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, 2023. 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 2023, there were no changes in 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. 71 Item 9B. Other Information. (a) Recent Developments Form 8-K, Item 5.02(e). Compensatory Arrangements of Certain Officers On March 7, 2024, the Company entered into new employment agreements with each of A.J. Kazimi, our Chief Executive Officer (the “ Kazimi Employment Agreement ”), Jim Herman, our Executive Vice President National Accounts and Chief Compliance Officer (the “ Herman Employment Agreement ”), Todd Anthony, our Vice President Organizational Development (the “Anthony Employment Agreement”), Chris T. Bitterman, Vice President Sales and Marketing (the “Bitterman Employment Agreement”) and John M. Hamm, our Vice President, Chief Financial Officer (the “Hamm Employment Agreement ”), and together with the Kazimi Employment Agreement, the Herman Employment Agreement, the Anthony Employment Agreement, the Bitterman Employment Agreement and the Hamm Employment Agreement, (the “ Employment Agreements ”). The Employment Agreements were effective as of January 1, 2024. Employment Agreements Each Employment Agreement provides for a salary for services performed, a potential annual bonus and a grant of restricted incentive stock options pursuant to a restricted stock agreement. Under the terms of each Employment Agreement, employment is at-will and may be terminated by the Company at any time, with or without notice and with or without cause. Similarly, each of Mr. Kazimi, Mr. Herman, Mr. Anthony, Mr. Bitterman, and Mr. Hamm may terminate his respective employment with us at any time, with or without notice. The Employment Agreements do not provide for any severance payments in the event employment is terminated for cause nor any severance benefits in the event employment is terminated as a result of death or permanent disability. The Employment Agreements include non-competition, non-solicitation and non-disclosure covenants on the part of employees. The Employment Agreements impose obligations regarding confidential information and state that any discoveries or improvements conceived, developed or otherwise made by the employees, or with others, are deemed our sole property. The Employment Agreements do not contain any termination or change in control provisions. Kazimi Employment Agreement Pursuant to the Kazimi Employment Agreement, Mr. Kazimi will serve as the Company’s Chief Executive Officer and will receive a base salary of $702,000. The foregoing description of the Kazimi Employment Agreement is qualified in its entirety by reference to the Kazimi Employment Agreement, which is included as Exhibit 10.11 to this Annual Report on Form 10-K and is incorporated by reference into this Item. The foregoing description of the Kazimi Employment Agreement does not purport to be complete and is qualified in its entirety by reference to such exhibit. Herman Employment Agreement Pursuant to the Herman Employment Agreement, Mr. Herman will serve as the Company’s Senior Vice President, National Accounts and Chief Compliance Officer and will receive a base salary of $310,000. The foregoing description of the Herman Employment Agreement is qualified in its entirety by reference to the Herman Employment Agreement, which is included as Exhibit 10.12 to this Annual Report on Form 10-K and is incorporated by reference into this Item. The foregoing description of the Herman Employment Agreement does not purport to be complete and is qualified in its entirety by reference to such exhibit. 72 Anthony Employment Agreement Pursuant to the Anthony Employment Agreement, Mr. Anthony will serve as the Company’s Vice President Organizational Development and will receive a base salary of $286,125. The foregoing description of the Anthony Employment Agreement is qualified in its entirety by reference to the Anthony Employment Agreement, which is included as Exhibit 10.13 to this Annual Report on Form 10-K and is incorporated by reference into this Item. The foregoing description of the Anthony Employment Agreement does not purport to be complete and is qualified in its entirety by reference to such exhibit. Bitterman Employment Agreement Pursuant to the Bitterman Employment Agreement, Mr. Bitterman will serve as the Company’s Vice President Sales and Marketing and will receive a base salary of $268,840. The foregoing description of the Bitterman Employment Agreement is qualified in its entirety by reference to the Bitterman Employment Agreement, which is included as Exhibit 10.14 to this Annual Report on Form 10-K and is incorporated by reference into this Item. The foregoing description of the Bitterman Employment Agreement does not purport to be complete and is qualified in its entirety by reference to such exhibit. Hamm Employment Agreement Pursuant to the Hamm Employment Agreement, Mr. Hamm will serve as the Company’s Vice President, Chief Financial Officer and will receive a base salary of $246,240. The foregoing description of the Hamm Employment Agreement is qualified in its entirety by reference to the Hamm Employment Agreement, which is included as Exhibit 10.15 to this Annual Report on Form 10-K and is incorporated by reference into this Item. The foregoing description of the Hamm Employment Agreement does not purport to be complete and is qualified in its entirety by reference to such exhibit. (b) Insider Trading Arrangements and Policies During the three months ended December 31, 2023, no “director” or “officer” (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,”as each term is defined in Item 408(a) of Regulation S-K. 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 2024 annual meeting of shareholders, which is expected to be filed with the SEC on or around March 13, 2024. 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 Report of Independent Registered Public Accounting Firm - Consolidated Financial Statements - Carr, Riggs & Ingram; Nashville, TN; PCAOB ID: 213 Report of Independent Registered Public Accounting Firm – Consolidated Financial Statements - FORVIS, LLP (formerly BKD, LLP); Nashville, TN PCAOB ID: 686 F-2 Consolidated Balance Sheets F- 8 Consolidated Statements of Operations F- 9 Consolidated Statements of Cash Flows F- 10 Consolidated Statements of Equity F- 12 Notes to Consolidated Financial Statements F- 13 (2) Financial Statement Schedule Valuation and Qualifying Accounts F- 39 b. Exhibits Exhibit Number Description 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 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 74 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 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 8, 2024, effective as of January 1, 2024, by and between A.J. Kazimi and Cumberland Pharmaceuticals Inc. 10.12# Employment Agreement dated March 8, 2024, effective as of January 1, 2024, by and between Jim Herman and Cumberland Pharmaceuticals Inc. 75 10.13# Employment Agreement dated March 8, 2024, effective as of January 1, 2024, by and between Todd Anthony and Cumberland Pharmaceuticals Inc. 10.14# Employment Agreement dated March 7, 2024, effective as of January 1, 2024, by and between Chris Bitterman and Cumberland Pharmaceuticals Inc. 10.15# Employment Agreement dated March 7, 2024, effective as of January 1, 2024, by and between John M. Hamm and Cumberland Pharmaceuticals Inc. 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 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 76 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 10.38# 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 10.44 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 16 Letter to the SEC from FORVIS, LLP, incorporated herein by reference to Exhibit 16.1 of the Company’s Current Report on Form 8-K (File No. 001-33637) as filed with the SEC on May 24, 2023 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 Carr, Riggs & Ingram, LLC 23.2 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. 97.1 Policy for the Recovery of Previously Awarded Incentive Compensation 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 77 101.PRE INLINE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT 104 Cover Page Interactive Data File (embedded within the Inline XBRL document). # 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. 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. 78 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 12, 2024. Cumberland Pharmaceuticals, Inc. /s/ A. J. Kazimi By: A. J. Kazimi Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ A. J. Kazimi Chairman and CEO March 12, 2024 A. J. Kazimi (Principal Executive Officer and Director) /s/ John M. Hamm Vice President, Chief Financial Officer March 12, 2024 John M. Hamm (Principal Financial and Accounting Officer /s/ Gordon R. Bernard Director March 12, 2024 Gordon R. Bernard /s/ James R. Jones Director March 12, 2024 James R. Jones /s/ Caroline R. Young Director March 12, 2024 Caroline R. Young /s/ Kenneth J. Krogulski Director March 12, 2024 Kenneth J. Krogulski /s/ Joseph C. Galante Director March 12, 2024 Joseph C. Galante /s/ Martin S. Brown, Jr. Director March 12, 2024 Martin S. Brown, Jr. 79 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, 2023. 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, 2023, the Company’s internal control over financial reporting was effective based on those criteria. /s/ A. J. Kazimi A. J. Kazimi Chief Executive Officer March 12, 2024 /s/ John M. Hamm John M. Hamm Chief Financial Officer March 12, 2024 F-1 Report of Independent Registered Public Accounting Firm To the Shareholders, Board of Directors and Audit Committee of Cumberland Pharmaceuticals Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheet of Cumberland Pharmaceuticals Inc. and subsidiaries (the "Company") as of December 31, 2023, the related consolidated statements of operations, equity, and cash flows for the year then ended, 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, 2023, and the results of its operations and its cash flows for the year then ended , in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. F-2 Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Customer Allowances for Chargebacks, Discounts and Damaged Goods, and Accruals for Rebates, Coupons, Product Returns, and Certain Fees As described in Note 2 to the consolidated financial statements, 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. As of December 31, 2023, 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 $7.6 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 certain allowances and developed an independent expectation of the reserve balance for the remaining allowances. • Performed 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 evaluating a service organization from which data was obtained, 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. F-3 • 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 claims, 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. • Compared actual activity for chargebacks, discounts, and damaged goods and rebates, coupons, product returns, and certain fees reported after December 31, 2023, to estimated reserves and accruals on the December 31, 2023, consolidated balance sheet. /s/ Carr, Riggs & Ingram, LLC We have served as the Company’s auditor since 2023. Nashville, Tennessee March 12, 2024 F-4 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 sheet of Cumberland Pharmaceuticals Inc. (“Company”) as of December 31, 2022, the related consolidated statements of operations, equity, and cash flows for the year 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 the results of its operations and its cash flows for the year 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 audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (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 (SEC) and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides 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. F-5 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 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 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. F-6 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 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: a. 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. b. 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. c. 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: i. Evaluated the reasonableness of the Company’s third-party valuation models and methodologies, expected cash flow calculations, and reviewed significant assumptions. ii. Developed an independent calculation of the discount rates used and compared our rates to those used by management. iii. 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. i. Reviewing and evaluating the adequacy of the disclosures made in the Company’s SEC filings. /s/ FORVIS, LLP We served as the Company’s auditor from 2020 to 2023. Nashville, Tennessee March 13, 2023 F-7 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2023 and 2022 2023 2022 ASSETS Current assets: Cash and cash equivalents $ 18,321,624 $ 19,757,970 Accounts receivable, net 9,758,176 13,163,681 Inventories, net 4,609,362 9,863,581 Prepaid and other current assets 3,025,248 3,084,978 Total current assets 35,714,410 45,870,210 Non-current inventories 12,804,529 7,527,167 Property and equipment, net 367,903 284,039 Intangible assets, net 22,607,918 30,590,678 Goodwill 914,000 914,000 Operating lease right-of-use assets 6,674,394 5,218,403 Other assets 2,692,921 2,520,661 Total assets $ 81,776,075 $ 92,925,158 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 14,037,629 $ 10,819,011 Operating lease current liabilities 348,092 172,910 Other current liabilities 13,596,528 17,587,911 Total current liabilities 27,982,249 28,579,832 Revolving line of credit 12,784,144 16,200,000 Operating lease non-current liabilities 5,296,247 4,586,301 Other long-term liabilities 6,453,566 7,585,019 Total liabilities 52,516,206 56,951,152 Commitments and contingencies Equity: Shareholders’ equity: Common stock – no par value; 100,000,000 shares authorized; 14,121,833 and 14,366,316 shares issued and outstanding as of December 31, 2023 and 2022, respectively 47,091,602 47,474,973 Accumulated deficit ( 17,488,161 ) ( 11,208,841 ) Total shareholders’ equity 29,603,441 36,266,132 Noncontrolling interests ( 343,572 ) ( 292,126 ) Total equity 29,259,869 35,974,006 Total liabilities and equity $ 81,776,075 $ 92,925,158 See accompanying notes to consolidated financial statements. F-8 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 2023 and 2022 2023 2022 Revenues: Net product revenue $ 37,513,492 $ 40,681,182 Other revenue 2,039,015 1,329,767 Net revenues 39,552,507 42,010,949 Costs and expenses: Cost of products sold 6,066,611 9,118,521 Selling and marketing 18,451,765 16,660,945 Research and development 5,834,229 6,688,924 General and administrative 10,651,915 10,180,120 Amortization and impairment 8,102,648 5,067,368 Total costs and expenses 49,107,168 47,715,878 Operating loss ( 9,554,661 ) ( 5,704,929 ) Interest income 286,854 98,405 Other income 2,828,871 — Other income - settlement 475,000 — Other income - gain on insurance proceeds 346,800 611,330 Interest expense ( 667,861 ) ( 585,995 ) Loss before income taxes ( 6,284,997 ) ( 5,581,189 ) Income tax expense ( 45,769 ) ( 68,850 ) Net loss ( 6,330,766 ) ( 5,650,039 ) Net loss at subsidiary attributable to noncontrolling interests 51,446 79,798 Net loss attributable to common shareholders $ ( 6,279,320 ) $ ( 5,570,241 ) Loss per share attributable to common shareholders: Basic $ ( 0.44 ) $ ( 0.38 ) Diluted $ ( 0.44 ) $ ( 0.38 ) Weighted-average common shares outstanding: Basic 14,298,774 14,563,592 Diluted 14,298,774 14,563,592 See accompanying notes to consolidated financial statements. F-9 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2023 and 2022 2023 2022 Cash flows from operating activities: Net loss $ ( 6,330,766 ) $ ( 5,650,039 ) Adjustments to reconcile net loss to net cash flows provided by operating activities: Depreciation and amortization expense 4,935,954 5,328,113 Impairment loss on intangible assets 3,343,842 — Amortization of operating lease right-of-use asset 834,500 — Disposal of assets 20,256 — Stock-based compensation 365,040 447,503 Decrease in non-cash contingent consideration ( 1,253,840 ) ( 2,088,296 ) Decrease (increase) in cash surrender value of life insurance policies over premiums paid ( 124,736 ) 613,657 Noncash interest expense 15,523 11,237 Noncash gain on RediTrex transaction — ( 37,882 ) Gain on receipt of life insurance policies ( 346,800 ) ( 611,330 ) Net changes in assets and liabilities affecting operating activities: Accounts receivable 3,404,949 ( 6,115,640 ) Inventories, net ( 23,143 ) 911,078 Other current assets and other assets 65,684 689,260 Operating lease liabilities ( 1,405,363 ) — Accounts payable and other current liabilities 3,724,174 14,536,076 Other long-term liabilities ( 1,131,453 ) 419,659 Net cash provided by operating activities 6,093,821 8,453,396 Cash flows from investing activities: Additions to property and equipment ( 281,268 ) ( 102,148 ) Additions to intangible assets ( 171,783 ) ( 1,971,662 ) Return of RediTrex — 1,000,000 Life insurance policy proceeds received 347,356 877,597 Settlement of patent litigation — 21,757 Cash paid for acquisition — ( 13,500,000 ) Net cash used in investing activities ( 105,695 ) ( 13,674,456 ) F-10 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2023 and 2022 2023 2022 Cash flows from financing activities: Borrowings on line of credit 31,475,000 52,900,000 Payments on line of credit ( 34,890,856 ) ( 51,700,000 ) Payments made in connection with repurchase of common shares ( 740,533 ) ( 1,053,042 ) Cash settlement of contingent consideration ( 3,268,083 ) ( 2,208,744 ) Net cash used in financing activities ( 7,424,472 ) ( 2,061,786 ) Net decrease in cash and cash equivalents ( 1,436,346 ) ( 7,282,846 ) Cash and cash equivalents, beginning of year 19,757,970 27,040,816 Cash and cash equivalents, end of year $ 18,321,624 $ 19,757,970 Supplemental disclosure of cash flow information: Net cash paid during the year for: Interest $ 647,137 $ 523,161 Income taxes 108,823 3,300 Total cash paid included in measurement of lease liability 804,818 1,011,313 Noncash investing and financing activities: Change in unpaid invoices for intangible asset additions $ ( 51,895 ) $ ( 1,803,403 ) Change in unpaid invoices for offering costs 69,001 ( 94,689 ) Lease liability obtained from right-of-use assets 1,158,367 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-11 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Consolidated Statements of Equity Years ended December 31, 2023 and 2022 Cumberland Pharmaceuticals Inc. Shareholders Common stock Accumulated deficit Non-controlling interest Total equity Shares Amount Balance, December 31, 2021 14,742,754 $ 48,452,906 $ ( 5,638,600 ) $ ( 212,328 ) $ 42,601,978 Net 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 Net loss — $ — ( 6,279,320 ) ( 51,446 ) ( 6,330,766 ) Share-based compensation 157,360 $ 365,040 — — 365,040 Repurchase of common shares ( 402,143 ) $ ( 748,411 ) — — ( 748,411 ) Balance, December 31, 2023 14,121,833 $ 47,091,602 $ ( 17,488,161 ) $ ( 343,572 ) $ 29,259,869 See accompanying notes to consolidated financial statements F-12 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 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. 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 $ 51,446 and $ 79,798 for the years ended December 31, 2023 and 2022, 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. 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 do 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. Since 2019, Cumberland has made annual cash contributions to the Foundation. During the years 2023 and 2022, the Company made cash contributions of $ 40,000 and $ 25,000 , respectively. F-13 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (2) Significant Accounting Policies Principles of Consolidation The consolidated financial statements of the Company are stated in U.S. dollars and are prepared using U.S. generally accepted accounting principles. These financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. 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, (3) valuation of contingent consideration liability associated with business combinations and (4) evaluation of continuing utility of intangible assets. 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 $ 1.1 million and $ 1.5 million for the years ended December 31, 2023 and 2022, 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. F-14 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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, 2023 and 2022, cash equivalents consist primarily of money market funds. The Company monitors concentration of credit risk with the financial institutions in which it conducts business. The Company has cash deposits which fluctuate in excess of federally insured limits throughout the year. 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, 2023 and 2022. 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. Non-current inventories consist of active pharmaceutical ingredients which typically has an extended life and selected finished good products with extended life longer than one year. F-15 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. The Company filed an updated Form S-3 with the SEC in December 2020 (the “Prior Registration Statement”), 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 ATM Sales Agreement on December 27, 2021, in order to allow the Company to continue using its ATM feature to sell shares at market prices. This ATM program was under the Prior Registration Statement and is no longer active. The Company filed an updated Form S-3 with the SEC on December 14, 2023, which was declared effective on December 26, 2023 (the “Current Registration Statement”). The Company intends to enter into an agreement with H.C. Wainwright & Co., LLC to establish a new ATM program under the Current Registration Statement. 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 and December 2023. 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, 2023. 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 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. Given the delay in identifying a packager for Omeclamox-Pak, the Company has taken a non-cash write down of the related intangible asset of $ 3.3 million. The financial statements reflect this adjustment as efforts to identify a packager continue. F-16 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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 Trade and Note Receivables Current Expected Credit Losses (“CECL”) is applicable to all financial assets measured at amortized cost. All financial instruments are evaluated, which principally relates to trade receivables and two notes receivable. CECL 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: • Internal or external credit score/rating • Risk ratings or classification • Financial asset type • Size • Effective interest rate • Term • Geographical location • Historical or expected credit loss patterns • 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 reassesses 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. 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. F-17 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. In 2023, given the delay in identifying a packager for Omeclamox-Pak the Company has taken a non-cash write down of the related intangible assets of $ 3.3 million, which is included in amortization expense in the statement operations. These intangible assets consisted of product and license rights and trademarks. 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, focuses on acquiring, developing, registering, and commercializing development stage and commercial stage biopharmaceuticals for China, Hong Kong and other Asian markets. The agreement provided 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. During the year ended December 31, 2023, the Company revised its estimate for rebates related to Sancuso revenues based on additional information related to actual product activities. As a result, the Company recognized additional revenue allowances of $0.6 million for rebates as a change of estimate. Sales Rebates and Discounts The allowances against accounts receivable and accrued liabilities for chargebacks, discounts, service fees and expired product returns are determined on a product-by-product basis, and established by management as the Company’s best estimate at the time of sale based on each product’s historical experience adjusted to reflect known changes in the factors that impact such allowances. These allowances are established based on the contractual terms with direct and indirect customers and analyses of historical levels of chargebacks, discounts and returns of expired product. Other organizations, such as managed care providers, pharmacy benefit management companies and government agencies, may receive rebates from the Company based on either negotiated contracts to carry the Company’s products or reimbursements for filled prescriptions. These entities are considered indirect customers of the Company. In conjunction with recognizing a sale to a wholesaler, sales revenues are reduced and accrued liabilities are increased by the Company’s estimate of the rebate that may be claimed. Sales Returns Consistent with industry practice, the Company maintains a return policy that allows customers to return product within a specified period prior to and subsequent to the expiration date. The Company’s estimate of the provision for returns is based upon historical experience, expiration date by product as well as any other factor F-18 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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: 2023 2022 Distribution costs $ 881,829 $ 857,842 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: 2023 2022 Advertising costs $ 2,903,741 $ 2,927,041 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 F-19 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. Loss per Share Basic loss per share is calculated by dividing net loss attributable to common shareholders by the weighted-average number of shares outstanding. Except where the result would be antidilutive, diluted 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, related to the Vibativ and Sancuso contingent consideration payments, 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 consolidated statements of operations. Related Party Transactions In July 2023, 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 with which Mr. Brown is affiliated. In 2023 and 2022, the Company paid Mr. Brown’s law firm $ 0.05 million and $ 0.04 million, respectively. Recent Accounting Guidance Recent Accounting Pronouncements Adopted 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 F-20 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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 , and the adoption did not have a material impact on the Company’s consolidated financial statements. Recently Issued Accounting Standards Not Yet Adpoted In November 2023, the FASB issued final guidance intended to improve transparency of segment disclosures, primarily through expanded disclosures for significant segment expenses. The guidance is effective for annual periods beginning in 2024 and interim periods beginning in 2025. Early adoption is permitted. This new guidance will result in incremental disclosures in the notes to the Company’s segment reporting disclosures. In December 2023, the FASB issued final guidance to improve transparency of income tax disclosures. The final guidance requires enhanced disclosures primarily related to existing rate reconciliation and income taxes paid information. The guidance is effective for 2025 annual reporting. Early adoption is permitted. This new guidance will result in incremental disclosures in the notes to the Company’s income tax disclosures. (3) Vibativ ® , Sancuso ® and RediTrex ® Products 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 annually. F-21 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Contingent Consideration Liability 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 Cash payment of royalty during the period ( 1,018,451 ) Change in fair value ( 270,485 ) Contingent consideration earned and accrued 1,167,486 Balance at December 31, 2023 $ 4,033,373 The current portion of the contingent consideration liability is $ 1.7 million and the non-current portion is $ 2.3 million, as of December 31, 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 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. In January 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 milestone payments are tied to achievement of certain annual sales levels for the product. 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 fair value for the assets and liabilities assumed using Level 3 fair value inputs were as follows: prepaid expenses of $ 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. F-22 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) The following table presents the changes in the fair value of the contingent consideration liability that is remeasured on a recurring basis. Contingent Consideration Liability Contingent Consideration Liability Including Milestone Balance at January 3, 2022 $ 3,384,000 $ 3,946,716 Cash payment of royalty during the period ( 1,075,631 ) (1,075,631) Change in fair value 16,394 1,210,678 Contingent consideration earned and accrued 675,237 675,237 Balance at December 31, 2022 $ 3,000,000 $ 4,757,000 Cash payment of royalty during the period ( 790,632 ) (2,249,632) Change in fair value ( 685,355 ) (983,355) Contingent consideration earned and accrued 781,987 781,987 Balance at December 31, 2023 $ 2,306,000 $ 2,306,000 The current portion of the contingent consideration liability is $ 1.3 million and the non-current portion is $ 1.0 million, as of December 31, 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 $ 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 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. In accordance with the terms of the amendment, Nordic a) returned the 180,000 restricted Cumberland shares we previously issued to Nordic which were cancelled; b) refunded to Cumberland the milestone payment of $ 1.0 million we made associated with the brand’s U.S. approval; and c) issued 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 all in 2023. Cumberland will receive a long-term royalty on any Nordic sales of the product. F-23 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (4) Revenues Product Revenue The Company’s net product revenues consisted of the following for the years ended December 31: 2023 2022 Products: Kristalose $ 15,981,850 $ 15,205,155 Vibativ 8,812,692 7,487,462 Sancuso 8,096,788 13,205,603 Caldolor 4,333,923 4,827,200 Acetadote 458,759 501,040 Omeclamox-Pak 20,030 29,145 Vaprisol 151,336 ( 447,697 ) RediTrex ( 341,886 ) ( 126,726 ) Total net product revenues $ 37,513,492 $ 40,681,182 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 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 year ended December 31, 2023. Other revenues includes funding from federal grant programs including those secured from the FDA and from those secured by CET through the Small Business Administration. Grant revenue from these federal grant programs totaled approximately $ 0.4 million and $ 0.2 million for the year ended December 31, 2023 and 2022,respectively. Other revenues also includes 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 15 - Leases, was approximately $ 0.5 million for the years ended December 31, 2023 and 2022. F-24 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (5) Inventories, Net The Company's net inventories consisted of the following as of December 31: 2023 2022 Raw materials $ 12,619,092 $ 12,899,659 Consigned inventory 149,701 168,923 Finished goods, net of reserve 4,645,098 4,322,167 Total inventories 17,413,891 17,390,748 less non-current inventories ( 12,804,529 ) ( 7,527,167 ) Total inventories classified as current $ 4,609,362 $ 9,863,581 The Company's non-current inventories consisted of the following as of December 31: 2023 2022 Vibativ - raw materials $ 6,611,426 $ 7,138,936 Vibativ - finished goods 810,454 — Kristalose - raw materials 3,263,515 — Vaprisol - raw materials 1,170,641 — Caldolor - finished goods 67,307 — Sancuso - raw materials 574,502 — Study drug - raw materials 203,383 256,474 Study drug - finished goods — 131,757 Other products 103,300 — Total non-current inventory $ 12,804,529 $ 7,527,167 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. Consigned inventory represents Authorized Generic inventory stored with Padagis until shipment. At December 31, 2023, there were no cumulative obsolescence or discontinuance losses necessary to recognize. 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. F-25 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 2023 2022 Computer equipment 3 – 5 years $ 499,557 $ 465,508 Office equipment 3 – 15 years 771,667 746,602 Furniture and fixtures 5 – 15 years 533,778 369,365 Leasehold improvements 3 – 15 years, or remaining lease term 800,974 787,749 Total property and equipment, gross 2,605,976 2,369,224 Less: accumulated depreciation and amortization ( 2,238,073 ) ( 2,085,185 ) Total property and equipment, net $ 367,903 $ 284,039 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: 2023 2022 Depreciation expense $ 177,148 $ 260,745 (7) Intangible Assets and Goodwill Intangible assets and Goodwill consisted of the following at December 31, 2023 and 2022. 2023 2022 Product and license rights $ 43,250,341 $ 49,668,141 Less: accumulated amortization ( 22,755,543 ) ( 21,891,974 ) Total product and license rights 20,494,798 27,776,167 Patents 10,712,405 10,610,228 Less: accumulated amortization ( 8,819,287 ) ( 8,051,018 ) Total patents 1,893,118 2,559,210 Trademarks 413,775 397,974 Less: accumulated amortization ( 193,773 ) ( 142,673 ) Total trademarks 220,002 255,301 Total intangible assets $ 22,607,918 $ 30,590,678 Goodwill $ 914,000 $ 914,000 Product and license rights include assets associated with the Company’s acquired products, including those discussed in Note 3, Vibativ and Sancuso. F-26 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) During 2023 and 2022, the Company recorded an additional $ 0.1 million and $ 0.2 million, respectively, in intangible assets for patents, trademarks and capitalized patent costs, including amounts incurred in the protection of the Company's intellectual property. Amortization expense related to product and license rights, trademarks and patents were as follows for the years ended December 31: 2023 2022 Amortization and impairment expense $ 8,102,648 $ 5,067,368 The expected amortization expense for the Company's current balance of intangible assets are as follows: Year ending December 31: 2024 $ 4,304,157 2025 4,245,825 2026 3,859,206 2027 3,452,780 2028 and thereafter 6,745,950 $ 22,607,918 (8) Other Current and Other Long-term Liabilities Other current liabilities consisted of the following at December 31: 2023 2022 Rebates, product returns, administrative fees and service fees $ 7,579,783 $ 8,347,214 Employee wages and benefits 1,197,832 1,440,859 Sancuso related liabilities 827,813 2,226,725 Current portion of accrued contingent consideration 2,424,000 3,006,310 Studies accrual 385,266 400,702 Accrued inventory purchases — 609,621 Current deferred charges 220,402 614,551 Other 961,432 941,929 Total other current liabilities $ 13,596,528 $ 17,587,911 Other long-term liabilities consisted of the following at December 31: 2023 2022 Non-current portion of accrued contingent consideration $ 3,284,672 $ 4,931,513 Deferred compensation 2,894,894 2,522,506 Other 274,000 131,000 Total other long-term liabilities $ 6,453,566 $ 7,585,019 F-27 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (9) Debt 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 a 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 December 31, 2023 and December 31, 2022, the Company had $ 12.8 million and $ 16.2 million, respectively, in borrowings outstanding under its revolving credit facility. The applicable interest rate under the Pinnacle Agreement was 8.125 % at December 31, 2023. In 2022, under a previous agreement with Pinnacle Bank, the applicable interest rate was based on LIBOR plus an interest rate spread and was 6.75 % at December 31, 2022. (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, 2023 and 2022, there was no preferred stock outstanding. (c) Common Stock During 2023 and 2022, the Company issued 157,360 shares and 171,655 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 2023 and 2022. (d) Share Repurchases The Company 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. The Company repurchased 402,143 shares and 367,793 shares of common stock for approximately $ 0.7 million and $ 1.0 million during the years ended December 31, 2023 and 2022, respectively. There remains approximately $ 3 million available under the current repurchase program available for share repurchases at December 31, 2023. F-28 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (11) Loss Per Share The following table shows the computation of the numerator and the denominator used to calculate diluted loss per share for the years ended December 31: 2023 2022 Numerator: Net loss ( 6,330,766 ) ( 5,650,039 ) Net loss at subsidiary attributable to noncontrolling interests 51,446 79,798 Net loss attributable to common shareholders $ ( 6,279,320 ) $ ( 5,570,241 ) Denominator: Weighted-average shares outstanding – basic 14,298,774 14,563,592 Weighted-average shares outstanding – diluted 14,298,774 14,563,592 The Company's anti-dilutive restricted shares and stock options outstanding were as follows for the years ended December 31: 2023 2022 Anti-dilutive shares and options 452,224 227,050 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: 2023 2022 Deferred Tax Assets Net operating loss and tax credits $ 15,427,801 $ 16,164,754 Property and equipment and intangibles 71,990 264,653 Operating lease liabilities 1,307,178 1,121,800 Intangible assets 2,337,091 866,942 Capitalized research cost 2,208,093 1,481,455 Allowance for accounts receivable 147,919 145,803 Reserve for expired product 616,979 654,148 Inventory 185,189 217,025 Deferred charges 937,935 1,156,150 Cumulative compensation costs incurred on deductible equity awards 176,926 635,989 Total deferred tax assets 23,417,101 22,708,719 Deferred Tax Liabilities Operating lease right-of-use assets ( 1,547,773 ) ( 1,150,935 ) Intangible assets — — Net deferred tax assets, before valuation allowance 21,869,328 21,557,784 Less: deferred tax asset valuation allowance ( 21,869,328 ) ( 21,557,784 ) 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, 2023: Years of expiration Federal State 2024 $ — $ 30,756,304 2025-2042 45,709,390 28,333,628 Indefinite Period 6,405,835 473,278 Total federal and state net operating loss carryforwards $ 52,115,225 $ 59,563,210 F-30 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Income tax expense includes the following components for the years ended December 31: 2023 2022 Current: Federal $ — $ — State and other 45,769 68,850 Total current income tax expense 45,769 68,850 Deferred: Federal — — State — — Total deferred income tax expense — — Total income tax expense $ 45,769 $ 68,850 The Company’s effective income tax rate for 2023 and 2022 reconciles with the federal statutory tax rate as follows: 2023 2022 Federal tax expense at statutory rate $ 21.00 $ 21.00 State income tax expense (net of federal income tax benefit) ( 0.58 ) 2.11 Permanent differences associated with general business credits 0.80 — Change in valuation allowance ( 4.96 ) ( 21.76 ) Other permanent differences ( 6.51 ) ( 2.58 ) Expiring tax credits ( 3.32 ) — Deferred True-ups ( 7.16 ) — Net loss tax expense $ ( 0.73 ) $ ( 1.23 ) 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, 2023 and 2022. As of December 31, 2023, the Company has general business credit carryforwards of $ 1.3 million. These credit carryforwards will expire in years 2024 through 2044. Years of expiration Federal 2024 $ 18,370 2025-2044 1,322,531 Total federal and state credit carryforwards $ 1,340,901 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 2020, and with few exceptions, the Company is not subject to examination by state tax authorities for tax years which ended before 2020. Loss carryforwards and credit carryforwards generated or utilized in years earlier than 2020 remain subject to examination and adjustment. The Company has no unrecognized tax benefits in 2023 and 2022. F-31 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (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 3.2 million shares of common stock for issuance under the 2007 Plan and 250,000 shares for issuance under the Directors’ Plan. As of December 31, 2023, the Company had 933,517 shares available for future grants under the 2007 Plan and 130,507 shares available 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, except for incentive stock options granted to 10 % shareholders, which the exercise price is no less than 110 % of the fair market value. The maximum contractual term of stock options is ten years from the grant date, except for incentive stock options granted to 10 % shareholders, which is no more than 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 grant date. Restricted stock issued to directors vests on the one year anniversary of the grant date. Stock compensation expense is presented as a component of general and administrative expense in the consolidated statements of operations. Stock compensation expense was $ 0.4 million for the years ended December 31, 2023 and 2022. At December 31, 2023, there was approximately $ 0.5 million of unrecognized compensation cost related to share-based payments, which is expected to be recognized over a weighted-average period of 1.85 years. Stock Options Stock options activity was as follows: Number of option shares Weighted- average exercise price Weighted-average remaining contractual term Outstanding, December 31, 2021 170,600 3.33 Granted 178,950 2.68 Exercised — — Forfeited/canceled ( 29,900 ) 2.98 Outstanding, December 31, 2022 319,650 $ 3.00 6.15 Granted 192,750 2.06 Exercised — $ — Forfeited/canceled ( 25,150 ) $ 2.55 Outstanding, December 31, 2023 487,250 $ 2.65 5.59 The weighted-average grant-date fair value of options granted during the years 2023 and 2022 was 1.16 and 1.29 , respectively. No options were vested and exercisable at December 31, 2023. The aggregate intrinsic value of options outstanding was minimal. F-32 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) The fair value of stock options is calculated using the Black-Scholes (“Black-Scholes-Merton”, or “BSM”) option-pricing model on the grant date. Since 2012, the Company had been issuing Restricted Share Awards where the grant date Fair Value (“FV”) equaled the closing share price. The assumptions used in the Black-Scholes valuation to determine the FV of stock options were as follows at December 31: 2023 2022 Expected term (in years) 5.71 5.88 Expected volatility 65.87 % 54.38 % Risk free interest rate 3.45 % 2.29 % Expected dividend yield — — • Expected Term - The Company has estimated the expected life of its stock options using the simplified method, whereby the expected life equals the average of the vesting term and the original contractual term of the option. • Expected volatility - Based on the Company’s historical stock price volatility. • Risk Free rate - The Company bases the risk-free interest rate assumption for equity awards on the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. • Expected dividend yield - The Company’s expected dividend yield assumption is zero as it has never paid dividends and has no present intention to do so in the future. Restricted Stock Awards Restricted stock activity was as follows: Number of shares Weighted-average grant-date fair value Nonvested, December 31, 2021 568,181 5.17 Granted 65,225 2.59 Vested/released ( 171,655 ) 6.42 Forfeited/canceled ( 66,000 ) 4.67 Nonvested, December 31, 2022 395,751 $ 4.29 Granted 34,250 1.93 Vested/released ( 157,360 ) 5.73 Forfeited/canceled ( 12,075 ) 3.63 Nonvested, December 31, 2023 260,566 $ 3.14 The fair value of restricted stock granted was based on the closing market price of the Company’s common stock on the grant date. The fair value of restricted stock awards that vested during the years 2023 and 2022 was $ 0.3 million and $ 0.5 million, respectively. At December 31, 2023, there was approximately $ 0.2 million of unrecognized compensation costs related to restricted stock awards, which is expected to be recognized over a weighted-average period of less than a year. The restricted stock grants are included in the diluted weighted shares outstanding computation until they cliff-vest. Once vested they are included in the basic weighted shares outstanding computation. F-33 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (14) Employee Benefit Plans The Company sponsors an employee benefit plan that was established on January 1, 2006, the Cumberland Pharmaceuticals 401(k) Plan (the "Plan"), under Section 401(k) of the Internal Revenue Code of 1986, as amended, for the benefit of all employees over the age of 21 , having been employed by the Company for at least six months . The Plan provides that participants may contribute up to the maximum amount of their compensation as set forth by the Internal Revenue Service each year. Employee contributions are invested in various investment funds based upon elections made by the employees. During 2023 and 2022, the Company contributed approximately $ 0.08 million and $ 0.06 million, 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 $ 2.9 million and $ 2.5 million as of December 31, 2023 and 2022, 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 $ 2.4 million and $ 2.3 million as of December 31, 2023 and 2022, respectively. (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. On October 24, 2022, the CET lease with The Gateway to Nashville, LLC provided the notice of exercise to extend the lease for five years . The lease is for approximately 14,200 square feet of wet laboratory and office space in Nashville, Tennessee where CET operates the CET Life Sciences Center.The wet laboratory and office space is leased through April 2028. The Company also subleases a portion of the space under this lease. Also included within the right-of-use assets are start up expenditures related to a new supply agreement with Nephron Pharmaceuticals Corporation (“Nephron”). These expenditures are classified as an embedded lease resulting in a right-of-use asset to be amortized over the life of the Nephron contract. As of December 31, 2023, the value of this asset was $ 1.0 million. Rent expense is recognized over the expected term of the lease 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: 2023 2022 Rent expense $ 1,304,865 $ 1,159,695 Sublease income $ 544,138 $ 529,411 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. F-34 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Operating lease liabilities were recorded as the present value of remaining lease payments not yet paid for the lease term discounted using the incremental borrowing rate associated with each lease. Operating lease right-of-use assets represent operating lease liabilities adjusted for lease incentives and initial direct costs. As the Company’s leases do not contain implicit borrowing rates, the incremental borrowing rates were calculated based on information available at October 25, 2022 and May 1, 2023. 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 Gateway leases is 10.42 years and 12.69 years for the years ended December 31, 2023 and 2022, respectively.. The weighted-average incremental borrowing rate used to discount the present value of the remaining lease payments of both leases is 9.40 % and 9.24 % for the years ended December 31, 2023 and 2023, respectively. Lease Position At December 31, 2023 and 2022, the Company recorded the following on the Consolidated Balance Sheet: Right-of-Use Assets December 31, 2023 December 31, 2022 Operating lease right-of-use assets $ 6,674,394 $ 5,218,403 Lease Liabilities December 31, 2023 December 31, 2022 Operating lease current liabilities $ 348,092 $ 172,910 Operating lease non-current liabilities 5,296,247 4,586,301 Total $ 5,644,339 $ 4,759,211 Cumulative future minimum sublease income under non-cancelable operating subleases totals approximately $ 0.3 million and will be paid through the leases ending in April 2024. 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, 2023 Operating Leases 2024 $ 863,320 2025 836,100 2026 909,911 2027 934,180 2028 740,791 After 2028 4,847,400 Total minimum lease payments 9,131,702 Less: Interest ( 3,487,363 ) Present value of lease liabilities $ 5,644,339 F-35 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: 2023 2022 Customer 1 29 % 22 % Customer 2 26 % 29 % Customer 3 24 % 24 % The Company’s accounts receivable, net of allowances, due from the customers representing 10% or more of consolidated revenue was 62.3 % and 51.8 % at December 31, 2023 and 2022, 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. (19) 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-36 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 by 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 was 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. On April 18, 2023 the state court ruled in favor of the Company. On June 16, 2023, the Company received consideration related to the breach of contract action with the Defendants that finalized a settlement agreement that was entered into by the Company and the Defendants to close the case. F-37 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (20) Quarterly Financial Information (Unaudited) The following table sets forth the unaudited operating results for each fiscal quarter of 2023 and 2022: First Quarter Second Quarter Third Quarter Fourth Quarter Total 2023: Net revenues $ 9,224,638 $ 10,888,877 $ 10,085,926 $ 9,353,066 $ 39,552,507 Operating income (loss) ( 1,531,678 ) 22,859 ( 1,866,603 ) ( 6,179,239 ) ( 9,554,661 ) Net income (loss) 172,286 862,154 ( 1,063,219 ) ( 6,301,987 ) ( 6,330,766 ) Net income (loss) attributable to common shareholders 192,184 872,200 ( 1,049,298 ) ( 6,294,406 ) ( 6,279,320 ) Earnings (loss) per share attributable to common shareholders (1) Basic $ 0.01 $ 0.06 $ ( 0.07 ) $ ( 0.44 ) $ ( 0.44 ) Diluted $ 0.01 $ 0.06 $ ( 0.07 ) $ ( 0.44 ) $ ( 0.44 ) 2022: Net revenues $ 11,175,045 $ 10,299,152 $ 11,413,072 $ 9,123,680 $ 42,010,949 Operating loss ( 1,291,999 ) ( 1,846,538 ) ( 288,588 ) ( 2,277,804 ) ( 5,704,929 ) Net loss ( 1,402,433 ) ( 1,364,666 ) ( 423,226 ) ( 2,459,714 ) ( 5,650,039 ) Net loss attributable to common shareholders ( 1,385,253 ) ( 1,335,620 ) ( 408,639 ) ( 2,440,729 ) ( 5,570,241 ) Loss per share attributable to common shareholders (1) Continuing operations - basic $ ( 0.09 ) $ ( 0.09 ) $ ( 0.03 ) $ ( 0.17 ) $ ( 0.38 ) Continuing operations - diluted $ ( 0.09 ) $ ( 0.09 ) $ ( 0.03 ) $ ( 0.17 ) $ ( 0.38 ) (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-38 Schedule II CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 31, 2023 and 2022. 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: 2022 340,964 6,673,104 — ( 6,417,977 ) 596,091 2023 596,091 5,953,142 — ( 5,969,671 ) (1) 579,562 Valuation allowance for deferred tax assets: For the years ended December 31: 2022 19,761,922 1,795,862 — — 21,557,784 2023 21,557,784 311,544 — — 21,869,328 (1) Composed of actual returns and credits for chargebacks and cash discounts. F-39