment, operating lease right-of-use assets and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If events or circumstances arise that require a long-lived asset to be tested for potential impairment, the Company first compares undiscounted cash flows expected to be generated by the asset to its carrying value. If the carrying amount of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment charge is recognized to the extent that the carrying value exceeds the fair value. Fair value is determined through various valuation techniques including quoted market prices, third-party independent appraisals and discounted cash flow models. Goodwill and other indefinite lived intangible assets that are not subject to amortization are tested at least annually for impairment. The impairment analysis for goodwill requires a comparison of fair value to the carrying value of the reporting unit. The Company's goodwill was acquired in November 2018 with the Vibativ acquisition and in January 2022 with the Sancuso acquisition. As a result, the Vibativ and Sancuso components of the Company are the reporting units evaluated for goodwill impairment. Cumberland determined the fair value of the reporting units through current and future estimated revenue and profitability of the product. The Company recorded no impairment charges during 2022 and 2021. Joint Venture Agreement In August 2020, Cumberland entered into an agreement with WinHealth Investment (Singapore) Ltd creating WHC Biopharmaceuticals, Pte. Ltd. The joint venture, as a limited liability company, will focus on acquiring, developing, registering, and commercializing development stage and commercial stage biopharmaceuticals for China, Hong Kong and other Asian markets. The agreement provides for initial investment from WinHealth in the form of a $ 0.2 million equity contribution and an initial investment from Cumberland in the form of $ 0.2 million convertible note. The joint venture will seek additional future capital from additional investors and has entered into exclusive option agreements to license intellectual property from both Cumberland Pharmaceuticals Inc. and Cumberland Emerging Technologies. Net Product Revenue Revenues from product sales are recognized in the amount that reflects the consideration that we expect to receive for these goods. Depending upon the shipping terms of the transaction, the revenue is recognized at the point where the customer obtains control of the goods and we satisfy our performance obligation. This occurs upon either shipment of the product or arrival at its ship to destination. Payment terms typically range from 30 to 60 days from date of shipment. The Company’s net product revenue reflects the reduction from gross product revenue for estimated allowances for chargebacks, discounts and damaged goods, and reflects sales related accruals for rebates, coupons, product returns, and certain administrative and service fees. Significant judgments must be made in determining the transaction price for our sales of products related to these adjustments. Sales Rebates and Discounts The allowances against accounts receivable and accrued liabilities for chargebacks, discounts, service fees and expired product returns are determined on a product-by-product basis, and established by management as the Company’s best estimate at the time of sale based on each product’s historical experience adjusted to reflect known changes in the factors that impact such allowances. These allowances are established based on the contractual terms with direct and indirect customers and analyses of historical levels of chargebacks, discounts and returns of expired product. F-15 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Other organizations, such as managed care providers, pharmacy benefit management companies and government agencies, may receive rebates from the Company based on either negotiated contracts to carry the Company’s products or reimbursements for filled prescriptions. These entities are considered indirect customers of the Company. In conjunction with recognizing a sale to a wholesaler, sales revenues are reduced and accrued liabilities are increased by the Company’s estimate of the rebate that may be claimed. Sales Returns Consistent with industry practice, the Company maintains a return policy that allows customers to return product within a specified period prior to and subsequent to the expiration date. The Company’s estimate of the provision for returns is based upon historical experience, expiration date by product as well as any other factor expected to impact future returns. Any changes in the assumptions used to estimate the provision for returns are recognized in the period those assumptions are changed. Other Revenues Other revenues primarily consist of income from grant funding programs, licensing agreements, leases and contract services. Revenue related to grants is recognized when all conditions related to such grants have been met. All other revenue is recognized when earned. Cost of Products Sold Cost of products sold consists principally of the cost to acquire each unit of product sold, including in-bound freight expense as well as any adjustment in the net realizable value of inventory acquired in acquisitions. Cost of products sold also includes expenses associated with the reduction in the net realizable value of slow-moving or expired product. Selling and Marketing Expense Selling and marketing expense consists primarily of expenses relating to the advertising, promotion, distribution and sale of products, including royalty expense, salaries and related costs. Distribution Costs Distribution costs are expensed as incurred and are included as a component of selling and marketing expenses in the consolidated statements of operations. Distribution costs were as follows for the years ended December 31: 2022 2021 Distribution costs $ 857,842 $ 806,311 Advertising Costs Advertising costs are expensed as incurred and are included as a component of selling and marketing expenses in the consolidated statements of operations. Advertising costs were as follows for the years ended December 31: 2022 2021 Advertising costs $ 2,927,041 $ 1,927,864 F-16 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Research and Development Research and development costs are expensed in the period incurred. Research and development costs are comprised mainly of clinical trial expenses, salaries, wages and other related costs such as materials and supplies. Research and development expense includes activities performed by third-party providers participating in the Company’s clinical studies. The Company accounts for these costs based on estimates of work performed, patients enrolled or fixed fees for services over the period of time the clinical trials are performed. Income Taxes The Company provides for deferred taxes using the asset and liability approach. Under this method, deferred tax assets and liabilities are recognized for future tax consequences attributable to operating loss and tax credit carryforwards, as well as differences between the carrying amounts of existing assets and liabilities and their respective tax bases. The Company’s principal differences are related to the timing of deductibility of certain items, such as inventory, depreciation, amortization and share-based compensation. Deferred tax assets and liabilities are measured using enacted statutory tax rates that are expected to apply to taxable income in the years such temporary differences are anticipated to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of enactment. The Company only recognizes income tax benefits associated with an income tax position in which it is “more likely than not” that the position would be sustained upon examination by the taxing authorities. In assessing the realizability of deferred tax assets, management considers whether some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of existing temporary differences, projected future taxable income and tax planning strategies in making this assessment. The Company’s accounting policy with respect to interest and penalties arising from income tax settlements is to recognize them as part of the provision for income taxes. Earnings (Loss) per Share Basic earnings (loss) per share is calculated by dividing net income (loss) attributable to common shareholders by the weighted-average number of shares outstanding. Except where the result would be antidilutive to income from continuing operations, diluted earnings (loss) per share is calculated by assuming the vesting of unvested restricted stock and the exercise of stock options and warrants and unrecognized compensation costs. Share-Based Payments The Company recognizes compensation cost for all share-based payments issued, modified, repurchased or canceled. Depending on the nature of the vesting provisions, restricted stock awards are measured using either the fair value on the grant date or the fair value of common stock on the date the vesting provisions lapse. Prior to the lapse for those equity grants not valued on the grant date, the fair value is measured on the last day of the reporting period. Collaborative Agreements The Company is a party to several collaborative arrangements with research institutions to identify and pursue promising pharmaceutical product candidates. The funding for these programs is primarily provided through Federal Small Business Administration (SBIR/STTR) and other grant awards. The Company has determined that these collaborative agreements, with the exception of the collaborative payment discussed in Note 3 do not meet the criteria for accounting under ASC Topic 808, Collaborative Agreements . The agreements do not specifically designate each party’s rights and obligations to each other under the collaborative arrangements. Except for patent defense costs, expenses incurred by one party are not required to be reimbursed by the other party. Expenses F-17 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) incurred under these collaborative agreements are included in research and development expenses and funding received from grants are recorded as net revenues in the consolidated statements of operations. Related Party Transactions In July 2022, Cumberland named Martin S. Brown Jr. to our Board of Directors. Mr. Brown is an attorney with over 30 years of corporate law experience who brings significant legal, public company, health care and civic experience to our board. The Company relies on several law firms for legal advice, including the firm Martin is affiliated. In 2022, the Company paid Martin's law firm $ 0.04 million. Discontinued Operations During May 2019, Cumberland entered into a Dissolution Agreement ("Dissolution Agreement") with Clinigen Healthcare Limited ("Clinigen") in which the Company returned the exclusive rights to commercialize Ethyol ® and Totect ® in the United States to Clinigen. Under the terms of the Dissolution Agreement, Cumberland is no longer involved directly or indirectly with the distribution, marketing and promotion of either Ethyol or Totect or any competing products following December 31, 2019. The Company's exit from the products meets the accounting criteria to be reported as discontinued operations and the discontinued operating results have been reclassified in the financial statements and footnotes for all periods presented to reflect the discontinued status of these products. Refer to Note 19, for additional information. Recent Accounting Guidance Recent Accounting Pronouncements 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. The Company adopted both ASU 2016-13 and ASU 2019-05 on January 1, 2023. The adoption of ASU 2016-13 and ASU 2019-05 are not expected to have a material impact on the Company’s consolidated financial statements. (3) RediTrex ® , Vibativ ® and Sancuso ® 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 $ 0.1 million 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 F-18 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. This milestone payment was paid in July 2020. During December 2020, Cumberland began distributing RediTrex which also resulted in a $ 1.0 million milestone payment due to Nordic. The full launch of RediTrex occurred in October 2021. 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 June 30, 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. Cumberland had approximately $ 2.6 million in net intangible assets related to RediTrex at December 31, 2021. Vibativ During November 2018, the Company closed on an agreement with Theravance Biopharma ("Theravance") to acquire the global responsibility for Vibativ including the marketing, distribution, manufacturing and regulatory activities associated with the brand. Vibativ is a patented, FDA approved injectable anti-infective for the treatment of certain serious bacterial infections including hospital-acquired and ventilator-associated bacterial pneumonia and complicated skin and skin structure infections. It addresses a range of Gram-positive bacterial pathogens, including those that are considered difficult-to-treat and multidrug-resistant. Cumberland acquired Vibativ to further add to its product offerings, increase its net revenue and positively contribute to the Company's operating results. Cumberland expects to deduct the goodwill acquired in the acquisition for tax purposes. In addition, Cumberland agreed to pay a royalty of up to 20 % on future net sales of the product after a $ 2.5 million threshold is met. The future royalty payments were required to be recognized at their acquisition-date fair value as part of the contingent consideration transferred in the business combination. The following table presents the changes in the Company's Level 3 contingent consideration liability. The contingent consideration earned and accrued in operating expenses is paid to the seller quarterly. F-19 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Contingent consideration liability Balance at December 31, 2020 $ 8,200,553 Cash payment of royalty during the period ( 2,166,682 ) Change in fair value ( 1,147,750 ) Contingent consideration earned and accrued 1,629,506 Balance at December 31, 2021 $ 6,515,627 Cash payment of royalty during the period ( 1,133,113 ) Change in fair value ( 2,104,690 ) Contingent consideration earned and accrued 876,999 Balance at December 31, 2022 $ 4,154,823 The current portion of the contingent consideration liability is $ 1.3 million and the non-current portion is $ 2.8 million, as of December 31, 2022. Sancuso On January 3, 2022, Cumberland acquired the U.S. rights to the FDA-approved oncology-supportive care medicine Sancuso from Kyowa Kirin, Inc. ("Kyowa Kirin"), 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. The remaining milestone of $ 2.0 million will be paid if and when annual net revenue exceeds $ 20 million. 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 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 worked with an outside consultant firm to finalize the Sancuso valuation of the transaction. The fair value for the assets and liabilities assumed were as follows: prepaid expenses $ 1.8 million, inventory $ 2.6 million, goodwill $ 0.03 million, intangible assets $ 14.1 million, milestone payable $ 1.7 million and contingent liability $ 3.4 million. The following table presents the changes in the fair value of the contingent consideration liability that is remeasured on a recurring basis. F-20 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Balance at January 3, 2022 $ 3,384,000 Cash payment of royalty during the period ( 1,075,631 ) Change in fair value 16,394 Contingent consideration earned and accrued 675,237 Balance at December 31, 2022 $ 3,000,000 The current portion of the contingent consideration liability is $ 1.7 million and the non-current portion is $ 1.3 million, as of December 31, 2022. Sancuso Intangible Assets, Goodwill, Revenue and Earnings An outside consultant prepared the Sancuso valuation and the valuation is complete. The goodwill of $ 0.03 million arising from this acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and the acquired company. Based on discussions with Management, the identified intangible assets were valued as a composite asset referred to as the Sancuso product rights. It is comprised of: • Technology – patented and unpatented IP and know-how; • Marketing intangible assets including product trademarks/names/dress; and • Customer base to which the product is sold. It is a common practice in the life sciences industry to value intangible assets under a portfolio approach given the nature of the intangible assets and facts and circumstances that are common to the industry. The Goodwill amount to be deducted for tax purposes is expected to be $ 0.03 million and will be amortized over 15 years. Sancuso was acquired on January 3, 2022. For the year ended December 31, 2022, the amounts included in the income statement for revenue and operating profit were $ 13.6 million and $ 6.6 million, respectively. On a pro-forma basis, the revenue and earnings of the combined entity as though the business combination had occurred in 2021 appears below: Cumberland 2022 Results Pro-forma 2021 Results Net Revenue $ 42,010,949 50,085,043 Operating income (loss) $ ( 5,704,929 ) ( 5,447,420 ) The 2021 pro-forma results include results for Sancuso as provided by the management of Kyowa Kirin. The Seller is a pharmaceutical company similar to Cumberland. The 2021 results for Sancuso as reported by Kyowa Kirin reflect accounting methodology and reporting which were similar to those employed by the Company. The Company’s 2022 balance sheet reflects the full year impact of the Sancuso acquisition, as the acquisition occurred on January 3, 2022. F-21 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (4) Revenues Product Revenues The Company’s net product revenues consisted of the following for the years ended December 31: 2022 2021 Products: Kristalose $ 15,205,155 $ 15,993,658 Sancuso 13,205,603 — Vibativ 7,487,462 11,704,062 Caldolor 4,827,200 4,970,301 Acetadote 501,040 850,993 Omeclamox-Pak 29,145 ( 388,657 ) Vaprisol ( 447,697 ) 1,859,581 RediTrex ( 126,726 ) 55,321 Total net product revenues $ 40,681,182 $ 35,045,259 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. The international agreements provide for $ 1.5 million in non-refundable up-front payments, milestone payments of up to $ 2.4 million related to regulatory approvals and up to $ 5.6 million in payments related to product sales. From 2012 through December 31, 2022, the Company has recognized a cumulative $ 1.9 million in upfront payments as other revenue and has recognized $ 0.5 million during the year 2022. Other revenues during 2022 and 2021 also include funding from federal grant programs including those secured by CET through the Small Business Administration as well as lease income generated by CET’s Life Sciences Center. The Life Sciences Center is a research center that provides scientists with access to flexible lab space and other resources to develop biomedical products. Grant revenue from these programs totaled approximately $ 0.2 million and $ 0.4 million for the years ending December 31, 2022 and 2021, respectively. F-22 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (5) Inventories The Company's net inventories consisted of the following as of December 31: 2022 2021 Raw materials and work in process, net of reserve $ 12,899,659 $ 12,374,983 Consigned inventory 168,923 164,378 Finished goods, net of reserve 4,322,167 4,939,088 Total inventories 17,390,748 17,478,449 less non-current inventories ( 7,527,167 ) ( 9,048,567 ) Total inventories classified as current $ 9,863,581 $ 8,429,882 At December 31, 2022 and 2021, the Company had recognized and maintained cumulative net realizable value charges for potential obsolescence and discontinuance losses of approximately $ 0.5 million and $ 1.4 million, respectively. In connection with the acquisition of certain product rights related to the Kristalose brand, the Company is responsible for the purchase of the active pharmaceutical ingredient ("API") for Kristalose and maintains the inventory at the third-party packagers. As the API is consumed in production, the value of the API is transferred from raw materials to finished goods. API for the Company's Vaprisol brand is also included in the raw materials inventory total at December 31, 2022 and 2021. Consigned inventory represents Authorized Generic inventory stored with Padagis until shipment. As part of the Vibativ acquisition, Cumberland acquired API and work in process inventories of $ 15.6 million that were classified as non-current inventories. The Vibativ non-current API inventory was $ 7.1 million at December 31, 2022 and $ 8.1 million at December 31, 2021. The Company had no Vibativ finished goods included in the non-current inventories at December 31, 2022, and $ 0.5 million at December 31, 2021. At December 31, 2022 and 2021, Cumberland had $ 0.3 million in non-current inventory for API related to its ifetroban clinical initiatives and $ 0.1 million of finished goods F-23 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (6) Property and Equipment Property and equipment consisted of the following at December 31: Range of useful lives 2022 2021 Computer equipment 3 – 5 years $ 465,508 $ 1,352,734 Office equipment 3 – 15 years 746,602 820,712 Furniture and fixtures 5 – 15 years 369,365 638,903 Leasehold improvements 3 – 15 years, or remaining lease term 787,749 1,422,439 Total property and equipment, gross 2,369,224 4,234,788 Less: accumulated depreciation and amortization ( 2,085,185 ) ( 3,792,153 ) Total property and equipment, net $ 284,039 $ 442,635 Depreciation expense, including amortization expense related to leasehold improvements, is included in general and administrative expense in the consolidated statements of operations. Depreciation expense was as follows for the years ended December 31: 2022 2021 Depreciation expense $ 260,745 $ 235,066 F-24 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (7) Intangible Assets and Goodwill Intangible assets and Goodwill consisted of the following at December 31, 2022 and 2021. 2022 2021 Product and license rights $ 49,668,141 $ 38,543,542 Less: accumulated amortization ( 21,891,974 ) ( 18,015,112 ) Total product and license rights 27,776,167 20,528,430 Patents 10,610,228 10,478,930 Less: accumulated amortization ( 8,051,018 ) ( 7,333,251 ) Total patents 2,559,210 3,145,679 Trademarks 397,974 373,462 Less: accumulated amortization ( 142,673 ) ( 93,096 ) Total trademarks 255,301 280,366 Total intangible assets $ 30,590,678 $ 23,954,475 Goodwill $ 914,000 $ 882,000 Product and license rights include assets associated with the Company's acquired products, including those discussed in Note 3, RediTrex, Vibativ and Sancuso. RediTrex is only represented in 2021. During 2022 and 2021, the Company recorded an additional $ 0.2 million in each year in intangible assets for patents, trademarks and capitalized patent costs, including amounts incurred in the protection of the Company's intellectual property. The Company also recorded an additional $ 14.1 million in product rights and $ 0.03 million in goodwill related to the Sancuso acquisition. These costs will be amortized over the remaining expected useful life of the associated patents. Amortization expense related to product and license rights, trademarks and patents were as follows for the years ended December 31: 2022 2021 Amortization expense $ 5,067,368 $ 4,371,300 The expected amortization expense for the Company's current balance of intangible assets are as follows: Year ending December 31: 2023 $ 4,736,657 2024 4,687,365 2025 4,652,156 2026 4,092,961 2027 and thereafter 12,421,539 $ 30,590,678 F-25 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (8) Other Current and Other Long-term Liabilities Other current liabilities consisted of the following at December 31: Other current liabilities 2022 2021 Rebates, product returns, administrative fees and service fees $ 8,347,214 $ 3,680,677 Employee wages and benefits 1,440,859 1,340,846 Sancuso related liabilities 2,226,725 — Current portion of accrued contingent consideration 3,006,310 2,685,531 Current deferred charges 614,551 — Accrued inventory purchases 609,621 18,211 Other 1,342,631 943,038 Total other current liabilities $ 17,587,911 $ 8,668,303 Other long-term liabilities 2022 2021 Non-current portion of accrued contingent consideration $ 4,931,513 $ 3,830,096 Deferred compensation 2,522,506 3,433,962 Other 131,000 224,786 Total other long-term liabilities $ 7,585,019 $ 7,488,844 F-26 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (9) Debt On December 31, 2021, the Company entered into a Fifth Amendment to the Revolving Credit Note and Sixth Amendment (the "Sixth Amendment") to Revolving Credit Loan Agreement with Pinnacle Bank (the "Pinnacle Agreement"). The Sixth 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. The Pinnacle Agreement includes specific financial covenants including Debt Ratio and Tangible Capital Ratio. In 2022, the Company and Pinnacle Bank agreed to modify the financial covenants to align with the current use of the line of credit. 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 year ended December 31, 2022, we were in compliance with the Funded Debt Ratio financial covenant. The Company had $ 16.2 million and $ 15.0 million in borrowings outstanding under the Pinnacle Agreement at December 31, 2022 and 2021, respectively. The interest rate on the Pinnacle Agreement is based on LIBOR plus an interest rate spread. The pricing under the Fourth Amendment provides for an interest rate spread of 1.75 % to 2.75 % above LIBOR with a minimum LIBOR of 0.90 % (representing an interest rate of 6.875 % at December 31, 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. In 2022, the LIBOR benchmark rate is expected to be discontinued. When the LIBOR rate is no longer available, the Pinnacle Agreement calls for a new Benchmark rate to be used to determine the interest rate for the Agreement. It is expected that SOFR will become the replacement benchmark. Borrowings under the line of credit are collateralized by substantially all of our assets. Paycheck Protection Program Loan On April 20, 2020, Cumberland received the funding of a loan from Pinnacle Bank in the aggregate amount of $ 2,187,140 pursuant to the Paycheck Protection Program (the “PPP”) under the Federal Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which was enacted March 27, 2020. The PPP is administered by the U.S. Small Business Administration ("SBA"). The loan was scheduled to mature April 14, 2022, and bears interest at a rate of 1.0 % per year, payable monthly. The loan could be prepaid at any time prior to maturity with no prepayment penalties. Funds from the loan are to be used to maintain payroll, continue group health care benefits and pay for rent and utilities. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act, including qualifying payroll costs, covered rent payments, and covered utilities. From the date of funding the Company has used the loan amount for such qualifying expenses. Cumberland has elected to account for the proceeds of the loan as a government grant under International Accounting Standard 20 ("IAS 20"), Accounting for Government Grants and Disclosure of Government Assistance. The permitted analogous use of IAS 20 outlines a model for the accounting for government assistance, including forgivable loans. As a result, the Company has recorded the $ 2,187,140 as a deferred income liability, which is included as a component of other current liabilities on the consolidated balance sheet as of December 31, 2021. Cumberland applied for this loan after carefully considering, with its bank, the eligibility criteria to participate in this program, and determining that Cumberland met these criteria. The Company evaluated and provided information on our payroll and other qualifying expenses to determine the amount of PPP funds to apply for. F-27 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Cumberland has not laid off or furloughed any employees as a result of the COVID-19 pandemic and, based on assistance from the PPP loan, the Company currently does not foresee doing so. In October 2020, the Company submitted a request for forgiveness of the PPP loan. The request was approved by the lender, Pinnacle Bank, who then submitted it to SBA for the SBA's review and approval. On June 11, 2021, the Company received a notice from the SBA that the full amount of the loan was forgiven. The Company accounted for the forgiveness of the loan under IAS 20 and recorded the $ 2,187,140 as other income during the year ended December 31, 2021. (10) Shareholders’ Equity (a) Initial Public Offering On August 10, 2009 , the Company completed its initial public offering of 5,000,000 shares of common stock at a price of $ 17.00 per share, raising gross proceeds of $ 85.0 million. After deducting underwriting discounts of approximately $ 6.0 million and offering costs incurred of approximately $ 4.2 million, the net proceeds to the Company were approximately $ 74.8 million. (b) Preferred Stock The Company is authorized to issue 20,000,000 shares of preferred stock. The Board of Directors is authorized to divide these shares into classes or series, and to fix and determine the relative rights, preferences, qualifications and limitations of the shares of any class or series so established. At December 31, 2022 and 2021, there was no preferred stock outstanding. (c) Common Stock During 2022 and 2021, the Company issued 171,655 shares and 192,684 shares of common stock, respectively, as a result of restricted shares vesting as well as other common share issuances. There were no option exercise transactions during 2022 and 2021. (d) Share Repurchases The Company currently has a share repurchase program to repurchase up to $ 10 million of its common stock pursuant to Rule 10b-18 of the Securities Exchange Act, as amended. In January 2019, the Company's Board of Directors established the current $ 10 million repurchase program to replace the prior authorizations. The Company repurchased 367,793 shares and 438,359 shares of common stock for approximately $ 1.0 million and $ 1.4 million during the years ended December 31, 2022 and 2021, respectively. There remains $ 3.8 million available under the current repurchase program available for share repurchases at December 31, 2022. F-28 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (11) Earnings (Loss) Per Share The following table shows the computation of the numerator and the denominator used to calculate diluted earnings (loss) per share for the years ended December 31: 2022 2021 Numerator: Net income (loss) from continuing operations $ ( 5,650,039 ) $ ( 5,597,121 ) Discontinued operations — 1,994,322 Net income (loss) ( 5,650,039 ) ( 3,602,799 ) Net loss at subsidiary attributable to noncontrolling interests 79,798 95,212 Net income (loss) attributable to common shareholders $ ( 5,570,241 ) $ ( 3,507,587 ) Denominator: Weighted-average shares outstanding – basic 14,563,592 14,904,834 Weighted-average shares outstanding – diluted 14,563,592 14,904,834 The Company's anti-dilutive restricted shares and stock options outstanding were as follows for the years ended December 31: 2022 2021 Anti-dilutive shares and options 227,050 183,300 F-29 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (12) Income Taxes The components of the Company's net deferred tax assets at December 31 are as follows: 2022 2021 Deferred Tax Assets Net operating loss and tax credits $ 16,164,754 $ 16,817,070 Property and equipment and intangibles 264,653 222,893 Operating lease liabilities 1,121,800 — Intangible assets 866,942 — Capitalized research cost 1,481,455 — Allowance for accounts receivable 145,803 83,931 Reserve for expired product 654,148 457,723 Inventory 217,025 104,824 Deferred charges 1,156,150 1,303,664 Cumulative compensation costs incurred on deductible equity awards 635,989 834,070 Total deferred tax assets 22,708,719 19,824,175 Deferred Tax Liabilities Operating lease right-of-use assets ( 1,150,935 ) — Intangible assets — ( 62,253 ) Net deferred tax assets, before valuation allowance 21,557,784 19,761,922 Less: deferred tax asset valuation allowance ( 21,557,784 ) ( 19,761,922 ) Net deferred tax assets $ — $ — The following table summarizes the amount and year of expiration of the Company's federal and state net operating loss carryforwards as of December 31, 2022: Years of expiration Federal State 2023 $ — $ 251,811 2024-2042 46,656,666 55,790,944 Indefinite Period 6,405,835 433,203 Total federal and state net operating loss carryforwards $ 53,062,501 $ 56,475,958 F-30 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Income tax (expense) benefit includes the following components for the years ended December 31: 2022 2021 Current: Federal $ — $ — State and other 68,850 34,891 Total current income tax (expense) benefit 68,850 34,891 Deferred: Federal — 61,678 State — ( 61,678 ) Total deferred income tax (expense) benefit — — Total income tax (expense) benefit $ 68,850 $ 34,891 The Company’s effective income tax rate for 2022 and 2021 reconciles with the federal statutory tax rate as follows: 2022 2021 Federal tax expense at statutory rate 21 % 21 % State income tax expense (net of federal income tax benefit) 2 % 1 % Permanent differences associated with general business credits — % — % Change in valuation allowance ( 22 ) % ( 19 ) % Other permanent differences ( 2 ) % ( 4 ) % Other — % — % Net income tax expense ( 1 ) % ( 1 ) % The Company believes that it is not more likely than not that its net deferred tax assets will be realized. As such, the net deferred tax assets are fully offset with a valuation allowance as of the periods ended December 31, 2022 and 2021. F-31 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) As of December 31, 2022, the Company has general business credit carryforwards of $ 1.5 million. These credit carryforwards will expire in years 2023 through 2042. Years of expiration Federal 2023 $ 200,825 2024-2042 1,319,161 Total federal and state credit carryforwards $ 1,519,986 The Company expects it will continue to pay minimal taxes in future periods through the continued utilization of net operating loss carryforwards, as it is able to achieve taxable income through its operations. The Company is no longer subject to U.S. federal tax examinations for tax years before 2019, and with few exceptions, the Company is not subject to examination by state tax authorities for tax years which ended before 2019. Loss carryforwards and credit carryforwards generated or utilized in years earlier than 2019 remain subject to examination and adjustment. During 2012, the 2009 federal tax return was examined by the Internal Revenue Service with no significant findings or adjustments. The Company has no unrecognized tax benefits at December 31, 2022 and 2021. (13) Stock-Based Compensation Plans The Company has grants outstanding under two equity compensation plans. The 2007 Long-Term Incentive Compensation Plan (the "2007 Plan") and the 2007 Directors’ Incentive Plan (the "Directors’ Plan"), which were approved by shareholders, superseded the 1999 Stock Option Plan. Both plans are available for future grants of equity compensation awards to employees, consultants and directors. The 2007 Plan and the Directors’ Plan provide for the issuance of stock options, stock appreciation rights and restricted stock. Vesting is determined on a grant-by-grant basis in accordance with the terms of the plans and the related grant agreements. The Company has reserved 2.4 million shares of common stock for issuance under the 2007 Plan and 250,000 shares for issuance under the Directors’ Plan. The exercise price of stock options is generally 100 % of the fair market value of the underlying common stock on the grant date. The maximum contractual term of stock options is ten years from the date of grant, except for incentive stock options granted to 10 % shareholders, which is five years . During 2011, the Company began issuing shares of restricted stock with no exercise price to employees and directors. Restricted stock issued to employees generally cliff-vests on the fourth anniversary of the date of grant. Restricted stock issued to directors vests on the one year anniversary of the date of grant. Stock compensation expense is presented as a component of general and administrative expense in the consolidated statements of operations. Stock compensation expense consisted of the following for the years ended December 31: 2022 2021 Share-based compensation - employees $ 449,467 $ 730,412 Share-based compensation - nonemployees ( 1,964 ) 11,455 Total share-based compensation $ 447,503 $ 741,867 At December 31, 2022, there was approximately $ 0.8 million of unrecognized compensation cost related to share-based payments, which is expected to be recognized over a weighted-average period of 1.81 years. This amount relates primarily to unrecognized compensation cost for employee restricted stock and stock options awards. F-32 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Stock Options The Company granted 178,950 and 186,900 incentive stock options during 2022 and 2021, respectively, which vest in four years . There were no options exercised during 2022 and 2021. As such, there was no intrinsic value of options or weighted-average fair value of options exercised for the periods. Incentive Stock Options Incentive stock options activity was as follows: Number of option shares Weighted- average exercise price Weighted-average remaining contractual term Nonvested, December 31, 2020 — $ — Options shares granted 186,900 3.32 Options shares vested — — Option shares forfeited ( 16,300 ) 3.22 Nonvested, December 31, 2021 170,600 3.33 Options shares granted 178,950 2.68 Options shares vested — — Option shares forfeited ( 29,900 ) 2.98 Nonvested, December 31, 2022 319,650 $ 3.00 6.15 The weighted-average grant-date fair value of options granted during the years 2022 and 2021 was $ 1.29 and $ 1.10 , respectively. The fair value of stock options is calculated using the Black-Scholes (“Black-Scholes-Merton”, or “BSM”) option-pricing model on the date of grant. Since 2012, the Company had been issuing RSA’s (Restricted Share Awards) where the grant date Fair Value (“FV”) equaled the closing share price. The ISO’s required a BSM valuation to approximate FV. The following inputs were used in the creation of the valuation. • Volatility - We estimate volatility in accordance with SAB No. 107, as amended by SAB No. 110. We have been publicly traded since August 2009, so we have sufficient years of trading history and volatility to appropriately evaluate this component of the BSM model. As such, we are using our own historical volatility to value stock options. We have noted no conditions that would indicate the historical volatility would not be an indicator of future volatility, as such we are using historical volatility over the same period as the expected term of the awards ( 7 years) back to 2015 and believe it to be sufficient. Calculated volatility for the grants issued in 2022 ranges from 44 % to 45 %. Our average volatility over the life of stock being public is 42 % and 45 % over the last 6 months. Based on the similar amounts, we believe our volatility estimate for the ISO’s are appropriate. • Expected Term - We estimate the expected life of employee share options based on the simplified method allowed by SAB No. 107, as amended by SAB No. 110. Under this approach, the expected term is presumed to be the average between the weighted-average vesting period and the contractual term. The ISO’s have a 10-year contractual term and the vesting period is 4 years. This results in a calculated expected term of 7 years. F-33 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) • Risk Free rate - The risk-free interest rate is based on the U.S. Treasury Note, on the date of grant with a term equal to the corresponding option’s expected term. So, in this case, we are using the 7 year treasury note as of the date of grant, which ranges from 2.22 % and 3.92 % at the date of the grants. • Dividend yield - We have never declared or paid any cash dividends and there is currently no expected cash dividend payments as of the date of this grant. As such, dividend yield is zero . Restricted Stock Awards Restricted stock activity was as follows: Number of shares Weighted- average grant-date fair value Nonvested, December 31, 2020 779,415 $ 5.56 Shares granted 36,850 3.21 Shares vested ( 192,684 ) 6.29 Shares forfeited ( 55,400 ) 5.39 Nonvested, December 31, 2021 568,181 5.17 Shares granted 65,225 2.59 Shares vested ( 171,655 ) 6.42 Shares forfeited ( 66,000 ) 4.67 Nonvested, December 31, 2022 395,751 $ 4.29 The fair value of restricted stock granted was based on the closing market price of the Company’s common stock on the date of grant. The restricted stock grants are included in the diluted weighted shares outstanding computation until they cliff-vest. Once vested they are included in the basic weighted shares outstanding computation. F-34 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (14) Employee Benefit Plans The Company sponsors an employee benefit plan that was established on January 1, 2006, the Cumberland Pharmaceuticals 401(k) Plan (the "Plan"), under Section 401(k) of the Internal Revenue Code of 1986, as amended, for the benefit of all employees over the age of 21 , having been employed by the Company for at least six months . The Plan provides that participants may contribute up to the maximum amount of their compensation as set forth by the Internal Revenue Service each year. Employee contributions are invested in various investment funds based upon elections made by the employees. During 2022 and 2021, the Company contributed approximately $ 60,000 and 50,000 , respectively, in each year to the Plan as an employer match of participant contributions. In 2012 and 2013, the Company established non-qualified unfunded deferred compensation plans that allow participants to defer receipt of a portion of their compensation. The liability under the plans, reflected in other long term liabilities in the consolidated balance sheets, was $ 2.5 million and $ 3.4 million as of December 31, 2022 and 2021, respectively. The Company had assets consisting of company-owned life insurance contracts generally designated to pay benefits of the deferred compensation plans reflected in other assets in the consolidated balance sheet of $ 2.3 million and $ 3.2 million as of December 31, 2022 and 2021, respectively. F-35 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (15) Leases On November 15, 2021, Cumberland entered into a lease, pursuant to which the Company leases approximately 16,903 rentable square feet of space at the new development Broadwest located in Nashville, Tennessee with 1600 West End Avenue Partners, LLC. The Leased Premise serves 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, with the commencement date of October 25, 2022. This lease currently expires in November 2035. The Company is responsible for paying rent to the Landlord under the Lease beginning three months after the Commencement Date. The Company pays a base rent of $ 33.06 per square foot of rentable space with a gradual rental rate increase of 2.5 % for each year period thereafter of the prior year's base rental. In addition to the monthly base rent, the Company is responsible for its percentage share of the operating expenses of the Building. The Lease also provides for a tenant improvement allowance for the space. In addition, the operating leases also include the lease of approximately 14,200 square feet of wet laboratory and office space in Nashville, Tennessee by CET, our majority-owned subsidiary, where it operates the CET Life Sciences Center. The research lab space at CET, under an agreement amended in July 2012, is leased through April 2023, with an option to extend the lease through April 2028. The Company also subleases a portion of the space under these leases. Rent expense is recognized over the expected term of the lease, including renewal option periods, if applicable, on a straight-line basis as a component of general and administrative expense. Rent expense and sublease income as follows for the years ended December 31: 2022 2021 Rent expense $ 1,159,695 $ 1,209,102 Sublease income $ 529,411 $ 699,889 In March 2016, the FASB issued ASU 2016-02. ASU 2016-02’s core principle is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information. The primary effect of adopting ASU 2016-02 to the Company was to record right-of-use assets and obligations for the leases currently classified as operating leases. Operating lease liabilities were recorded as the present value of remaining lease payments not yet paid for the lease term discounted using the incremental borrowing rate associated with each lease. Operating lease right-of-use assets represent operating lease liabilities adjusted for lease incentives and initial direct costs. As the Company’s leases do not contain implicit borrowing rates, the incremental borrowing rates were calculated based on information available at January 1, 2019 and October 25, 2022. Incremental borrowing rates reflect the Company’s estimated interest rates for collateralized borrowings over similar lease terms. The weighted-average remaining lease term for the Broadwest lease is 12.7 years and for the CET lease is 0.1 years. The weighted-average incremental borrowing rate used to discount the present value of the remaining CPI lease payments is 9.28 % and remaining CET lease payments is 7.42 %. F-36 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Lease Position At December 31, 2022 and 2021, the Company recorded the following on the Consolidated Balance Sheet: Right-of-Use Assets December 31, 2022 December 31, 2021 Operating lease right-of-use assets $ 5,218,403 $ 1,024,200 Lease Liabilities December 31, 2022 December 31, 2021 Operating lease current liabilities $ 172,910 $ 969,677 Operating lease non-current liabilities 4,586,301 90,016 Total $ 4,759,211 $ 1,059,693 Cumulative future minimum sublease income under non-cancelable operating subleases totals approximately $ 0.1 million and will be paid through the leases ending in April 2023. Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) are as follows: Maturity of Leases Liabilities at December 31, 2022 Operating Leases 2023 $ 607,061 2024 575,209 2025 539,347 2026 604,254 2027 619,354 After 2027 5,482,220 Total minimum lease payments $ 8,427,445 Less: Interest ( 3,668,234 ) Present value of lease liabilities $ 4,759,211 F-37 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (16) Market Concentrations The Company’s principal financial instruments subject to potential concentration of credit risk are accounts receivable, which are unsecured, and cash equivalents. The Company’s cash equivalents consist primarily of money market funds. Certain bank deposits may be in excess of the insurance limits provided by the Federal Deposit Insurance Corporation. The Company’s primary customers are wholesale pharmaceutical distributors in the U.S. Total revenues by customer for each customer representing 10% or more of consolidated revenues are summarized below for the years ended December 31: 2022 2021 Customer 1 29 % 27 % Customer 2 24 % 24 % Customer 3 22 % 20 % The Company’s accounts receivable, net of allowances, due from the customers representing 10% or more of consolidated revenue was 51.77 % and 51.1 % at December 31, 2022 and 2021, respectively. (17) Manufacturing and Supply Agreements The Company utilizes one or two primary suppliers to manufacture each of its products and product candidates. Although there are a limited number of manufacturers of pharmaceutical products, the Company believes it could utilize other suppliers to manufacture its prescription products on comparable terms. A change in suppliers, problems with its third-party manufacturing operations or related production capacity, or contract disputes with suppliers could cause a delay in manufacturing or shipment of finished goods and possible loss of sales, which could adversely affect operating results. (18) Employment Agreements The Company has entered into employment agreements with all its full-time employees. Each employment agreement provides for a salary for services performed, a potential annual bonus and, if applicable, a grant of restricted common shares pursuant to a restricted stock and incentive stock option agreement. F-38 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (19) Discontinued Operations In 2016, Cumberland entered into an agreement with Clinigen Group Plc ("Clinigen") for the rights and responsibilities associated with the commercialization of Ethyol in the United States. In 2017, the Company entered into another agreement with Clinigen for the rights and responsibilities associated with the commercialization of Totect in the United States. Ethyol and Totect are collectively referred to herein as the "Products." Early in 2019, Cumberland announced a strategic review of the Company's brands, capabilities, and international partners. This review followed an accelerated business development initiative, which resulted in a series of transactions. Because of that progress, Cumberland felt that it was prudent to take a fresh look at our product portfolio, partners, and organization to ensure proper focus and capabilities. During May 2019, Cumberland entered into the Dissolution Agreement with Clinigen in which the Company returned the exclusive rights to commercialize Ethyol and Totect (“the Products”) in the United States to Clinigen. This Dissolution Agreement originally targeted a transition from the Company's arrangements with Clinigen effective September 30, 2019, but was then amended to change the transition date to December 31, 2019. Under the terms of the Dissolution Agreement, Cumberland was no longer responsible for the distribution, marketing and promotion of either the Products or any competing products after December 31, 2019. In exchange for the return of these product license rights and the non-compete provisions of the Dissolution Agreement, Cumberland received $ 5 million in financial consideration paid in quarterly installments over the two-years following the transition date. Cumberland recorded the last four quarterly installments totaling $ 2.0 million during the year ended December 31, 2021. The exit from the Ethyol and Totect products meets the accounting criteria to be reported as discontinued operations. As a result, January 1, 2020, was the first day of discontinued operations for the Products. The Products provided revenue, incurred direct expenses and resulted in discontinued operations income during the periods presented. The following amounts have been separated from continuing operations, as discontinued operations, for all periods presented. The direct expenses separated for discontinued operations do not reflect the direct selling and marketing costs attributable to the individuals at Cumberland responsible for promotion of the Products. Subsequent to the transaction date, th ose sales and marketing individuals who supported the Products shifted their efforts from the Products and continue to support other Cumberland brands. (20) Commitments and Contingencies Commitments In connection with its licensing agreements for Caldolor, the Company is required to pay royalties based on net sales over the life of the product. Royalty expense is recognized as a component of selling and marketing expense in the period that revenue is recognized. In connection with the acquisition of Vibativ, the Company is required to pay royalties based on net sales of the product. At the purchase date, Cumberland recorded the fair value of this liability and will continue to evaluate the liability each period and the royalty expense is recognized as a component of selling and marketing expense in the period that the change in fair value is recognized. In connection with the acquisition of Sancuso, the Company is required to pay up to $ 3.5 million in milestones and tiered royalties ranging from 10 % to 5 % on U.S. net product sales for ten years . F-39 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Legal Matters Cumberland has a number of patents issued through the United States Patent and Trademark Office (the “USPTO”) including U.S. Patent number 8,148,356 (the “356 Acetadote Patent”) which is assigned to the Company. The claims of the 356 Acetadote Patent encompass the new Acetadote formulation and include composition of matter claims. Following its issuance, the 356 Acetadote Patent was listed in the FDA Orange Book. The 356 Acetadote Patent is scheduled to expire in May 2026, which time period includes a 270-day patent term adjustment granted by the USPTO. Since 2012, Cumberland has continued to vigorously defend and protect its Acetadote product and related intellectual property rights including the use of all its legal options. Melinta Litigation On February 2, 2022, the Company filed an action for breach of contract against Melinta Therapeutics, LLC and Targanta Therapeutics Corporation (collectively, the “Defendants”) in the United States District Court for the Southern District of New York (Case No. 1:22-cv-00915-VM). The Company and the Defendants are parties to an agreement (the “Agreement”), pursuant to which the Defendants have a license to develop and commercialize products under certain Company patents, in exchange for the Defendants paying the Company certain milestone payments and royalties on net sales of the licensed products. Specifically, the Agreement requires the Defendants to, among other things, make a $ 500,000 payment to the Company within 30 days following the first filing of an sNDA in relation to the Product (as defined the Agreement) and a $ 500,000 payment to the Company following the approval of the first sNDA in relation to the Product. After Defendants disclosed the domiciles of its limited partners to the Company, as required by the Court, on October 24, 2022, the action for breach of contract was refiled in the Supreme Court of the State of New York, County of New York (Index No. 654234/2022) on November 7, 2022. The complaint alleges that, despite the Defendants filing an NDA and sNDA for the Product and receiving FDA approval for both applications, the Defendants failed to make the required total of $ 1 million in milestone payments to the Company. The Company is seeking damages in the amount of no less than $ 1 million, pre- and post-judgment interest under N.Y. C.P.L.R. § 5001, costs, and such further relief as the court deems just and proper. The Company is a party to various other legal proceedings in the ordinary course of its business. In the opinion of management, the liability associated with these matters, will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. F-40 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (21) Quarterly Financial Information (Unaudited) The following table sets forth the unaudited operating results for each fiscal quarter of 2022 and 2021: First Quarter Second Quarter Third Quarter Fourth Quarter Total 2022: Net revenues $ 11,175,045 $ 10,299,152 $ 11,413,072 $ 9,123,680 $ 42,010,949 Operating income (loss) ( 1,291,999 ) ( 1,846,538 ) ( 288,588 ) ( 2,277,804 ) ( 5,704,929 ) Net income (loss) from continuing operations ( 1,402,433 ) ( 1,364,666 ) ( 423,226 ) ( 2,459,714 ) ( 5,650,039 ) Net income (loss) attributable to common shareholders ( 1,385,253 ) ( 1,335,620 ) ( 408,639 ) ( 2,440,729 ) ( 5,570,241 ) Earnings (loss) per share attributable to common shareholders (1) Continuing operations - basic $ ( 0.09 ) $ ( 0.09 ) $ ( 0.03 ) $ ( 0.17 ) $ ( 0.38 ) Discontinued operations - basic — — — — — Basic $ ( 0.09 ) $ ( 0.09 ) $ ( 0.03 ) $ ( 0.17 ) $ ( 0.38 ) Continuing operations - diluted $ ( 0.09 ) $ ( 0.09 ) $ ( 0.03 ) $ ( 0.17 ) $ ( 0.38 ) Discontinued operations - diluted — — — — — Diluted $ ( 0.09 ) $ ( 0.09 ) $ ( 0.03 ) $ ( 0.17 ) $ ( 0.38 ) 2021: Net revenues $ 10,537,159 $ 9,055,483 $ 8,072,540 $ 8,319,861 $ 35,985,043 Operating income (loss) ( 324,300 ) ( 1,435,729 ) ( 1,563,395 ) ( 4,353,996 ) ( 7,677,420 ) Net income (loss) from continuing operations ( 350,749 ) 724,684 ( 1,583,480 ) ( 4,387,576 ) ( 5,597,121 ) Net income (loss) from discontinued operations 495,410 498,807 496,787 503,318 1,994,322 Net income (loss) attributable to common shareholders 166,828 1,228,560 ( 1,055,278 ) ( 3,847,697 ) ( 3,507,587 ) Earnings (loss) per share attributable to common shareholders (1) Continuing operations - basic $ ( 0.02 ) $ 0.05 $ ( 0.10 ) $ ( 0.29 ) $ ( 0.37 ) Discontinued operations - basic 0.03 0.03 0.03 0.03 0.13 Basic $ 0.01 $ 0.08 $ ( 0.07 ) $ ( 0.26 ) $ ( 0.24 ) Continuing operations - diluted $ ( 0.02 ) $ 0.05 $ ( 0.10 ) $ ( 0.29 ) $ ( 0.37 ) Discontinued operations - diluted 0.03 0.03 0.03 0.03 0.13 Diluted $ 0.01 $ 0.08 $ ( 0.07 ) $ ( 0.26 ) $ ( 0.24 ) (1) Due to the nature of interim earnings per share calculations, the sum of the quarterly earnings (loss) per share amounts may not equal the reported earnings (loss) per share for the full year. F-41 Schedule II CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 31, 2022, 2021 and 2020 Description Balance at beginning of period Charged to costs and expenses Charged to other accounts Deductions Balance at end of period Allowance for uncollectible amounts, cash discounts, chargebacks, and credits issued for damaged products: For the years ended December 31: 2021 984,677 2,963,279 — ( 3,606,992 ) (1) 340,964 2022 340,964 6,673,104 — ( 6,417,977 ) (1) 596,091 Valuation allowance for deferred tax assets: For the years ended December 31: 2021 19,196,121 565,801 — — 19,761,922 2022 19,761,922 1,795,862 — — 21,557,784 (1) Composed of actual returns and credits for chargebacks and cash discounts. F-42