CUMBERLAND PHARMACEUTICALS INC 10-Q

Item 1. Financial Statements (Unaudited) CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) September 30, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 18,507,965 $ 19,757,970 Accounts receivable, net 12,620,120 13,163,681 Inventories, net 8,670,548 9,863,581 Prepaid and other current assets 1,971,164 3,084,978 Total current assets 41,769,797 45,870,210 Non-current inventories 8,301,845 7,527,167 Property and equipment, net 377,439 284,039 Intangible assets, net 27,121,070 30,590,678 Goodwill 914,000 914,000 Operating lease right-of-use assets 6,711,155 5,218,403 Other assets 2,555,638 2,520,661 Total assets $ 87,750,944 $ 92,925,158 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 10,818,045 $ 10,819,011 Operating lease current liabilities 334,288 172,910 Other current liabilities 16,175,937 17,587,911 Total current liabilities 27,328,270 28,579,832 Revolving line of credit 12,923,125 16,200,000 Operating lease non-current liabilities 5,388,900 4,586,301 Other long-term liabilities 6,455,091 7,585,019 Total liabilities 52,095,386 56,951,152 Equity: Shareholders’ equity: Common stock— no par value; 100,000,000 shares authorized; 14,217,926 and 14,366,616 shares issued and outstanding as of September 30, 2023 and December 31, 2022 , respectively 47,185,304 47,474,973 Accumulated deficit ( 11,193,755 ) ( 11,208,841 ) Total shareholders’ equity 35,991,549 36,266,132 Noncontrolling interests ( 335,991 ) ( 292,126 ) Total equity 35,655,558 35,974,006 Total liabilities and equity $ 87,750,944 $ 92,925,158 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 1 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Net revenues $ 10,085,926 $ 11,413,072 $ 30,199,441 $ 32,887,269 Costs and expenses: Cost of products sold 1,765,590 2,224,443 4,536,628 6,468,212 Selling and marketing 4,743,142 4,110,397 13,692,535 13,281,511 Research and development 1,924,768 1,714,254 4,569,476 5,283,083 General and administrative 2,343,855 2,166,118 7,212,731 6,672,442 Amortization 1,175,174 1,486,448 3,563,493 4,609,146 Total costs and expenses 11,952,529 11,701,660 33,574,863 36,314,394 Operating loss ( 1,866,603 ) ( 288,588 ) ( 3,375,422 ) ( 3,427,125 ) Interest income 98,603 21,602 205,854 52,709 Other income — — 2,828,871 — Other income - settlement 475,000 — 475,000 — Other income - insurance proceeds 346,800 — 346,800 611,330 Interest expense ( 110,081 ) ( 149,340 ) ( 489,069 ) ( 406,539 ) Loss before income taxes ( 1,056,281 ) ( 416,326 ) ( 7,966 ) ( 3,169,625 ) Income tax expense ( 6,938 ) ( 6,900 ) ( 20,813 ) ( 20,700 ) Net loss ( 1,063,219 ) ( 423,226 ) ( 28,779 ) ( 3,190,325 ) Net loss at subsidiary attributable to noncontrolling interests 13,921 14,587 43,865 60,813 Net income (loss) attributable to common shareholders $ ( 1,049,298 ) $ ( 408,639 ) $ 15,086 $ ( 3,129,512 ) Earnings (loss) per share attributable to common shareholders - basic $ ( 0.07 ) $ ( 0.03 ) $ — $ ( 0.21 ) - diluted $ ( 0.07 ) $ ( 0.03 ) $ — $ ( 0.21 ) Weighted-average shares outstanding - basic 14,277,229 14,477,478 14,343,560 14,618,975 - diluted 14,277,229 14,477,478 14,521,600 14,618,975 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 2 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) Nine months ended September 30, 2023 2022 Cash flows from operating activities: Net loss $ ( 28,779 ) $ ( 3,190,325 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization expense 3,702,687 4,816,630 Share-based compensation 271,146 320,598 Decrease in non-cash contingent consideration ( 1,017,712 ) ( 1,051,908 ) Decrease in cash surrender value of life insurance policies over premiums paid 16,357 708,293 Increase in noncash interest expense 11,713 7,608 Life insurance proceeds ( 346,800 ) ( 611,330 ) Net changes in assets and liabilities affecting operating activities: Accounts receivable 890,361 ( 8,184,656 ) Inventories 418,355 1,338,881 Other current assets and other assets ( 439,320 ) 4,355,396 Accounts payable and other current liabilities 1,903,021 8,778,631 Other long-term liabilities ( 327,329 ) ( 2,472,453 ) Net cash provided by operating activities 5,053,700 4,815,365 Cash flows from investing activities: Additions to property and equipment ( 232,595 ) ( 255,676 ) Settlement of patent litigation — 21,757 Life insurance policy proceeds received — 877,597 Cash paid for acquisitions — ( 13,500,000 ) Additions to intangible assets ( 133,739 ) ( 177,362 ) Net cash used in investing activities ( 366,334 ) ( 13,033,684 ) Cash flows from financing activities: Borrowings on line of credit 23,775,000 46,700,000 Repayments on line of credit ( 27,051,875 ) ( 44,000,000 ) Cash payment of contingent consideration ( 2,108,933 ) ( 1,117,576 ) Repurchase of common shares ( 551,563 ) ( 863,383 ) Net cash provided by (used in) financing activities ( 5,937,371 ) 719,041 Net decrease in cash and cash equivalents ( 1,250,005 ) ( 7,499,278 ) Cash and cash equivalents at beginning of period $ 19,757,970 $ 27,040,816 Cash and cash equivalents at end of period $ 18,507,965 $ 19,541,538 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 3 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Condensed Consolidated Statements of Equity (Unaudited) Common stock Accumulated deficit Noncontrolling interests Total equity Shares Amount Balance, December 31, 2021 14,742,754 $ 48,452,906 $ ( 5,638,600 ) $ ( 212,328 ) $ 42,601,978 Share-based compensation 162,155 159,901 — — 159,901 Repurchase of common shares ( 174,149 ) ( 566,043 ) — — ( 566,043 ) Net loss — — ( 1,385,253 ) ( 17,180 ) ( 1,402,433 ) Balance, March 31, 2022 14,730,760 $ 48,046,764 $ ( 7,023,853 ) $ ( 229,508 ) $ 40,793,403 Balance, March 31, 2022 14,730,760 $ 48,046,764 $ ( 7,023,853 ) $ ( 229,508 ) $ 40,793,403 Share-based compensation 2,250 ( 27,753 ) — — ( 27,753 ) Repurchase of common shares ( 83,317 ) ( 196,692 ) — — ( 196,692 ) Net loss — — ( 1,335,620 ) ( 29,046 ) ( 1,364,666 ) Balance, June 30, 2022 14,649,693 $ 47,822,319 $ ( 8,359,473 ) $ ( 258,554 ) $ 39,204,292 Balance, June 30, 2022 14,649,693 $ 47,822,319 $ ( 8,359,473 ) $ ( 258,554 ) $ 39,204,292 Share-based compensation — 188,449 — — 188,449 Repurchase of common shares ( 33,110 ) ( 78,793 ) — — ( 78,793 ) Net loss — — ( 408,639 ) ( 14,587 ) ( 423,226 ) Balance, September 30, 2022 14,616,583 $ 47,931,975 $ ( 8,768,112 ) $ ( 273,141 ) $ 38,890,722 Common stock Accumulated deficit Noncontrolling interests Total equity Shares Amount Balance, December 31, 2022 14,366,616 $ 47,474,973 $ ( 11,208,841 ) $ ( 292,126 ) $ 35,974,006 Share-based compensation 150,260 90,156 — — 90,156 Repurchase of common shares ( 86,829 ) ( 187,961 ) — — ( 187,961 ) Net income (loss) — — 192,184 ( 19,898 ) 172,286 Balance, March 31, 2023 14,430,047 $ 47,377,168 $ ( 11,016,657 ) $ ( 312,024 ) $ 36,048,487 Balance, March 31, 2023 14,430,047 $ 47,377,168 $ ( 11,016,657 ) $ ( 312,024 ) $ 36,048,487 Share-based compensation 97,877 — — 97,877 Repurchase of common shares ( 99,057 ) ( 171,616 ) — — ( 171,616 ) Net income (loss) — — 872,200 ( 10,046 ) 862,154 Balance, June 30, 2023 14,330,990 $ 47,303,429 $ ( 10,144,457 ) $ ( 322,070 ) $ 36,836,902 Balance, June 30, 2023 14,330,990 $ 47,303,429 $ ( 10,144,457 ) $ ( 322,070 ) $ 36,836,902 Share-based compensation 3,500 83,112 — — 83,112 Repurchase of common shares ( 116,564 ) ( 201,237 ) — — ( 201,237 ) Net loss — — ( 1,049,298 ) ( 13,921 ) ( 1,063,219 ) Balance, September 30, 2023 14,217,926 $ 47,185,304 $ ( 11,193,755 ) $ ( 335,991 ) $ 35,655,558 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 4 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (1) ORGANIZATION AND BASIS OF PRESENTATION Cumberland Pharmaceuticals Inc. (“Cumberland,” the “Company,” or as used in the context of “we,” “us,” or “our”), is a specialty pharmaceutical company focused on the acquisition, development and commercialization of branded prescription pharmaceutical products. We are dedicated to our mission of working together to provide unique products that improve the quality of patient care. Our primary markets are hospital acute care, gastroenterology and oncology. These medical specialties are characterized by relatively concentrated prescriber bases that we believe can be served effectively by small, targeted sales forces. We promote our approved products through our hospital, oncology and field sales forces in the United States. We have also established international partnerships and are continuing to build a network of companies outside the U.S. to register and provide our medicines to patients in their countries. Cumberland’s growth strategy involves maximizing the success of our existing brands, while continuing to add differentiated products. We have built our portfolio of FDA approved products through both development and acquisition. Additionally, we look for opportunities to expand our products into new patient populations through clinical trials, improved presentations and our support of select, investigator-initiated studies. We actively pursue opportunities to acquire additional marketed products, as well as late-stage development product candidates in our target medical specialties. Our clinical team is developing a pipeline of new product candidates to address poorly met medical needs. The Company’s products are manufactured by third parties, which are overseen by our quality control and manufacturing professionals. We work closely with our warehousing and distribution partners to make our products available in the U.S. In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company have been prepared on a basis consistent with the December 31, 2022, audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly present the information set forth herein. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (the “SEC”), and certain information and disclosures have been condensed or omitted as permitted by the SEC for interim period presentation. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report on Form 10-K”). The results of operations for the three and nine months ended September 30, 2023, are not necessarily indicative of the results to be expected for the entire fiscal year or any future period. Recent Accounting Guidance Recent Accounting Pronouncements In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 are required to use a new forward-looking “expected loss” model that generally results in an earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, companies measure credit losses in a manner similar with previous guidance, except that the losses are recognized as allowances rather than as reductions in the amortized cost of the securities. Companies have to disclose additional information, including information they use to track credit quality by year of origination for most financing receivables. Companies apply the ASU’s provisions as a cumulative-effect adjustment, if any, to the accumulated deficit as of the beginning of the first reporting period in which the guidance is adopted. Related to ASU No. 2016-13 discussed above, in May 2019, the FASB issued ASU 2019-05, "Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief" which provides transition relief for ASU 2016-13 by providing entities with an alternative to irrevocably elect the fair value option for eligible financial assets measured at amortized cost upon adoption of the new credit losses standard. Certain eligibility requirements must be met and the election must be applied on an instrument-by-instrument basis. The election is not available for either available-for-sale or held-to-maturity debt securities. The Company adopted both ASU 2016-13 and ASU 2019-05 on January 1, 2023. Please refer to Trade and Notes Receivables Policy below. 5 Accounting Policies: Use of Estimates The preparation of the condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates under different assumptions and conditions. The Company's most significant estimates include: (1) its allowances for chargebacks and accruals for rebates and product returns, (2) the allowances for obsolescent or unmarketable inventory and (3) valuation of contingent consideration liabilities associated with business combinations. Operating Segments The Company has one operating segment which is specialty pharmaceutical products. Management has chosen to organize the Company based on the type of products sold. Operating segments are identified as components of an enterprise about which separate discrete financial information is evaluated by the chief operating decision maker, or decision-making group, in making decisions regarding resource allocation and assessing performance. The Company, which uses consolidated financial information in determining how to allocate resources and assess performance, has concluded that our specialty pharmaceutical products compete in similar economic markets and similar circumstances. Substantially all of the Company’s assets are located in the United States and total revenues are primarily attributable to U.S. customers. Trade and Note Receivables Policy Management performed a scoping exercise to ensure completeness over the application of Current Expected Credit Losses (CECL) across the various financial instruments including trade and note receivables. CECL is applicable to all financial assets measured at amortized cost. The authoritative guidance requires that all financial instruments should be evaluated, including cash equivalents such as 3-month T-Bills, even if the expected loss is determined to be zero, or materially zero. All bank balances are maintained in cash or money market funds. Therefore for the Company, this principally relates to trade receivables and two notes receivable. CECL also requires the measurement of expected credit losses on a collective (pool) basis when similar risk characteristics exist. This may include, either individually or in combination, some of the following characteristics of Accounting Standards Codification ("ASC") (326-20-55-5): a. Internal or external credit score/rating b. Risk ratings or classification c. Financial asset type d. Size e. Effective interest rate f. Term g. Geographical location h. Historical or expected credit loss patterns i. Reasonable and supportable forecast periods The standard requires entities to pool financial assets but allows them to choose which risk characteristics to use. Under the requirements of the guidance, the Company would need to reassess at the end of each reporting period whether the pool of assets continue to display similar risk characteristics. With twenty years of experience, Cumberland has experienced virtually no write downs of receivables as most of our receivables are due from large successful pharmaceutical, healthcare or government customers, consistently making payments on account. Although the payment behaviors of all of our customers are consistently reliable, for the sake of transparency, we have separated our customer base into seven separate pools. The Company performs a monthly analysis of aged accounts receivable to determine how much, if any, of the accounts receivable balance should be reserved as potential bad debt. The Company reviews all balances over 90 days past due for a possible reserve and considers any specific factors or information for balances aged under 90 days if there are indicators that the balance should be reserved, such as other aged balances with the customer or bankruptcy as well as any economic issues with a customer industry or region. The adoption of ASC 326 did not result in a material impact to the Company. 6 (2) EARNINGS (LOSS) PER SHARE The following table reconciles the numerator and denominator used to calculate basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2023 and 2022: Three months ended September 30, 2023 2022 Numerator: Net loss attributable to common shareholders $ ( 1,049,298 ) $ ( 408,639 ) Denominator: Weighted-average shares outstanding – basic 14,277,229 14,477,478 Dilutive effect of other securities — — Weighted-average shares outstanding – diluted 14,277,229 14,477,478 Nine months ended September 30, 2023 2022 Numerator: Net income (loss) attributable to common shareholders $ 15,086 $ ( 3,129,512 ) Denominator: Weighted-average shares outstanding – basic 14,343,560 14,618,975 Dilutive effect of other securities 178,040 — Weighted-average shares outstanding – diluted 14,521,600 14,618,975 As of September 30, 2023 and 2022, restricted stock awards and options to purchase 440,389 and 233,750 shares of common stock, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect would be antidilutive. 7 (3) REVENUES Product Revenues The Company accounts for revenues from contracts with customers under ASC 606. The Company’s net revenues consisted of the following for the three and nine months ended September 30, 2023 and 2022: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Products: Kristalose $ 3,887,476 $ 3,903,305 $ 12,313,321 $ 11,418,673 Sancuso 1,933,222 3,960,652 5,736,981 10,756,411 Vibativ 2,789,579 1,909,750 6,785,592 6,008,005 Caldolor 1,155,509 921,811 3,316,866 3,075,355 Acetadote 120,052 99,792 440,071 337,685 Vaprisol — ( 436 ) 39,866 ( 252,059 ) Omeclamox-Pak 23,288 35,600 28,832 31,925 RediTrex ( 122,556 ) 85,809 ( 254,108 ) 238,712 Other revenue 299,356 496,789 1,792,020 1,272,562 Total net revenues $ 10,085,926 $ 11,413,072 $ 30,199,441 $ 32,887,269 The Omeclamox-Pak net revenue for the third quarter of 2023 was impacted by our lack of commercial inventory of this product. The packager for our Omeclamox-Pak product encountered financial difficulties due to the impact of COVID-19. They are under new management and we are awaiting a potential resumption of supply. For the three and nine months ended September 30, 2023 and 2022, the amounts noted resulted from normal adjustments by channel partners. With regard to Vaprisol, we are in the process of transitioning to a new manufacturer, who was issued a U.S. Food and Drug Administration ("FDA") Form 483 in the second quarter of 2022. Once these FDA Form 483 related issues are satisfactorily resolved by the manufacturer, we will then resubmit our application for their facility to the FDA for approval. For the nine months ended September 30, 2023 and the three and nine months ended September 30, 2022, net revenue was impacted by product return and accrual adjustments. Other Revenues The Company has agreements with international partners for commercialization of the Company's products with associated payments included in other revenues. Those agreements provide that each of the partners is 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. In the second quarter of 2023, the Company received $ 1.0 million relating to a litigation settlement based on two $ 500,000 milestone payments due to us for the license associated with our Vibativ product that is included in other revenue for the nine months ended September 30, 2023. Other revenues include funding from federal grant programs including those secured from the FDA and from those secured by Cumberland Emerging Technologies Inc. ("CET") through the Small Business Administration. Grant revenue from these federal grant programs totaled approximately $ 0.1 million and $ 0.2 million for the three months ended September 30, 2023 and 2022, respectively, and approximately $ 0.3 million for the nine months ended September 30, 2023 and 2022. 8 Other revenues also include lease income generated by CET’s Life Sciences Center. It is a research facility that provides scientists with access to flexible lab space and other resources to develop biomedical products. This lease income, as noted in Footnote 5 - Leases, was approximately $ 0.2 million and $ 0.1 million for the three months ended September 30, 2023 and 2022, respectively, and $ 0.4 million for the nine months ended September 30, 2023 and 2022 . (4) INVENTORIES The Company works closely with third parties to manufacture and package finished goods for sale. Based on the arrangements with the manufacturer or packager, the Company will either take title to the finished goods at the time of shipment or at the time of arrival at the Company’s warehouses. The Company then holds such goods in inventory until distribution and sale. These finished goods inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out method. The Company continually evaluates inventory for potential losses due to excess, obsolete or slow-moving goods by comparing sales history and projections to the inventory on hand. When evidence indicates that the carrying value may not be recoverable, a charge is taken to reduce the inventory to its current net realizable value. At September 30, 2023, there were no cumulative obsolescence and discontinuance losses necessary. At December 31, 2022, the Company had recognized and maintained cumulative net realizable value charges for potential obsolescence and discontinuance losses of approximately $ 0.5 million. The Company purchases the active pharmaceutical ingredient (“API”) for Kristalose and maintains the inventory of that raw material. API for the Company's Vaprisol and Vibativ brands were included in the assets associated with the acquisition of those brands and are also included in the raw materials inventory. As part of the Vibativ acquisition, the Company acquired API and work in process inventories of $ 15.6 million that were all initially classified as non-current inventories at the date of acquisition. As these APIs are consumed in the manufacture of our products, the value of the API involved is transferred from raw materials to finished goods. Consigned inventory represents Authorized Generic inventory stored with our partner until shipment to their customers. At September 30, 2023 and December 31, 2022, total non-current inventory was $ 8.3 million and $ 7.5 million, respectively. It included Vibativ finished goods of $ 1.3 million, Vibativ raw materials of $ 4.3 million, Kristalose raw materials of $ 1.5 million, Vaprisol raw materials of $ 0.9 million and ifetroban raw materials of $ 0.2 million. At December 31, 2022, the Company's non-current inventory included Vibativ raw materials of $ 7.1 million and ifetroban raw materials of $ 0.3 million and finished goods of $ 0.1 million. At September 30, 2023 and December 31, 2022, the Company's net inventories consisted of the following: September 30, 2023 December 31, 2022 Raw materials and work in process $ 12,052,652 $ 12,899,659 Consigned inventory 191,957 168,923 Finished goods 4,727,784 4,322,166 Total inventories 16,972,393 17,390,748 less non-current inventories ( 8,301,845 ) ( 7,527,167 ) Total inventories classified as current $ 8,670,548 $ 9,863,581 (5) LEASES On November 15, 2021, Cumberland entered into a lease (the "Lease"), pursuant to which the Company leases approximately 16,903 rentable square feet of space (the "Leased Premise") at Broadwest located in Nashville, Tennessee with 1600 West End Avenue Partners, LLC (the "Landlord"). 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 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 provided for a tenant improvement allowance which we used to build out the space. 9 In addition, the Company's operating leases also include the lease of approximately 14,200 square feet of wet laboratory and office space in Nashville, Tennessee by CET, our majority-owned subsidiary, where it operates the CET Life Sciences Center. This laboratory and office space at CET is leased through April 2028. The Company also subleases a portion of the space under this lease. 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 and CET leases is 10.6 years at September 30, 2023. The weighted-average incremental borrowing rate used to discount the present value of the remaining lease payments is 9.28 % for the Broadwest lease and 9.9 % for the remaining CET lease. Also included as a right-of-use asset is an embedded lease of $ 0.8 million related to our new manufacturer for Vaprisol. Lease Position At September 30, 2023 and December 31, 2022, the Company's lease assets and liabilities were as follows: Right-of-Use Assets September 30, 2023 December 31, 2022 Operating lease right-of-use assets $ 6,711,155 $ 5,218,403 Lease Liabilities September 30, 2023 December 31, 2022 Operating lease current liabilities $ 334,288 $ 172,910 Operating lease noncurrent liabilities 5,388,900 4,586,301 Total $ 5,723,188 $ 4,759,211 As of September 30, 2023, cumulative future minimum sublease income under non-cancelable operating subleases totals approximately $ 1.7 million and will be paid through the leases ending in April 2028. Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) are as follows: Maturity of Lease Liabilities at September 30, 2023 Operating Leases 2023 212,656 2024 863,320 2025 836,100 2026 909,911 2027 934,180 After 2027 5,588,192 Total lease payments 9,344,359 Less: Interest 3,621,171 Present value of lease liabilities $ 5,723,188 Rent expense is recognized over the expected term of the lease, including renewal option periods, if applicable, on a straight-line basis as a component of general and administrative expense. Rent expense and sublease income were as follows: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Rent expense $ 244,305 $ 239,647 $ 765,455 $ 861,398 Sublease income $ 155,025 $ 128,395 $ 400,524 $ 424,632 10 (6) SHAREHOLDERS’ EQUITY AND DEBT Share repurchases Cumberland currently has a share repurchase program available to repurchase up to $ 10 million of its common stock pursuant to Rule 10b-18 of the Securities Exchange Act of 1934. In January 2019, the Company's Board of Directors established the current $ 10 million repurchase program to replace the prior authorizations. During the nine months ended September 30, 2023 and September 30, 2022, the Company repurchased 302,450 shares and 290,576 shares of common stock for approximately $ 0.6 million and $ 0.8 million, respectively. At September 30, 2023, approximately $ 3.2 million was available for the repurchase of common shares under this program. Share purchases and sales In the Company's May 2023 trading window, several members of Cumberland's Board of Directors entered into agreements for trading plans to purchase shares of the Company's stock pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934. These purchases are designed to increase ownership in the Company by the members of the Board. These purchases began in August 2023 and as of September 30, 2023, a total of 14,731 shares have been purchased through these trading plans. Share Sales In November 2017, Cumberland filed a Shelf Registration on Form S-3 with the SEC associated with the sale of up to $ 100 million in corporate securities. The Shelf Registration was declared effective in January 2018. It also included an At the Market ("ATM") feature that allowed the Company to sell common shares at market prices, along with an agreement with B. Riley FBR Inc. to support such a placement of shares. The Company filed an updated Form S-3 with the SEC in December 2020, which was declared effective in January 2021. On December 27, 2021, the Company filed a related prospectus supplement in connection with the sale and issuance of shares having an aggregate gross sales price of up to $ 19 million. The Company intends to continue an ATM feature through B. Riley FBR, Inc. that would allow the Company to issue shares of its common stock. The Company did not issue any shares under an ATM during the nine months ended September 30, 2023 or September 30, 2022. Restricted Share Grants and Incentive Stock Options During the nine months ended September 30, 2023 and September 30, 2022, the Company issued 34,250 shares and 65,225 shares of restricted stock, respectively, to employees, advisors and directors. Restricted stock issued to employees and advisors generally cliff-vests on the fourth anniversary of the date of grant and for directors on the one-year anniversary of the date of grant. During the nine months ended September 30, 2023 and 2022, the Company also issued 192,550 and 172,300 incentive stock options, respectively, to employees that cliff-vest on the fourth anniversary of the date of grant, and are set to expire in 2033 and 2032, respectively. Stock compensation expense is presented as a component of general and administrative expense in the condensed consolidated statements of operations as it relates to these restricted share grants and options. For the nine months ended September 30, 2023, we recorded a credit of $ 0.05 million to stock compensation expense related to the forfeiture of unvested restricted stock awards. New Debt Agreement On September 5, 2023, the Company entered into a new Revolving Credit Loan Agreement with Pinnacle Bank. This facility provides for an aggregate principal funding amount of up to $ 25 million. The initial revolving line of credit is up to $ 20 million, with the ability for Cumberland to increase the amount to $ 25 million, under certain conditions. It has a three year term expiring on October 1, 2026. The interest rate is based on Benchmark (Term SOFR) plus a spread of 2.75 %. Cumberland is subject to one financial covenant, the maintenance of a Funded Debt Ratio, determined on a quarterly basis. Borrowings under the line of credit are collateralized by substantially all of our assets. As of September 30, 2023 and December 31, 2022, the Company had $ 12.9 million and $ 16.2 million, respectively, in borrowings outstanding under its revolving credit facility. The applicable interest rate under the Pinnacle Agreement was 8.25 % at September 30, 2023. 11 Joint Venture Agreement In August 2020, Cumberland entered into an agreement with WinHealth Investment (Singapore) Ltd creating WHC Biopharmaceuticals, Pte. Ltd . The joint venture, as a limited liability company, will focus on acquiring, developing, registering, and commercializing development stage and commercial stage biopharmaceuticals for China, Hong Kong and other Asian markets. The agreement provides for initial investment from WinHealth in the form of a $ 0.2 million equity contribution and an initial investment from Cumberland in the form of a $ 0.2 million convertible note, which was funded during the first quarter of 2021. The joint venture will seek additional future capital from additional investors and has entered into exclusive option agreements to license product candidates from both Cumberland Pharmaceuticals Inc. and Cumberland Emerging Technologies Inc. (7) INCOME TAXES As of September 30, 2023, the Company has approximately $ 53.2 million in federal net operating loss carryforwards including approximately $ 44.1 million of net operating loss carryforwards resulting from the exercise of nonqualified stock options. These have historically been used to significantly offset income tax obligations. The Company expects it will continue to pay minimal income taxes during 2023 and beyond, through the continued utilization of these net operating loss carryforwards, on any taxable income generated from our operations. (8) OTHER INCOME Cumberland recorded a total of $ 3.7 million as other income in the first nine months of 2023. In March 2023, the Company was granted a barrier-to-innovation waiver from the FDA for certain fiscal year 2022 prescription drug fees resulting in a refund of $ 1.8 million. In June 2023, the Company was granted another waiver from the FDA for the fiscal year 2023 fees in the amount of $ 1.0 million. Both of these refunds were paid by the FDA in second quarter of 2023. In the third quarter of 2023, the Company recorded a $ 0.5 million settlement relating to a manufacturing dispute as well as life insurance proceeds of $ 0.3 million. (9) COLLABORATIVE AGREEMENTS Cumberland is a party to several collaborative arrangements with research institutions to identify and pursue promising pharmaceutical product candidates. The funding for these programs is primarily provided through Federal Small Business Administration (SBIR/STTR) and other grant awards. The Company has determined that these collaborative agreements, with the exception of the collaborative payment received related to RediTrex, do not meet the criteria for accounting under ASC Topic 808, Collaborative Agreements . The agreements do not specifically designate each party’s rights and obligations to each other under the collaborative arrangements. Except for patent defense costs, expenses incurred by one party are not required to be reimbursed by the other party. Expenses incurred under these collaborative agreements are included in research and development expenses and funding received from grants are recorded as net revenues in the condensed consolidated statements of operations. (10) COMMITMENTS AND CONTINGENCIES The company is involved in litigation arising in the normal course of business. The Company does not believe that the disposition or ultimate resolution of existing claims or lawsuits will have a material adverse effect on the business or financial condition of the Company. 12 (11) PRODUCT ACQUISITIONS AND RETURN OF PRODUCT RIGHTS Vibativ During November 2018, the Company executed an agreement with Theravance Biopharma ("Theravance") to acquire the assets and global rights to Vibativ including responsibility for 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 accounted for the transaction as a business combination in accordance with ASC 805 and the product sales are included in the results of operations subsequent to the acquisition date. The Company made an upfront payment of $ 20 million at the closing of the transaction and a $ 5 million milestone payment in early April 2019. In addition, Cumberland has agreed to pay royalties of up to 20 % of on-going net sales of the product in the U.S. after a $ 2.5 million threshold is met. The future royalty payments were recognized at their acquisition-date fair value as a contingent consideration liability, as part of the contingent consideration transferred in the business combination. Cumberland prepared the valuations of the contingent consideration liability utilizing significant unobservable inputs. As a result, the valuation is classified as Level 3 fair value measurement. The following table presents the changes in the fair value of the contingent consideration liability that is remeasured on a recurring basis. The contingent consideration earned and accrued in operating expenses is paid to Theravance quarterly. Balance at December 31, 2022 $ 4,154,823 Cash payment of royalty during the period ( 537,623 ) Change in fair value of contingent consideration included in operating expenses ( 127,310 ) Contingent consideration earned and accrued in operating expenses 762,405 Balance at September 30, 2023 $ 4,252,295 The contingent consideration liability of $ 4.3 million was accounted for as $ 1.8 million of other current liabilities and $ 2.5 million of other long-term liabilities on the condensed consolidated balance sheet as of September 30, 2023. 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. The product’s FDA registration was subsequently transferred from Kyowa Kirin to Cumberland in August 2023. Cumberland has also accounted for this 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 called for milestone payments of up to $ 3.5 million based on the attainment of various approvals and sales performance. In March 2023, Cumberland made a $ 1.0 million milestone payment to Kwoya Kirin based on the FDA approval of a manufacturing site for the product. In October 2023, Cumberland made a $ 0.5 million milestone payment based on the successful transfer of the product’s FDA registration from Kyowa Kirin to Cumberland. The remaining $ 2 million in milestones are tied to achievement of certain annual sales levels for the product. 13 In addition, Cumberland has agreed to pay a royalty of up to 10 % of on-going net sales of Sancuso. 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 fair value for the assets and liabilities assumed were as follows: prepaid expenses of $ 1.8 million, inventory of $ 2.6 million, goodwill of $ 0.03 million, intangible assets of $ 14.1 million, milestone payable of $ 1.7 million and contingent liability of $ 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. Balance at December 31, 2022 $ 4,757,000 Cash payment of milestones and royalty during the period ( 1,571,310 ) Change in fair value of contingent consideration included in operating expenses ( 890,402 ) Contingent consideration earned and accrued in operating expenses 545,712 Balance at September 30, 2023 $ 2,841,000 The contingent consideration liability earned and accrued in operating expenses is paid to Kyowa Kirin quarterly. The contingent consideration liability of $ 2.8 million was accounted for as $ 1.8 million of current liabilities and $ 1.1 million of other long-term liabilities on the condensed consolidated balance sheet as of September 30, 2023. RediTrex In November 2016, the Company announced an agreement with the Nordic Group B.V. ("Nordic") to acquire the exclusive U.S. rights to Nordic’s injectable methotrexate product line designed for the treatment of active rheumatoid arthritis, juvenile idiopathic arthritis, severe psoriatic arthritis and severe disabling psoriasis. As consideration for the license, Cumberland paid a deposit of $ 100,000 at closing. The Company then provided $ 0.9 million in consideration through a grant of 180,000 restricted shares of Cumberland common stock to be vested upon the FDA approval of the first Nordic product. Cumberland also agreed to provide Nordic a series of payments tied to the products’ FDA approval, launch and achievement of certain sales milestones. Under the terms of the agreement, Cumberland was responsible for the product registration and commercialization in the U.S., while Nordic was responsible for product manufacturing and supply. On November 27, 2019, Cumberland received FDA approval for the first Nordic injectable product line and authorization to market them under the RediTrex brand name. The 180,000 shares of restricted Cumberland common stock previously provided to Nordic vested upon approval and were valued at $ 0.9 million on the vesting date. The FDA approval also resulted in a $ 1.0 million milestone payment due to Nordic. During December 2020, Cumberland introduced RediTrex and the launch that took place in late 2021 resulting in a $ 1.0 million milestone payment due to Nordic. However, Cumberland encountered difficulties in introducing RediTrex to a new customer base and in achieving the needed managed care coverage due to market conditions during the pandemic. On July 12, 2022, the Company entered into an amendment to the agreement with Nordic returning all rights to them including the trademark and market authorization effective June 30, 2023. Cumberland then continued to distribute and support the product through June 30, 2023. In accordance with the terms of the amendment, Nordic has returned the 180,000 restricted Cumberland shares previously issued to Nordic, which were cancelled, refunded to Cumberland the milestone payment of $ 1.0 million associated with the brand's U.S. approval and issued a credit note in favor of the Company in the amount of $ 1.0 million for the unpaid milestone payment associated with the launch of the product line. The companies have cooperated on the transition and Cumberland will receive a long-term royalty on any Nordic sales of the product. 14