CUMBERLAND PHARMACEUTICALS INC 10-Q

Item 1. Financial Statements (Unaudited) CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) June 30, 2024 December 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 17,336,446 $ 18,321,624 Accounts receivable, net 11,619,763 9,758,176 Inventories, net 4,302,159 4,609,362 Prepaid and other current assets 2,322,725 3,025,248 Total current assets 35,581,093 35,714,410 Non-current inventories 11,868,487 12,804,529 Property and equipment, net 337,089 367,903 Intangible assets, net 20,458,835 22,607,918 Goodwill 914,000 914,000 Operating lease right-of-use assets 6,365,790 6,674,394 Other assets 2,993,881 2,692,921 Total assets $ 78,519,175 $ 81,776,075 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 12,508,026 $ 14,037,629 Operating lease current liabilities 376,780 348,092 Other current liabilities 11,871,363 13,596,528 Total current liabilities 24,756,169 27,982,249 Revolving line of credit 16,091,592 12,784,144 Operating lease non-current liabilities 5,100,260 5,296,247 Other long-term liabilities 6,538,970 6,453,566 Total liabilities 52,486,991 52,516,206 Equity: Shareholders’ equity: Common stock— no par value; 100,000,000 shares authorized; 14,083,183 and 14,121,833 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively 46,869,026 47,091,602 Accumulated deficit ( 20,520,036 ) ( 17,488,161 ) Total shareholders’ equity 26,348,990 29,603,441 Noncontrolling interests ( 316,806 ) ( 343,572 ) Total equity 26,032,184 29,259,869 Total liabilities and equity $ 78,519,175 $ 81,776,075 See accompanying Notes to Condensed Consolidated Financial Statements. 1 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) Three months ended June 30, Six months ended June 30, 2024 2023 2024 2023 Net revenues $ 9,848,849 $ 10,888,877 $ 18,346,550 $ 20,113,515 Costs and expenses: Cost of products sold 1,710,944 1,520,774 3,286,486 2,771,038 Selling and marketing 4,248,401 4,672,075 8,402,989 8,949,393 Research and development 1,059,187 1,145,038 2,217,440 2,644,708 General and administrative 2,757,148 2,369,883 5,125,055 4,868,876 Amortization 1,099,857 1,158,248 2,210,518 2,388,319 Total costs and expenses 10,875,537 10,866,018 21,242,488 21,622,334 Operating income (loss) ( 1,026,688 ) 22,859 ( 2,895,938 ) ( 1,508,819 ) Interest income 61,841 57,061 158,587 107,251 Other income — 981,806 — 2,828,871 Interest expense ( 126,347 ) ( 192,635 ) ( 244,873 ) ( 378,988 ) Income (loss) before income taxes ( 1,091,194 ) 869,091 ( 2,982,224 ) 1,048,315 Income tax expense ( 11,443 ) ( 6,937 ) ( 22,885 ) ( 13,875 ) Net income (loss) ( 1,102,637 ) 862,154 ( 3,005,109 ) 1,034,440 Net loss (income) at subsidiary attributable to noncontrolling interests 17,025 10,046 ( 26,766 ) 29,944 Net income (loss) attributable to common shareholders $ ( 1,085,612 ) $ 872,200 $ ( 3,031,875 ) $ 1,064,384 Earnings (loss) per share attributable to common shareholders - basic $ ( 0.08 ) $ 0.06 $ ( 0.21 ) $ 0.07 - diluted $ ( 0.08 ) $ 0.06 $ ( 0.21 ) $ 0.07 Weighted-average shares outstanding - basic 14,118,091 14,393,711 14,107,852 14,376,260 - diluted 14,118,091 14,554,264 14,107,852 14,570,798 See accompanying Notes to Condensed Consolidated Financial Statements. 2 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30, 2024 2023 Cash flows from operating activities: Net income (loss) $ ( 3,005,109 ) $ 1,034,440 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization expense 2,290,130 2,456,590 Amortization of operating lease right-of-use assets 570,369 468,359 Share-based compensation 150,712 188,034 Decrease in non-cash contingent consideration ( 442,321 ) ( 476,606 ) Increase in cash surrender value of life insurance policies over premiums paid ( 101,538 ) ( 95,997 ) Increase in noncash interest expense 8,654 7,809 Net changes in assets and liabilities affecting operating activities: Accounts receivable ( 1,861,587 ) 944,925 Inventories 1,243,245 ( 232,110 ) Other current assets and other assets 424,684 808,699 Operating lease liabilities ( 429,064 ) ( 1,042,792 ) Accounts payable and other current liabilities ( 1,925,886 ) 386,614 Other long-term liabilities 85,404 ( 630,813 ) Net cash provided by (used in) operating activities ( 2,992,307 ) 3,817,152 Cash flows from investing activities: Additions to property and equipment ( 48,799 ) ( 179,453 ) Additions to intangible assets ( 56,191 ) ( 91,808 ) Net cash used in investing activities ( 104,990 ) ( 271,261 ) Cash flows from financing activities: Borrowings on line of credit 22,000,000 16,000,000 Payments on line of credit ( 18,692,552 ) ( 19,051,875 ) Cash settlement of contingent consideration ( 813,478 ) ( 1,652,990 ) Payments made in connection with repurchase of common shares ( 381,851 ) ( 349,910 ) Net cash provided by (used in) financing activities 2,112,119 ( 5,054,775 ) Net decrease in cash and cash equivalents ( 985,178 ) ( 1,508,884 ) Cash and cash equivalents at beginning of period $ 18,321,624 $ 19,757,970 Cash and cash equivalents at end of period $ 17,336,446 $ 18,249,086 See accompanying Notes to Condensed Consolidated Financial Statements. 3 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Condensed Consolidated Statements of Equity (Unaudited) Common stock Accumulated deficit Noncontrolling interests Total equity Shares Amount Balance, December 31, 2022 14,366,616 $ 47,474,973 $ ( 11,208,841 ) $ ( 292,126 ) $ 35,974,006 Share-based compensation 150,260 90,156 — — 90,156 Repurchase of common shares ( 86,829 ) ( 187,961 ) — — ( 187,961 ) Net income (loss) — — 192,184 ( 19,898 ) 172,286 Balance, March 31, 2023 14,430,047 $ 47,377,168 $ ( 11,016,657 ) $ ( 312,024 ) $ 36,048,487 Balance, March 31, 2023 14,430,047 47,377,168 ( 11,016,657 ) ( 312,024 ) 36,048,487 Share-based compensation — 97,877 — — 97,877 Repurchase of common shares ( 99,057 ) ( 171,616 ) — — ( 171,616 ) Net income (loss) — — 872,200 ( 10,046 ) 862,154 Balance, June 30, 2023 14,330,990 14330990 $ 47,303,429 $ ( 10,144,457 ) $ ( 322,070 ) $ 36,836,902 Common stock Accumulated deficit Noncontrolling interests Total equity Shares Amount Balance, December 31, 2023 14,121,833 $ 47,091,602 $ ( 17,488,161 ) $ ( 343,572 ) $ 29,259,869 Share-based compensation 163,991 78,754 — — 78,754 Repurchase of common shares ( 125,870 ) ( 246,599 ) — — ( 246,599 ) Net income (loss) — — ( 1,946,263 ) 43,791 ( 1,902,472 ) Balance, March 31, 2024 14,159,954 $ 46,923,757 $ ( 19,434,424 ) $ ( 299,781 ) $ 27,189,552 Balance, March 31, 2024 14,159,954 $ 46,923,757 $ ( 19,434,424 ) $ ( 299,781 ) $ 27,189,552 Share-based compensation — 71,958 — — 71,958 Repurchase of common shares ( 76,771 ) ( 126,689 ) — — ( 126,689 ) Net loss — — ( 1,085,612 ) ( 17,025 ) ( 1,102,637 ) Balance, June 30, 2024 14,083,183 $ 46,869,026 $ ( 20,520,036 ) $ ( 316,806 ) $ 26,032,184 See accompanying Notes to Condensed Consolidated Financial Statements. 4 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (1) ORGANIZATION AND BASIS OF PRESENTATION Cumberland Pharmaceuticals Inc. ( " Cumberland, " the " Company, " or as used in the context of " we, " " us, " or " our " ), is a specialty pharmaceutical company focused on the acquisition, development and commercialization of branded prescription pharmaceutical products. We are dedicated to our mission of working together to provide unique products that improve the quality of patient care. Our primary target markets are hospital acute care, gastroenterology and oncology. These medical specialties are characterized by relatively concentrated prescriber bases that we believe can be served effectively by small, targeted sales forces. We promote our approved products through our hospital, field and oncology sales forces in the United States. We continue to build a network of established international partners with the needed regulatory and commercial capabilities to register and provide our medicines to patients in their countries. Cumberland’s growth strategy involves maximizing the potential of our existing brands, while continuing to build a portfolio of differentiated products. We currently own six products approved by the FDA in the United States. We are also continuing to build international partnerships to bring our medicines to patients in other countries. Additionally, we look for opportunities to expand our brands into new patient populations through clinical trials, new product presentations and our support of select, investigator-initiated studies. Meanwhile, our clinical team is developing a pipeline of new product candidates to address poorly met medical needs. We also pursue opportunities to acquire additional marketed brands as well as late-stage development product candidates in our target medical specialties. The Company’s products are manufactured by third parties, which are overseen by our quality control and manufacturing professionals. We work closely with our warehousing and distribution partners to make our products available in the U.S. In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company have been prepared on a basis consistent with the December 31, 2023, audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly present the information set forth herein. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (the " SEC " ), and certain information and disclosures have been condensed or omitted as permitted by the SEC for interim period presentation. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2023 (the " 2023 Annual Report on Form 10-K " ). The results of operations for the three and six months ended June 30, 2024, are not necessarily indicative of the results to be expected for the entire fiscal year or any future period. Recent Accounting Guidance Recent Accounting Pronouncements In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, " Financial Instruments-Credit Losses, " which changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, companies are required to use a new forward-looking " expected loss " model that generally results in an earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, companies measure credit losses in a manner similar with previous guidance, except that the losses are recognized as allowances rather than as reductions in the amortized cost of the securities. Companies have to disclose additional information, including information they use to track credit quality by year of origination for most financing receivables. Companies apply the ASU’s provisions as a cumulative-effect adjustment, if any, to the accumulated deficit as of the beginning of the first reporting period in which the guidance is adopted. Related to ASU No. 2016-13 discussed above, in May 2019, the FASB issued ASU 2019-05, "Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief" which provides transition relief for ASU 2016-13 by providing entities with an alternative to irrevocably elect the fair value option for eligible financial assets measured at amortized cost upon adoption of the new credit losses standard. Certain eligibility requirements must be met and the election must be applied on an instrument-by-instrument basis. The election is not available for either available-for-sale or held-to-maturity debt securities. The Company adopted both ASU 2016-13 and ASU 2019-05 on January 1, 2023. Please refer to Trade and Notes Receivables Policy below. 5 Recently Issued Accounting Standards Not Yet Adopted 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. We intend to adopt this standard in our Annual Report on Form 10-K for the year ending December 31, 2025. We are currently evaluating the potential impact of adopting this standard on our 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. We are currently assessing the impact of the requirements on our consolidated financial statements and disclosures. We intend to adopt this standard in our Annual Report on Form 10-K for the year ending December 31, 2024. We are currently evaluating the potential impact of adopting this standard on our disclosures. Accounting Policies Use of Estimates The preparation of the condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates under different assumptions and conditions. The Company's most significant estimates include: (1) its allowances for chargebacks and accruals for rebates and product returns, (2) the allowances for obsolescent or unmarketable inventory and (3) valuation of contingent consideration liabilities associated with business combinations. Operating Segments The Company has one operating segment which is specialty pharmaceutical products. Management has chosen to organize the Company based on the type of products sold. Operating segments are identified as components of an enterprise about which separate discrete financial information is evaluated by the chief operating decision maker, or decision-making group, in making decisions regarding resource allocation and assessing performance. The Company, which uses consolidated financial information in determining how to allocate resources and assess performance, has concluded that our specialty pharmaceutical products compete in similar economic markets and similar circumstances. Substantially all of the Company’s assets are located in the United States and total revenues are primarily attributable to U.S. customers. Trade and Note Receivables Policy Management evaluates the application of Current Expected Credit Losses (CECL) to all of its financial instruments including trade and note receivables. CECL is applicable to all financial instruments measured at amortized cost. Therefore for the Company, this principally relates to trade receivables and two notes receivable. CECL also requires the measurement of expected credit losses on a collective (pool) basis when similar risk characteristics exist. This may include, either individually or in combination, some of the following characteristics of Accounting Standards Codification ("ASC") (326-20-55-5): a. Internal or external credit score/rating b. Risk ratings or classification c. Financial asset type d. Size e. Effective interest rate f. Term g. Geographical location h. Historical or expected credit loss patterns i. Reasonable and supportable forecast periods 6 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 continues 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. (2) EARNINGS (LOSS) PER SHARE The following table reconciles the numerator and denominator used to calculate basic and diluted earnings (loss) per share for the three and six months ended June 30, 2024 and 2023: Three months ended June 30, 2024 2023 Numerator: Net income (loss) attributable to common shareholders $ ( 1,085,612 ) $ 872,200 Denominator: Weighted-average shares outstanding – basic 14,118,091 14,393,711 Dilutive effect of other securities — 160,553 Weighted-average shares outstanding – diluted 14,118,091 14,554,264 Six months ended June 30, 2024 2023 Numerator: Net income (loss) attributable to common shareholders $ ( 3,031,875 ) $ 1,064,384 Denominator: Weighted-average shares outstanding – basic 14,107,852 14,376,260 Dilutive effect of other securities — 194,538 Weighted-average shares outstanding – diluted 14,107,852 14,570,798 As of June 30, 2024 and 2023, restricted stock awards and options to purchase 576,517 and 413,074 shares of common stock, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect would be antidilutive. 7 (3) REVENUES Product Revenues The Company accounts for revenues from contracts with customers under ASC 606. The Company’s net revenues consisted of the following for the three and six months ended June 30, 2024 and 2023: Three months ended June 30, Six months ended June 30, 2024 2023 2024 2023 Products: Kristalose $ 4,107,834 $ 4,110,718 $ 7,303,444 $ 8,425,846 Sancuso 2,188,776 1,916,966 4,016,544 3,803,759 Vibativ 2,454,481 2,147,826 4,059,970 3,996,013 Caldolor 844,248 1,226,314 2,314,947 2,161,356 Acetadote 43,396 150,163 123,599 320,019 Vaprisol ( 941 ) 8,062 ( 2,556 ) 5,544 Omeclamox-Pak ( 1,581 ) 23,857 7,081 39,866 RediTrex ( 1,156 ) 9,493 34,400 ( 131,552 ) Other revenue 213,792 1,295,478 489,121 1,492,664 Total net revenues $ 9,848,849 $ 10,888,877 $ 18,346,550 $ 20,113,515 There was no Omeclamox-Pak net revenue for the second quarter of 2024 due to our lack of commercial inventory of this product. The packager for our Omeclamox-Pak product encountered financial difficulties due to the impact of COVID-19. As we have not been able to identify an alternative site to package the product, we decided to discontinue the sales of Omeclamox-Pak and expense the remaining brand intangible assets in late 2023. For the three and six months ended June 30, 2024, the amounts noted resulted from normal distribution adjustments. With regard to Vaprisol, we are in the process of transitioning to a new manufacturing partner, who was issued a U.S. Food and Drug Administration ("FDA") Form 483 in the second quarter of 2022. Once these FDA Form 483 related issues are satisfactorily resolved, we will then resubmit our application for their facility to the FDA for approval. Meanwhile, we have been working with them to support a special, interim supply of compounded product for critically ill patients, which they introduced to the market in late 2023. For the three and six months ended June 30, 2024, the amounts reflected our share of sales of the compounded product and normal sales deduction adjustments. For the three and six months ended June 30, 2023, net revenue was impacted by normal accrual adjustments. Effective June 30, 2023, the Company returned all rights of RediTrex back and will receive a long-term royalty on any sales of the product in the future. For the three and six months ended June 30, 2024 and 2023, the revenue amounts represented normal distribution and accrual adjustments. Other Revenues The Company has agreements with international partners for commercialization of the Company's products with associated payments included in other revenues. Those agreements provide that each of the partners is responsible for seeking regulatory approvals for the product, and following approval, each partner will be responsible for the ongoing distribution and sales in the respective international territories. 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. 8 Other revenues include funding from federal grant programs including those provided by the FDA and from those secured by Cumberland Emerging Technologies Inc. ("CET") through the Small Business Administration's Small Business Innovation Research and Small Business Technology Transfer ("SBIR/STTR") programs. Grant revenue from these federal grant programs totaled approximately $ 0.1 million for the six months ended June 30, 2024 and 2023. Other revenues also include lease income generated by CET’s Life Sciences Center which is a research facility that provides scientists with access to flexible lab space and other resources to develop biomedical products. This lease income, as noted in Footnote 5 - Leases, was approximately $ 0.1 million for the three months ended June 30, 2024 and 2023, respectively, and $ 0.3 million and $ 0.2 million for the six months ended June 30, 2024 and 2023, respectively. (4) INVENTORIES The Company works closely with third parties to manufacture and package finished goods for sale. Based on the arrangements with the manufacturer or packager, the Company will either take title to the finished goods at the time of shipment or at the time of arrival at the Company’s warehouses. The Company then holds such goods in inventory until distribution and sale. These finished goods inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out method. The Company continually evaluates inventory for potential losses due to excess, obsolete or slow-moving goods by comparing sales history and projections to the inventory on hand. When evidence indicates that the carrying value may not be recoverable, a charge is taken to reduce the inventory to its current net realizable value. At June 30, 2024, the Company had recognized and maintained cumulative net realizable value charges for potential obsolescence and discontinuance losses of approximately $ 0.02 million. At December 31, 2023, there were no cumulative obsolescence and discontinuance losses necessary. The Company purchases the active pharmaceutical ingredient ("API") for Kristalose and maintains the inventory of that raw material. API for the Company's Vaprisol and Vibativ brands were included in the assets associated with the acquisition of those brands and are also included in the raw materials inventory. As part of the Vibativ acquisition, the Company acquired API and work in process inventories of $ 15.6 million that were all initially classified as non-current inventories at the date of acquisition. As these APIs are consumed in the manufacture of our products, the value of the API involved is transferred from raw materials to finished goods. Consigned inventory represents Authorized Generic inventory stored with our partner until shipment to their customers. 9 At June 30, 2024 and December 31, 2023, the Company's net inventories consisted of the following: June 30, 2024 December 31, 2023 Raw materials and work in process $ 12,684,573 $ 12,619,092 Consigned inventory 185,658 149,701 Finished goods 3,300,414 4,645,098 Total inventories 16,170,646 17,413,891 less non-current inventories ( 11,868,487 ) ( 12,804,529 ) Total inventories classified as current $ 4,302,159 $ 4,609,362 At June 30, 2024 and December 31, 2023, the Company's non-current inventories consisted of the following: June 30, 2024 December 31, 2023 Vibativ Raw Materials $ 6,781,071 $ 6,611,426 Kristalose Raw Materials 2,840,114 3,263,516 Vaprisol Raw Materials 1,173,442 1,170,641 Sancuso Raw Materials 536,237 574,502 Caldolor Raw Materials 31,489 — Acetadote Raw Materials 13,474 33,678 Ifetroban Raw Materials 203,383 203,383 Vibativ Finished Goods 92,734 810,454 Caldolor Finished Goods 98,268 67,307 Acetadote Finished Goods 28,653 — Omeclamox 69,622 69,622 Total inventories classified as non-current $ 11,868,487 $ 12,804,529 (5) LEASES On November 15, 2021, Cumberland entered into a lease (the "Lease"), pursuant to which the Company leases approximately 16,903 rentable square feet of space (the "Leased Premise") at the Broadwest office campus located in Nashville, Tennessee with 1600 West End Avenue Partners, LLC (the "Landlord"). The Leased Premise serves as the Company's 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 5 years each, with the commencement date of October 25, 2022. This lease currently expires in November 2035. The Company is responsible for paying rent to the landlord under the lease beginning three months after the commencement date. The Company pays a base rent of $ 33.06 per square foot of rentable space with a gradual rental rate increase of 2.5 % for each year thereafter of the prior year's base rental. In addition to the monthly base rent, the Company is responsible for its percentage share of the operating expenses of the building. The lease also provided for a tenant improvement allowance which was used to build out the space. On October 24, 2022, CET provided the notice of exercise to extend the lease with The Gateway to Nashville, LLC for 5 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") for our Vaprisol product. 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 June 30, 2024, the right-of-use asset was $ 0.9 million. 10 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 and 10.9 years at June 30, 2024 and June 30, 2023, respectively. The weighted-average incremental borrowing rate used to discount the present value of the remaining lease payments for both leases is 9.39 % and 9.40 % at June 30, 2024 and December 31, 2023, respectively. Lease Position At June 30, 2024 and December 31, 2023, the Company's lease assets and liabilities were as follows: Right-of-Use Assets June 30, 2024 December 31, 2023 Operating lease right-of-use assets $ 6,365,790 $ 6,674,394 Lease Liabilities June 30, 2024 December 31, 2023 Operating lease current liabilities $ 376,780 $ 348,092 Operating lease non-current liabilities 5,100,260 5,296,247 Total $ 5,477,040 $ 5,644,339 As of June 30, 2024, cumulative future minimum sublease income under non-cancelable operating subleases totals approximately $ 0.2 million which includes the 90-day notice required for lease termination. Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) are as follows: Maturity of Lease Liabilities at June 30, 2024 Operating Leases 2024 434,255 2025 836,100 2026 909,911 2027 934,180 2028 740,791 After 2028 4,847,401 8,702,638 Less: Interest 3,225,598 Present value of lease liabilities $ 5,477,040 Rent expense is recognized over the expected term of the lease, including renewal option periods, if applicable, on a straight-line basis as a component of general and administrative expense. Rent expense and sublease income were as follows: Three months ended June 30, Six months ended June 30, 2024 2023 2024 2023 Rent expense $ 344,418 $ 226,772 $ 699,482 $ 501,029 Sublease income $ 123,230 $ 130,842 $ 278,913 $ 245,499 11 (6) SHAREHOLDERS’ EQUITY AND DEBT Share repurchases Cumberland currently has a share repurchase program available to repurchase up to $ 10 million of its common stock pursuant to Rule 10b-18 of the Securities Exchange Act of 1934. In January 2019, the Company's Board of Directors established the current $ 10 million repurchase program to replace the prior authorizations. During the six months ended June 30, 2024 and June 30, 2023, the Company repurchased 202,641 shares and 185,886 shares of common stock for approximately $ 0.4 million for each period. At June 30, 2024, there remains approximately $ 2.6 million available under the current repurchase program for common share repurchases. Share purchases and sales In the Company's March 2024 trading window, several members of Cumberland's Board of Directors entered into agreements for trading plans to purchase shares of the Company's stock pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934. These purchases are designed to increase ownership in the Company by the members of the Board. The plans became effective on June 13, 2024, and as of June 30, 2024, a total of 3,529 shares have been purchased through these trading plans. Share Sales In November 2017, Cumberland filed a Shelf Registration on Form S-3 with the SEC associated with the sale of up to $ 100 million in corporate securities. The Shelf Registration was declared effective in January 2018. It also included an At the Market ("ATM") feature that allowed the Company to sell common shares at market prices, along with an agreement with B. Riley FBR Inc. to support such a placement of shares. The Company filed an updated Form S-3 with the SEC in December 2023, which was declared effective December 26, 2023. On March 20, 2024, 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 $ 5.8 million. The Company intends to continue an ATM feature through H.C. Wainwright & Co., LLC, that would allow the Company to issue shares of its common stock. The Company did not issue any shares under an ATM during the six months ended June 30, 2024. Restricted Share Grants and Incentive Stock Options During the six months ended June 30, 2024 and June 30, 2023, the Company issued 50,500 shares and 34,250 shares of restricted stock, respectively, to employees, advisors and directors. Restricted stock issued to employees and advisors generally cliff-vests on the fourth anniversary of the date of grant and for directors on the one-year anniversary of the date of grant. During the six months ended June 30, 2024 and June 30, 2023, the Company also issued 189,250 and 184,500 incentive stock options, respectively, to employees that cliff-vest on the fourth anniversary of the date of grant, and are largely set to expire in 2034 and 2033, respectively. Stock compensation expense is presented as a component of general and administrative expense in the condensed consolidated statements of operations as it relates to these restricted share grants and options. For the six months ended June 30, 2024, we recorded a credit of $ 0.02 million to stock compensation expense related to the forfeiture of unvested restricted stock awards and incentive stock options. Debt Agreement On September 5, 2023, the Company entered into a new Revolving Credit Loan Agreement ("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 3-year term expiring on October 1, 2026. The interest rate is based on Benchmark (Term SOFR) plus a spread of 2.75 %. Cumberland is subject to one financial covenant, the maintenance of a Funded Debt Ratio, determined on a quarterly basis. Borrowings under the line of credit are collateralized by substantially all of our assets. On May 6, 2024, the Company entered into a First Amendment to the Loan Agreement which provides an alternative to the financial covenant by delivering to the lender a borrowing base certificate and complying with certain borrowing base requirements which set forth a maximum revolver amount equal to the lessor of (a) up to $ 20 million or (b) the sum of the Company's cash balances and eligible accounts receivable. As of June 30, 2024 and December 31, 2023, the Company had $ 16.1 million and $ 12.8 million, respectively, in borrowings outstanding under its revolving credit facility. The applicable interest rate under the Pinnacle Agreement was 8.125 % at June 30, 2024. 12 Joint Venture Agreement In August 2020, Cumberland entered into an agreement with WinHealth Investment (Singapore) Ltd creating WHC Biopharmaceuticals, Pte. Ltd . The joint venture, as a limited liability company, will 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 a $ 0.2 million convertible note, which was funded during the first quarter of 2021. The joint venture will seek additional future capital from additional investors and has entered into exclusive option agreements to license product candidates from both Cumberland Pharmaceuticals Inc. and Cumberland Emerging Technologies Inc. (7) INCOME TAXES As of June 30, 2024, the Company has approximately $ 52.1 million in federal net operating loss carryforwards including approximately $ 44.1 million of net operating loss carryforwards resulting from the exercise of nonqualified stock options. These have historically been used to significantly offset income tax obligations. The Company expects it will continue to pay minimal income taxes during 2024 and beyond, through the continued utilization of these net operating loss carryforwards, on any taxable income generated from our operations. (8) COLLABORATIVE AGREEMENTS Cumberland is a party to several collaborative arrangements with research institutions to identify and pursue promising pharmaceutical product candidates. The funding for these programs is primarily provided through SBIR/STTR programs and other grant awards. The Company has determined that these collaborative agreements, with the exception of the collaborative payment discussed in Note 10, related to 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 condensed consolidated statements of operations. (9) COMMITMENTS AND CONTINGENCIES The company is involved in litigation arising in the normal course of business. The Company does not believe that the disposition or ultimate resolution of existing claims or lawsuits will have a material adverse effect on the business or financial condition of the Company. 13 (10) PRODUCT ACQUISITIONS AND RETURN OF PRODUCT RIGHTS Vibativ During November 2018, the Company executed an agreement with Theravance Biopharma ("Theravance") to acquire the assets and global rights to Vibativ including responsibility for the marketing, distribution, manufacturing and regulatory activities associated with the brand. Vibativ is a patented, FDA approved injectable anti-infective for the treatment of certain serious bacterial infections including hospital-acquired and ventilator-associated bacterial pneumonia and complicated skin and skin structure infections. It addresses a range of Gram-positive bacterial pathogens, including those that are considered difficult-to-treat and multidrug-resistant. Cumberland accounted for the transaction as a business combination in accordance with ASC 805 and the product sales are included in the results of operations subsequent to the acquisition date. The Company made an upfront payment of $ 20 million at the closing of the transaction and a $ 5 million milestone payment in early April 2019. In addition, Cumberland has agreed to pay royalties of up to 20 % of on-going net sales of the product in the U.S. after a $ 3 million threshold is met. The future royalty payments were recognized at their acquisition-date fair value as a contingent consideration liability, as part of the contingent consideration transferred in the business combination. Cumberland prepared the valuations of the contingent consideration liability utilizing significant unobservable inputs. As a result, the valuation is classified as Level 3 fair value measurement. The following table presents the changes in the fair value of the contingent consideration liability that is remeasured on a recurring basis. The contingent consideration earned and accrued in operating expenses is paid to Theravance quarterly. Balance at December 31, 2023 $ 4,033,373 Cash payment of royalty during the period ( 394,426 ) Change in fair value of contingent consideration included in operating expenses ( 7,718 ) Contingent consideration earned and accrued in operating expenses 219,143 Balance at June 30, 2024 $ 3,850,372 The contingent consideration liability of $ 3.9 million was accounted for as $ 1.4 million of other current liabilities and $ 2.5 million of other long-term liabilities on the condensed consolidated balance sheet as of June 30, 2024. Sancuso On January 3, 2022, Cumberland acquired the U.S. rights to the FDA-approved oncology-supportive care medicine Sancuso from Kyowa Kirin, Inc. ("Kyowa Kirin"), the U.S. affiliate of Japan-based Kyowa Kirin Co., Ltd. Sancuso is the first and only FDA-approved prescription patch for the prevention of nausea and vomiting in patients receiving certain types of chemotherapy treatment. The active drug in Sancuso, granisetron, slowly dissolves in the thin layer of adhesive that sticks to the patient’s skin and is released into their bloodstream over several days, working continuously to prevent chemotherapy-induced nausea and vomiting ("CINV"). It is applied 24 to 48 hours before receiving chemotherapy and can prevent CINV for up to five consecutive days. Alternative oral treatments must be taken several times (day and night) to deliver the same therapeutic doses. Cumberland acquired U.S. rights to Sancuso and assumed full commercial responsibility for the product in the U.S. – including its marketing, promotion, distribution, manufacturing and medical support activities. The product’s FDA registration was subsequently transferred from Kyowa Kirin to Cumberland in August 2023. Cumberland has also accounted for this transaction as a business combination in accordance with ASC 805 and the product sales are included in the results of operations subsequent to the acquisition date. The Company made an upfront payment of $ 13.5 million at the closing of the transaction. The agreement called for milestone payments of up to $ 3.5 million based on the attainment of various approvals and sales performance. In 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 $ 2.0 million in milestones are tied to achievement of certain annual sales levels for the product. 14 In addition, Cumberland has agreed to pay a royalty of up to 10 % of on-going net sales of Sancuso. The future royalty payments were required to be recognized at their acquisition-date fair value as a contingent consideration liability, as part of the contingent consideration transferred in the business combination. Cumberland has prepared a valuation of the contingent consideration liability utilizing significant unobservable inputs. As a result, the valuation is classified as Level 3 fair value measurement. The following table presents the changes in the fair value of the contingent consideration liability that is remeasured on a recurring basis. Balance at December 31, 2023 $ 2,306,000 Cash payment of milestones and royalty during the period ( 419,052 ) Change in fair value of contingent consideration included in operating expenses ( 434,603 ) Contingent consideration earned and accrued in operating expenses 401,655 Balance at June 30, 2024 $ 1,854,000 The contingent consideration liability earned and accrued in operating expenses is paid to Kyowa Kirin quarterly. The contingent consideration liability of $ 1.9 million was accounted for as $ 1.2 million of current liabilities and $ 0.6 million of other long-term liabilities on the condensed consolidated balance sheet as of June 30, 2024. RediTrex On July 12, 2022, the Cumberland entered into an amendment to an agreement with Nordic Group B.V.("Nordic") returning all the U.S. rights to RediTrex back to Nordic including the trademark and market authorization effective June 30, 2023. The companies have cooperated on the transition and Cumberland will receive a long-term royalty on any Nordic sales of the product. 15