10-Q 1 q3201710q.htm 10-Q Q3 2017 Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             .
Commission file number: 001-33637 
Cumberland Pharmaceuticals Inc.
(Exact Name of Registrant as Specified In Its Charter)
Tennessee
 
62-1765329
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
2525 West End Avenue, Suite 950,
Nashville, Tennessee
 
37203
(Address of Principal Executive Offices)
 
(Zip Code)
(615) 255-0068
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
Non-accelerated filer
 
ý (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Emerging growth company
 
¨

  
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at November 3, 2017
Common stock, no par value
 
15,748,137


CUMBERLAND PHARMACEUTICALS INC.
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
 
September 30,
2017
 
December 31, 2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
42,018,953

 
$
34,510,330

Marketable securities
8,055,017

 
15,622,111

Accounts receivable, net of allowances
7,205,378

 
7,330,127

Inventories, net
5,857,468

 
5,371,729

Other current assets
2,945,999

 
2,710,967

Total current assets
66,082,815

 
65,545,264

Property and equipment, net
474,748

 
464,454

Intangible assets, net
21,540,316

 
22,154,176

Deferred tax assets, net
—

 
3,119,930

Other assets
2,253,178

 
2,120,742

Total assets
$
90,351,057

 
$
93,404,566

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
7,921,600

 
$
8,036,611

Other current liabilities
7,876,491

 
6,755,652

Total current liabilities
15,798,091

 
14,792,263

Revolving line of credit
8,000,000

 
4,100,000

Other long-term liabilities
1,634,936

 
1,391,484

Total liabilities
25,433,027

 
20,283,747

Commitments and contingencies


 


Equity:
 
 
 
Shareholders’ equity:
 
 
 
Common stock—no par value; 100,000,000 shares authorized; 15,781,736 and 16,074,176 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
52,585,566

 
54,643,268

Retained earnings
12,509,767

 
18,604,931

Total shareholders’ equity
65,095,333

 
73,248,199

Noncontrolling interests
(177,303
)
 
(127,380
)
Total equity
64,918,030

 
73,120,819

Total liabilities and equity
$
90,351,057

 
$
93,404,566

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

1

CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (loss)
(Unaudited)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Net revenues
$
11,196,961

 
$
8,791,753

 
$
29,500,843

 
$
23,944,120

Costs and expenses:
 
 
 
 
 
 
 
Cost of products sold
2,166,353

 
1,973,948

 
5,216,776

 
4,353,148

Selling and marketing
6,226,438

 
3,614,714

 
16,174,391

 
10,585,955

Research and development
943,162

 
644,662

 
2,921,951

 
2,029,914

General and administrative
2,090,785

 
1,865,575

 
6,554,158

 
5,817,943

Amortization
609,572

 
562,722

 
1,811,589

 
1,632,920

Total costs and expenses
12,036,310

 
8,661,621

 
32,678,865

 
24,419,880

Operating income (loss)
(839,349
)
 
130,132

 
(3,178,022
)
 
(475,760
)
Interest income
94,833

 
51,636

 
216,849

 
160,248

Interest expense
(8,902
)
 
(29,088
)
 
(70,646
)
 
(77,777
)
Income (loss) before income taxes
(753,418
)
 
152,680

 
(3,031,819
)
 
(393,289
)
Income tax (expense) benefit
(3,822
)
 
(57,192
)
 
(4,196,192
)
 
159,282

Net income (loss)
(757,240
)
 
95,488

 
(7,228,011
)
 
(234,007
)
Net loss at subsidiary attributable to noncontrolling interests
14,209

 
10,678

 
49,923

 
39,018

Net income (loss) attributable to common shareholders
$
(743,031
)
 
$
106,166

 
$
(7,178,088
)
 
$
(194,989
)
Earnings (loss) per share attributable to common shareholders
 
 
 
 
 
 
 
- basic
$
(0.05
)
 
$
0.01

 
$
(0.45
)
 
$
(0.01
)
- diluted
$
(0.05
)
 
$
0.01

 
$
(0.45
)
 
$
(0.01
)
Weighted-average shares outstanding
 
 
 
 
 
 
 
- basic
15,867,159

 
16,217,442

 
15,973,737

 
16,268,579

- diluted
15,867,159

 
16,504,568

 
15,973,737

 
16,268,579

 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to common shareholders
(743,031
)
 
106,166

 
(7,178,088
)
 
(194,989
)
Net loss at subsidiary attributable to noncontrolling interests
14,209

 
10,678

 
49,923

 
39,018

Total comprehensive income (loss)
$
(757,240
)
 
$
95,488

 
$
(7,228,011
)
 
$
(234,007
)
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


2

CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine months ended September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(7,228,011
)
 
$
(234,007
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Depreciation and amortization expense
1,974,194

 
1,785,057

Deferred tax expense
4,293,963

 
662,689

Share-based compensation
849,198

 
623,504

Excess tax (benefit) expense derived from exercise of stock options
(91,109
)
 
907,270

Noncash interest expense
60,708

 
61,224

Noncash investment gains
(48,084
)
 
(69,140
)
Net changes in assets and liabilities affecting operating activities:
 
 
 
Accounts receivable
124,748

 
(595,180
)
Inventories
(485,739
)
 
(713,084
)
Other current assets and other assets
(428,176
)
 
(1,241,372
)
Accounts payable and other current liabilities
640,453

 
(1,705,007
)
Other long-term liabilities
239,703

 
267,730

Net cash used in operating activities
(98,152
)
 
(250,316
)
Cash flows from investing activities:
 
 
 
Additions to property and equipment
(172,899
)
 
(98,275
)
Purchases of marketable securities
(2,029,414
)
 
(3,643,894
)
Proceeds from sale of marketable securities
9,644,592

 
3,676,745

Additions to intangible assets
(841,647
)
 
(1,554,410
)
Net cash provided by (used in) investing activities
6,600,632

 
(1,619,834
)
Cash flows from financing activities:
 
 
 
Net borrowings on line of credit
3,900,000

 
2,000,000

Excess tax expense derived from exercise of stock options
—

 
(907,270
)
Repurchase of common shares
(2,893,857
)
 
(1,879,395
)
Net cash provided by (used in) financing activities
1,006,143

 
(786,665
)
Net increase (decrease) in cash and cash equivalents
7,508,623

 
(2,656,815
)
Cash and cash equivalents at beginning of period
34,510,330

 
38,203,059

Cash and cash equivalents at end of period
$
42,018,953

 
$
35,546,244

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


3

CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Equity
(Unaudited)
 
 
 
Noncontrolling interests
 
 
 
Common stock
 
Retained earnings
 
 
Total equity
 
Shares
 
Amount
 
 
 
Balance, December 31, 2016
16,074,176

 
$
54,643,268

 
$
18,604,931

 
$
(127,380
)
 
$
73,120,819

Cumulative effect from change in accounting principle (Note 7)
—

 
—

 
1,082,924

 
—

 
1,082,924

Share-based compensation
146,275

 
849,198

 
—

 
—

 
849,198

Repurchase of common shares
(438,715
)
 
(2,906,900
)
 
—

 
—

 
(2,906,900
)
Net loss
—

 
—

 
(7,178,088
)
 
(49,923
)
 
(7,228,011
)
Balance, September 30, 2017
15,781,736

 
$
52,585,566

 
$
12,509,767

 
$
(177,303
)
 
$
64,918,030

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


4

CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Cumberland Pharmaceuticals Inc. (“Cumberland,” the “Company,” or as used in the context of “we,” “us,” or “our”) is a specialty pharmaceutical company focused on the acquisition, development and commercialization of branded prescription products. The Company's primary target markets are hospital acute care, gastroenterology, and oncology supportive care. 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.
Cumberland focuses its resources on maximizing the commercial potential of its products, as well as developing new product candidates, and has both internal development and commercial capabilities. The Company’s products are manufactured by third parties, which are overseen by Cumberland’s quality control and manufacturing professionals. The Company works closely with its third-party distribution partners to make its products available in the United States.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company have been prepared on a basis consistent with the December 31, 2016 audited consolidated financial statements, with the exception of the impacts of adopting accounting pronouncements during 2017, 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, or the SEC, and omit certain information and footnote disclosure necessary to present the statements in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). 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, 2016. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.
Total comprehensive income (loss) consisted solely of net income (loss) for the three and nine months ended September 30, 2017 and 2016.
Recent Accounting Guidance
Recent Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") released in the form of an Accounting Standards Update ("ASU"), "Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting." The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to broadly and significantly impact the net income, earnings per share ("EPS"), and the statement of cash flows. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. Effective January 1, 2017, the Company adopted this standard using the required modified retrospective method for the impact on its Balance Sheet. The adoption impact on its Statement of Operations was completed on a prospective basis. The impact of the adoption is discussed in Note 7. Income Taxes.
In July 2015, the FASB issued amended guidance in the form of a FASB ASU, “Inventory: Simplifying the Measurement of Inventory.” The amended guidance requires entities to measure inventory at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The requirement replaced the lower of cost or market evaluation. Accounting guidance is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail method. The amendments in this update are effective for fiscal years beginning after December 15, 2016. Effective January 1, 2017, the Company adopted this standard on a prospective basis. Adoption of this standard had no material impact to Cumberland's condensed consolidated financial statements and disclosures.
Recent Accounting Pronouncements - Not Yet Adopted
In November 2016, the FASB issued ASU, “Statement of Cash Flows-Restricted Cash-a consensus of the FASB Emerging Issues Task Force.” This revised standard is an effort by the FASB to reduce existing diversity in practice by providing specific guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. The updated guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. As such, amounts generally described as restricted cash and restricted cash equivalents should be included in the “beginning-of-period” and “end-of-period” total amounts shown on the statement of

5
CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
(Unaudited)


cash flows. The effective date for this standard is for years beginning after December 15, 2017, with early adoption permitted. The Company is evaluating the potential impact of this adoption on its condensed consolidated financial statements and disclosures.
In August 2016, the FASB issued amended guidance in the form of a FASB ASU, "Classification of Certain Cash Receipts and Cash Payments." The core principle of the new guidance is to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this update are effective for fiscal years beginning after December 15, 2017. The accounting guidance should be applied retrospectively and early adoption is permitted. The Company continues to evaluate the potential impact of this adoption on its condensed consolidated financial statements and disclosures but currently it does not anticipate that adoption will have a material impact.
In May 2014, the FASB issued amended guidance in the form of a FASB ASU, "Revenue from Contracts with Customers (ASC 606)." The core principle of the new guidance is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The new guidance defines a five-step process to achieve this core principle and, in doing so, additional judgments and estimates may be required within the revenue recognition process. The new standard will replace most of the existing revenue recognition standards in U.S. GAAP when it becomes effective. In July 2015, the FASB issued a one-year deferral of the adoption date, which extended the effective date for us to January 1, 2018, at which point we will adopt the standard. The new standard can be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the change recognized at the date of the initial application. The ASU also includes a cohesive set of quantitative and qualitative disclosure requirements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts with customers.
The Company has evaluated its revenue sources and individual components of the revenue process and is in the process of finalizing how the adoption of the ASU will impact its condensed consolidated financial statements. Cumberland expects to adopt ASC 606 using the modified retrospective method and while the Company continues to evaluate the effect of the standard, preliminarily, it does not anticipate a material impact on the consolidated financial statements. To complete the assessment of the impact of the standard to the financial statements, Cumberland continues to evaluate all implications of the standard, method of adoption and related financial disclosures. Additionally, the Company continues to monitor modifications, clarifications and interpretations issued by the FASB that may impact current conclusions.
In February 2016, the FASB issued guidance in the form of a FASB ASU, "Leases." The new standard establishes a right-of-use (ROU) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain optional practical expedients available. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are evaluating our current lease agreements for the impact of our pending adoption of the new standard on our consolidated financial statements and disclosures. Our material operating leases include the lease of approximately 25,500 square feet of office space in Nashville, Tennessee for our corporate headquarters, with the lease expiring in October 2022. The Cumberland Emerging Technologies ("CET") lease, through April 2018, of approximately14,200 square feet of office and wet laboratory space in Nashville, Tennessee is also included to operate the CET Life Sciences Center.
Accounting Policies:
Use of Estimates
In preparing the condensed consolidated financial statements in conformity with U.S. GAAP, management must make decisions that impact the reported amounts and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, management applies judgments based on its understanding and analysis of the relevant circumstances, historical experience, and other available information. 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) the projection of future taxable income for the realization of deferred tax assets.
Operating Segments
The Company has one operating segment which is specialty pharmaceutical products. Management has chosen to organize the Company based on the type of products sold. Operating segments are identified as components of an enterprise about which separate discrete financial information is evaluated by the chief operating decision maker, or decision-making group, in making decisions regarding resource allocation and assessing performance. The Company, which uses consolidated financial information in determining how to allocate resources and assess performance, has concluded that our specialty pharmaceutical products compete in similar economic markets and similar circumstances. Substantially all of the Company’s assets are located in the United States and total revenues are primarily attributable to U.S. customers.

6
CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
(Unaudited)



(2) MARKETABLE SECURITIES
The Company invests in marketable debt securities in order to maximize its return on cash. Marketable securities consist of U.S. Government Agency notes and bonds, and bank-guaranteed, variable rate demand notes ("VRDN"). At the time of purchase, the Company classifies marketable securities as either trading securities or available-for-sale securities, depending on the intent at that time. As of September 30, 2017 and December 31, 2016, the marketable securities are comprised solely of trading securities. Trading securities are carried at fair value with unrealized gains and losses recognized as a component of interest income in the condensed consolidated statements of operations and comprehensive income (loss).
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.
The Company's fair values of marketable securities are determined based on valuations provided by a third-party pricing service, as derived from such service's pricing models, and are considered either Level 1 or Level 2 measurements, depending on the nature of the investment. The Company has no marketable securities in which the fair value is determined based on Level 3 measurements. The level of management judgment required in evaluating fair value for Level 1 investments is minimal. Similarly, there is little subjectivity or judgment required for Level 2 investments valued using valuation models that are standard across the industry and whose parameter inputs are quoted in active markets. Inputs to the models may include, but are not limited to, reported trades, executable bid and ask prices, broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. Based on the information available, the Company believes that the valuations provided by the third-party pricing service, as derived from such service's pricing models, are representative of prices that would be received to sell the assets at the measurement date (exit prices). There were no transfers of assets between levels within the fair value hierarchy.
The following table summarizes the fair value of our marketable securities, by level within the fair value hierarchy, as of each period end:
 
September 30, 2017
 
December 31, 2016
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
U.S. Agency issued mortgage-backed securities – variable rate
$
—

 
$
5,456,811

 
$
5,456,811

 
$
—

 
$
6,814,957

 
$
6,814,957

U.S. Agency notes and bonds – fixed rate
—

 
1,199,538

 
1,199,538

 
—

 
1,795,330

 
1,795,330

SBA loan pools – variable rate
—

 
1,398,668

 
1,398,668

 
—

 
1,346,824

 
1,346,824

Municipal bonds – VRDN
—

 
—

 
—

 
5,665,000

 
—

 
5,665,000

Total fair value of marketable securities
$
—

 
$
8,055,017

 
$
8,055,017

 
$
5,665,000

 
$
9,957,111

 
$
15,622,111



7
CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
(Unaudited)



(3) EARNINGS (LOSS) PER SHARE
The following table reconciles the numerator and denominator used to calculate diluted earnings (loss) per share for the three and nine months ended September 30, 2017 and 2016:
 
Three months ended September 30,
 
2017
 
2016
Numerator:
 
 
 
Net income (loss) attributable to common shareholders
$
(743,031
)
 
$
106,166

Denominator:
 
 
 
Weighted-average shares outstanding – basic
15,867,159

 
16,217,442

Dilutive effect of other securities
—

 
287,126

Weighted-average shares outstanding – diluted
15,867,159

 
16,504,568

 
 
 
 
 
Nine months ended September 30,
 
2017
 
2016
Numerator:
 
 
 
Net income (loss) attributable to common shareholders
$
(7,178,088
)
 
$
(194,989
)
Denominator:
 
 
 
Weighted-average shares outstanding – basic
15,973,737

 
16,268,579

Dilutive effect of other securities
—

 
—

Weighted-average shares outstanding – diluted
15,973,737

 
16,268,579

As of September 30, 2017 and 2016, restricted stock awards and options to purchase 14,175 and 21,950 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.
(4) REVENUES
Product Revenues
The Company’s net revenues consisted of the following for the three and nine months ended September 30, 2017 and 2016:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Products:
 
 
 
 
 
 
 
Acetadote
$
1,342,457

 
$
1,807,495

 
$
4,331,675

 
$
5,532,893

Omeclamox-Pak
190,835

 
752,808

 
1,213,635

 
2,154,596

Kristalose
2,749,966

 
3,671,397

 
8,037,994

 
10,915,276

Vaprisol
385,541

 
496,279

 
1,346,793

 
1,286,126

Caldolor
896,640

 
1,357,289

 
2,762,790

 
3,060,441

Ethyol
2,566,611

 
519,400

 
8,325,254

 
519,400

       Totect
2,916,425

 
—

 
2,916,425

 
—

Other
148,486

 
187,085

 
566,277

 
475,388

Total net revenues
$
11,196,961

 
$
8,791,753

 
$
29,500,843

 
$
23,944,120

Cumberland supplies Perrigo Company ("Perrigo") with an Authorized Generic version of the Company's Acetadote product. The Company's revenue generated by sales of its Authorized Generic distributed by Perrigo is included in the Acetadote product revenue presented above. The Company's share of Authorized Generic revenue was $0.9 million and $1.2 million for third quarter of 2017 and 2016 and $3.0 million and $3.5 million on a year-to-date basis as of September 30, 2017 and 2016, respectively. Totect revenue includes $0.3 million in Cardioxane net revenue for the third quarter of 2017.


8
CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
(Unaudited)


Other Revenues
The Company has entered into agreements, beginning in 2012, with international partners for commercialization of the Company's products. The international agreements provide that each of the partners are responsible for seeking regulatory approvals for the products, and following approvals, each partner will handle ongoing distribution and sales in the respective international territories. The Company maintains responsibility for the intellectual property and product formulations. Under the international agreements, the Company is entitled to receive non-refundable, up-front payments at the time the agreements are entered into and milestone payments upon the partners' achievement of defined regulatory approvals and sales milestones. The Company recognizes revenue for these substantive milestones using the milestone method. The Company is also entitled to receive royalties on future sales of the products under the agreements.
(5) INVENTORIES
The Company works closely with third parties to manufacture and package finished goods for sale. Based on the relationship 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 from the manufacturer. The Company then warehouses such goods until distribution and sale. As discussed in Note 1, effective January 1, 2017, 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 inventory by comparing sales history and sales projections to the inventory on hand. When evidence indicates that the carrying value may not be recoverable, a charge is taken to reduce the inventory to its current net realizable value. At September 30, 2017 and December 31, 2016, the Company has recognized and maintained cumulative charges for potential obsolescence and discontinuance losses of approximately $0.6 million and $0.3 million, respectively.
In connection with the acquisition of certain product rights related to the Kristalose brand, the Company is responsible for the purchase of the active pharmaceutical ingredient ("API") for Kristalose and maintains the inventory at the third-party manufacturer. As the API is consumed in production, the value of the API is transferred from raw materials to finished goods. API for the Company's Vaprisol brand is also included in the raw materials inventory total at September 30, 2017 and December 31, 2016.
As of September 30, 2017 and December 31, 2016, net inventory consisted of the following:
 
September 30, 2017
 
December 31, 2016
Raw materials and work in process
$
3,188,240

 
$
2,810,711

Consigned inventory
247,003

 
277,324

Finished goods
2,422,225

 
2,283,694

Total
$
5,857,468

 
$
5,371,729

(6) SHAREHOLDERS’ EQUITY AND DEBT
Share Repurchases
The Company currently has a share repurchase program to repurchase up to $10.0 million of its common stock pursuant to Rule 10b-18 of the Securities Exchange Act. In January 2016, the Company's Board of Directors established the current $10.0 million repurchase program to replace the prior authorizations. During the nine months ended September 30, 2017 and September 30, 2016, the Company repurchased 438,715 shares and 407,457 shares, respectively, of common stock for approximately $2.9 million and $1.9 million, respectively.
Restricted Share Grants
During the nine months ended September 30, 2017, the Company issued 233,525 shares of restricted stock to employees and directors. Restricted stock issued to employees 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. Stock compensation expense is presented as a component of general and administrative expense in the condensed consolidated statements of operations and comprehensive income (loss).
New Debt Agreement
On July 31, 2017, the Company entered into a Revolving Credit Loan Agreement with Pinnacle Bank ("Pinnacle Agreement"). The Pinnacle Agreement replaced the June 2014 Revolving Credit Loan Agreement with SunTrust Bank ("SunTrust Agreement"), which was to expire on June 30, 2018. The Pinnacle Agreement provides for an aggregate principal amount of up to $20 million and has a three-year term expiring on July 31, 2020. The initial revolving line of credit is up to $12 million with the ability to increase the borrowing amount up to $20 million, upon the satisfaction of certain conditions.


9
CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
(Unaudited)


The interest rate on the Pinnacle Agreement is based on LIBOR plus an interest rate spread. There is no LIBOR minimum and the LIBOR pricing provides for an interest rate spread of 1.75% to 2.75% (representing an interest rate of 3.0% at September 30, 2017). In addition, a fee of 0.25% per year is charged on the unused line of credit. Interest and the unused line fee are payable quarterly. Borrowings under the line of credit are collateralized by substantially all of our assets.
Under the Pinnacle Agreement, Cumberland is subject to one financial covenant, the maintenance of a Funded Debt Ratio, as such term is defined in the agreement and determined on a quarterly basis. In addition, the Company is subject to standard general covenants. The Company achieved compliance with the Funded Debt Ratio covenant as of September 30, 2017 through the utilization of the covenant cure section of the agreement.
There were no early termination penalties upon termination of the previous SunTrust Agreement and the Company incurred less than $0.1 million in deferred financing costs related to the new Pinnacle Agreement, which will be amortized to interest expense using the effective interest method over the term of that agreement.
Previous Debt Agreement
On June 26, 2014, Cumberland entered into the SunTrust Agreement. The Company had $8.0 million in borrowings under that agreement at September 30, 2017. On July 29, 2016, Cumberland amended the agreement to extend the original three-year term by an additional year. The agreement provided for an aggregate principal amount up to $20 million. The initial revolving line of credit was up to $12 million, with the ability to increase the borrowing amount up to $20 million, upon the satisfaction of certain conditions.
The interest rate on the SunTrust Agreement was based on LIBOR plus an interest rate spread. There was no LIBOR minimum and the LIBOR pricing provided for an interest rate spread of 1.0% to 2.85%. In addition, a fee of 0.25% per year was charged on the unused line of credit. Interest and the unused line fee were payable quarterly. Borrowings under the line of credit were collateralized by substantially all of the Company’s assets.
Under the SunTrust Agreement, Cumberland was subject to certain financial covenants, including, but not limited to, maintaining a Funded Debt Ratio.
(7) INCOME TAXES
The Company adopted FASB ASU, "Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting" effective January 1, 2017. The Company adopted this standard using the required modified retrospective method for the impact on its Balance Sheet. The adoption impact on its Statement of Operations was completed on a prospective basis.
The impact of adoption on Cumberland's consolidated financial statements included the recording of $44.1 million in previously unrecognized net operating loss carryforwards, net of valuation allowances, generated from the exercise of nonqualified options during 2009. These net operating loss carryforwards occurred as a result of the actual tax benefit realized upon an employee's exercise exceeding the cumulative book compensation charge associated with the options. This adoption resulted in the recording of $1.1 million in net non-current deferred tax assets and retained earnings effective as of January 1, 2017. This $1.1 million in net non-current deferred tax assets is the result of a deferred tax asset of $17.0 million, net of a related valuation allowance of $15.9 million. Under the previous accounting guidance, these benefits had been recognized in the year in which they were able to reduce current income taxes payable. As part of the Company's adoption of the FASB guidance and its continued evaluation of Cumberland's utilization of net operating loss carryforwards and other deferred tax assets, including updates to our forecasts of future taxable income, the Company also recorded an additional valuation allowance of $1.0 million for its federal Orphan Drug and Research and Development tax credits that expire between 2021 and 2036. This additional valuation allowance impacted Cumberland's effective tax rate during the first quarter of 2017.
During the second quarter of 2017, as part of the Company's continued evaluation of the utilization of its net operating loss carryforwards and other deferred tax assets, including the most recent three-year operating results, the Company recorded an additional valuation allowance of $3.5 million for its remaining deferred tax assets. This additional valuation allowance impacted Cumberland's effective tax rate during the second quarter of 2017 and all deferred tax assets have a full valuation allowance.
The net operating loss carryforwards generated during 2009 consisted of $44.1 million in federal and $45.4 million in state amounts. Since they were generated, the Company has utilized these net operating loss carryforwards to pay minimal income taxes. The Company will continue to pay minimal income taxes during 2017 and beyond, through the continued utilization of these net operating loss carryforwards, as it is able to achieve taxable income through its operations.
The newly adopted FASB guidance also results in any changes in the tax benefit being recognized in the provision for taxes on income during the period incurred. Previously, the Company recorded these benefits directly to equity. During the first quarter of 2017, 146,275 restricted shares previously issued to employees and directors vested. As the market price on the vesting date exceeded the market price on the grant dates, the Company experienced a tax benefit in excess of compensation cost, also referred

10
CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
(Unaudited)


to as a tax benefit "windfall." This tax benefit windfall resulted in an additional tax benefit of $0.1 million during the first quarter of 2017.
The Company will continue to evaluate and record the future vesting of shares of restricted stock issued to employees and directors as well as any tax benefit windfall. In the event that future restricted shares have a market price on the vesting date that is less than the market price on the grant dates, the Company will experience a tax benefit less than the compensation cost, also referred to as a tax benefit "shortfall."
As a part of the adoption, the tax benefit or deficiency is now classified and presented as an operating cash flow. In the diluted net earnings per share calculation, when applying the treasury stock method for shares that could be repurchased, the assumed proceeds no longer include the amount of excess tax benefit. These changes have both been applied on a prospective basis. All cash payments made to taxing authorities on employees’ share-based compensation are classified as a cash outflow from financing activities, consistent with the Company's existing current presentation. Additionally, the Company has elected not to adjust its policy on accounting for equity award forfeitures.
(8) COLLABORATIVE AGREEMENTS
Cumberland is a party to several collaborative arrangements with certain research institutions to identify and pursue promising pre-clinical pharmaceutical product candidates. The Company has determined that these collaborative agreements do not meet the criteria for accounting under Accounting Standards Codification 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. The funding for these programs is generally provided through private sector investments or Federal Small Business Administration (SBIR/STTR) grant programs. Expenses incurred under these collaborative agreements are included in research and development expenses and funding received from private sector investments and grants are recorded as net revenues in the condensed consolidated statements of operations and comprehensive income (loss).
(9) COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company developed a new formulation of Acetadote (acetylcysteine) Injection as part of the Phase IV commitment in response to a request by the FDA regarding the role of EDTA in the product's formulation. The Company has received several patents from the United States Patent and Trademark Office ("USPTO") since 2012 as well as notices that its Acetadote patents are being challenged on the basis of invalidity or non-infringement by others. 
During the third quarter of 2015, an arbitrator issued a final award in the Company’s favor, enjoining Mylan Pharma Group Limited and Mylan Teoranta, together with all their affiliates (“Mylan”), from selling, delivering, or giving away any acetylcysteine injectable drug product to another entity or person until April 30, 2018. The arbitration request was filed with the American Arbitration Association for claims against Mylan in connection with agreements which require that Mylan manufacture and supply acetylcysteine drug product, including Acetadote, for us exclusively until April 2016. As the prevailing party, the Company received reimbursement of its attorney’s fees and related costs associated with the arbitration.
During the third quarter of 2015, the United States District Court for the Northern District of Illinois, Eastern Division ("District Court") ruled in the Company’s favor in its lawsuit against Mylan for infringement of its U.S. Patent number 8,399,445 (the “445 Acetadote Patent”). The opinion upheld our 445 Acetadote Patent and expressly rejected Mylan's validity challenge.   The District Court ruled that Mylan is liable to us for infringement of the 445 Acetadote patent in light of Mylan's Abbreviated New Drug Application in which Mylan sought to market a generic version of Acetadote. On November 17, 2015, the District Court entered an order enjoining Mylan and its affiliates from selling or using its generic version of Acetadote until August 2025, the date of expiration of the 445 Acetadote Patent. On October 30, 2015, Mylan filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit (the "Appeals Court").
On January 26, 2017, the Appeals Court affirmed the District Court ruling in the Company's favor in its lawsuit against Mylan for infringement of the 445 Acetadote Patent. The Appeals Court opinion affirmed the District Court’s ruling upholding Cumberland's 445 Acetadote Patent and expressly rejected Mylan's validity challenge. Additional information on these developments is included in Part 1, Item 3, Legal Proceedings in our Annual Report on Form 10-K for the year ended December 31, 2016.


11
CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
(Unaudited)


(10) NEW PRODUCTS
Totect ® 
In late July 2017, the Company initiated distribution and sale of Totect (dexrazoxane hydrochloride) in the United States. This followed the FDA approval of the updated labeling and product manufacturer for the product. In late September 2017, the Company announced the launch of Totect promotion in the United States.
Totect is an FDA-approved hospital based emergency oncology intervention drug, indicated to treat the toxic effects of anthracycline chemotherapy. It treats anthracycline extravasation that occurs when the injected medication escapes from the blood vessels and circulates into surrounding tissues in the body, causing severe damage and serious complications. Totect can limit such damage without the need for additional surgeries or procedures and enables patients to continue their essential anti-cancer treatment.
In preparation for the Totect promotional launch, the Company completed the training of its sales and medical organization, stocked the product at select wholesalers serving hospitals, and recently introduced the product website. Totect is supported by Cumberland's hospital sales force.
The Company launched Totect during a national shortage of dexrazoxane. It's our second oncology support product and the second product licensed to it through the Strategic Alliance with Clinigen Group plc ("Clinigen").
The Company began generating revenue from the sale of Totect during the third quarter of 2017. Totect contributed $2.6 million in net revenue for the three months ended September 30, 2017.
Cardioxane®
During August 2017, the Company also began shipments of Cardioxane (dexrazoxane hydrochloride, injection) which is used to support oncology patients from the cardiac complications associated with certain chemotherapeutic agents. These shipments were under a special, expedited clearance from the FDA to address the shortage of dexrazoxane in the United States.  The Company intends to make Cardioxane available in the United States through the end of 2017, until the current dexrazoxane drug shortage is alleviated.
The Company is distributing Cardioxane through its Strategic Alliance with Clinigen who is supplying the product and has been selling it in several markets outside the United States.
The Company began generating revenue from the sale of Cardioxane during the third quarter of 2017. Cardioxane contributed $0.3 million in net revenue for the three months ended September 30, 2017.


12


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains certain forward-looking statements which reflect management’s current views of future events and operations. These statements involve certain risks and uncertainties, and actual results may differ materially from them. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution you that our actual results may differ significantly from the results we discuss in these forward-looking statements. Some important factors which may cause results to differ from expectations include: availability of additional debt and equity capital required to finance the business model; market conditions at the time additional capital is required; our ability to continue to acquire branded products; product sales; and management of our growth and integration of our acquisitions. Other important factors that may cause actual results to differ materially from forward-looking statements are discussed in “Risk Factors” on pages 24 through 41, and “Special Note Regarding Forward-Looking Statements” on pages 41 and 42 of our Annual Report on Form 10-K for the year ended December 31, 2016. We do not undertake to publicly update or revise any of our forward-looking statements, even in the event that experience or future changes indicate that the anticipated results will not be realized. The following presentation of management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this report on Form 10-Q.
OVERVIEW
Our Business
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. Our primary target markets are hospital acute care, gastroenterology, and oncology supportive care. These medical specialties are characterized by relatively concentrated prescriber bases that we believe 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. We promote our approved products through our hospital and gastroenterology sales forces in the United States and are establishing a network of international partners to bring our products to patients in their countries.
Our portfolio of FDA approved brands includes:

•
Acetadote® (acetylcysteine) Injection, for the treatment of acetaminophen poisoning;

•
Caldolor® (ibuprofen) Injection, for the treatment of pain and fever;

•
Kristalose® (lactulose) for Oral Solution, a prescription laxative, for the treatment of chronic and acute constipation;

•
Omeclamox®-Pak, (omeprazole, clarithromycin, amoxicillin) for the treatment of Helicobacter pylori (H. pylori) infection and related duodenal ulcer disease;

•
Vaprisol® (conivaptan) Injection, to raise serum sodium levels in hospitalized patients with euvolemic and hypervolemic hyponatremia;

•
Ethyol® (amifostine) Injection, for the reduction of xerostomia (dry mouth) in patients undergoing post-operative radiation treatment for head and neck cancer, and the renal toxicity associated with the administration of cisplatin in patients with advanced ovarian cancer; and

•
Totect® (dexrazoxane hydrochloride) Injection, for emergency oncology intervention, to treat the toxic effects of anthracycline chemotherapy in case of extravasation (drug leakage from the bloodstream into the tissues).

Our pipeline of product candidates includes:

•
Hepatoren® (ifetroban) Injection, a Phase II candidate for the treatment of critically ill patients suffering from liver and kidney failure associated with hepatorenal syndrome (“HRS”);

•
Boxaban® (ifetroban) Oral Capsules, a Phase II candidate for the treatment of asthma patients with aspirin-exacerbated respiratory disease ("AERD");


13


•
Vasculan® (ifetroban) Oral Capsules, a Phase II candidate for the treatment of patients with the systemic sclerosis (SSc) form of autoimmune disease;

•
Portaban™ (ifetroban) Injection and Oral Capsules, a Phase II candidate for the treatment of patients with portal hypertension associated with liver disease; and

•
Methotrexate (methotrexate) Injection, an approval submission candidate for the treatment of active rheumatoid, juvenile idiopathic and severe psoriatic arthritis, as well as severe disabling psoriasis.
We have both product development and commercial capabilities, and believe we can leverage our existing infrastructure to support our expected growth. Cumberland's management team consists of pharmaceutical industry veterans experienced in business development, product development, regulatory, manufacturing, sales, marketing and finance. Our business development team identifies, evaluates and negotiates product acquisition, licensing and co-promotion opportunities. Cumberland's product development team creates proprietary product formulations, manages our clinical studies, prepares all regulatory submissions and manages our medical call center. The Company's quality and manufacturing professionals oversee the manufacture, release, and shipment of our products. Our marketing and sales professionals are responsible for our commercial activities, and we work closely with our distribution partners to ensure availability and delivery of our products.
Growth Strategy
Our growth strategy involves maximizing the potential of our existing brands while continuing to build a portfolio of differentiated products. We currently market seven FDA approved products for sale in the United States. Through our international partners, we are working to bring our products to patients in their countries. We also look for opportunities to expand our products into additional patient populations through clinical trials, new indications, and select investigator-initiated studies. We actively pursue opportunities to acquire additional marketed products as well as late-stage development product candidates in our target medical specialties. Our clinical team is developing a pipeline of new product candidates to address unmet medical needs. Further, we are supplementing these activities with the pipeline drug development activities at Cumberland Emerging Technologies ("CET"), our majority-owned subsidiary. Specifically, we are seeking long term sustainable growth by executing the following plans:
•
Support and expand the use of our marketed products. We continue to evaluate our products following their FDA approval to determine if further clinical work could expand the potential market opportunities. We will continue to explore opportunities for label expansion to bring our products to new patient populations. The Caldolor pediatric approval reflects our successful implementation of this strategy.
•
Selectively add complementary brands. In addition to our product development activities, we are also seeking to acquire products or late-stage development product candidates to continue to build a portfolio of complementary brands. We focus on under-promoted, FDA approved drugs as well as late-stage development products that address poorly met medical needs. We will continue to target product acquisition candidates that are competitively differentiated, have valuable intellectual property or other protective features, and allow us to leverage our existing infrastructure. Our acquisitions of the product rights to Ethyol and Totect in the U.S. represent recent examples of our execution of this strategy.
•
Progress clinical pipeline and incubate future product opportunities at CET. We believe it is important to build a pipeline of innovative new product opportunities. Our ifetroban Phase II development programs represent the implementation of this strategy. At CET, we are supplementing our acquisition and late-stage development activities with the early-stage drug development activities. CET partners with universities and other research organizations to develop promising, early-stage product candidates, and Cumberland has the opportunity to negotiate rights to further develop and commercialize them in the U.S and other markets.
•
Leverage our infrastructure through co-promotion partnerships. We believe that our commercial infrastructure can help drive prescription volume and product sales. We look for strategic partners that can accentuate our operational effectiveness and maximize the opportunity for our brands. Our recent co-promotion partnership with Poly Pharmaceuticals, Inc. allows us to expand current promotional support for Kristalose across the United States.
•
Continue to build the international contribution to our business. We have established our own commercial capabilities, including two sales divisions to cover the U.S. market for our products. We are also building a network of select international partners to register our products and make them available to patients in their countries. We will continue to expand our network of international partners and continue to support our partners’ registration and commercialization efforts in their respective territories.
•
Continue to manage our operations with financial discipline. We continually work to manage our expenses in line with our revenues in order to deliver positive cash flow from operations. We remain in a strong financial position, with high margins, and a strong balance sheet. We use excess cash flow for our ongoing share repurchase program.

14


Cumberland was incorporated in 1999 and has been headquartered in Nashville, Tennessee since inception. During 2009, we completed an initial public offering of our common stock and listing on the NASDAQ exchange. Our website address is www.cumberlandpharma.com. We make available through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all other material press releases, filings and amendments to those reports as soon as reasonably practicable after their filing with the SEC. These filings are also available to the public at www.sec.gov.
Recent Developments
Totect® Distribution and Launch
In late July 2017, we initiated distribution and sale of Totect (dexrazoxane hydrochloride) in the United States. This followed the FDA approval of the updated labeling and product manufacturer for the product. In late September 2017, we announced the launch of Totect promotion in the United States.
Totect is an FDA-approved hospital based emergency oncology intervention drug, indicated to treat the toxic effects of anthracycline chemotherapy. It treats anthracycline extravasation that occurs when the injected medication escapes from the blood vessels and circulates into surrounding tissues in the body, causing severe damage and serious complications. Totect can limit such damage without the need for additional surgeries or procedures and enables patients to continue their essential anti-cancer treatment.
In preparation for the Totect promotional launch, we completed the training of our sales and medical organization, stocked the product at select wholesalers serving hospitals, and recently introduced the product website. Totect is supported by our hospital sales force.
We launched Totect during a national shortage of dexrazoxane, resulting in strong initial demand for the product. It's our second oncology support product and the second product licensed to us through our Strategic Alliance with Clinigen Group plc ("Clinigen").
Cardioxane® Shipments
During August 2017, we also began shipments of Cardioxane (dexrazoxane hydrochloride, injection) which is used to support oncology patients from the cardiac complications associated with certain chemotherapeutic agents. These shipments were under a special, expedited clearance from the FDA to address the shortage of dexrazoxane in the United States.  We intend to make Cardioxane available in the United States through the end of 2017, until the current dexrazoxane drug shortage is alleviated.
We are distributing Cardioxane through our Strategic Alliance with Clinigen who is supplying the product to us and has been selling it in several markets outside the United States.
Kristalose® Co-Promotion
During the third quarter 2017, we fully implemented our co-promotion arrangements with Poly Pharmaceuticals, Inc. (“Poly”) following a multi-year agreement signed in April 2017. Poly is a privately held U.S. specialty pharmaceutical company that is featuring Kristalose to an expanded number of physicians. Poly’s sales organization is more than doubling the number of nationwide physicians called upon with Kristalose bringing the brand’s message to thousands of additional medical professionals. Cumberland continues to manage the national marketing, distribution, and regulatory activities associated with the product.
Boxaban® Clinical Program
We are developing Boxaban for the treatment of Aspirin-Exacerbated Respiratory Disease ("AERD"), also known as Samter's Triad, a a chronic medical condition that consists of three clinical features: asthma, sinus disease with nasal polyps and sensitivity to aspirin. AERD is characterized by sharp increases in inflammatory mediators and platelet activity within the respiratory system.
We completed an initial Phase II clinical study to evaluate the safety and tolerability of Boxaban in AERD patients. The multicenter study involved sixteen patients at several U.S. medical centers led by the Scripps Research Institute. Results indicated that Boxaban was well tolerated with no safety concerns noted in patients with a history of AERD.

Earlier this year the FDA cleared Cumberland’s investigational new drug (“IND”) application for the Company’s AERD clinical program. Following this clearance, we initiated a follow-on multicenter Phase II efficacy study to evaluate the efficacy of Boxaban in seventy-six patients with symptomatic AERD. Enrollment in this multi-center, placebo controlled study is now underway at a growing number of allergy and asthma centers across the United States.
Vasculan® Clinical Program
Cumberland has initiated the clinical development of Vasculan for the treatment of systemic sclerosis (SSc), also known as scleroderma. SSc is a debilitating autoimmune disorder characterized by diffuse fibrosis of the skin and internal organs, as well

15


as vascular dysfunction. Preclinical studies have shown that ifetroban prevents and can restore cardiac function in a preclinical model of pulmonary arterial hypertension.
The FDA has cleared Cumberland's IND to evaluate the safety and efficacy of Vasculan in patients with SSc. As a result, we initiated a Phase II multicenter study in thirty-four SSc patients. Enrollment in this randomized, placebo controlled trial is ongoing at several scleroderma centers of excellence in the United States.
PortabanTM Clinical Program
The Company has also initiated the clinical development of Portaban for the treatment of portal hypertension (“PH”) associated with chronic liver disease. Preclinical studies have shown ifetroban can reduce portal pressure, inflammation, and fibrosis in multiple models of liver injury.
The FDA cleared Cumberland's IND for a clinical development program evaluating the safety and efficacy of Portaban in patients with PH. Following that clearance, a multicenter Phase II study in thirty PH patients was initiated. Enrollment in this randomized, placebo controlled study is now underway at several United States hepatology centers.
Hepatoren® Clinical Program
We are developing Hepatoren as a potential treatment for Hepatorenal Syndrome ("HRS") - a life threatening condition involving liver and kidney failure, with a high mortality rate and no approved pharmaceutical therapy in this country. We completed a sixty-four patient Phase II study to evaluate the safety, efficacy and pharmacokinetics of Hepatoren for this unmet medical need.
Top line results from this study indicated that Hepatoren was overall well tolerated in the HRS patients with no safety concerns noted. We have filed the results from this study with the FDA, and are evaluating and designing strategies for a follow-on Phase II efficacy study.
New Hospital Product Candidate
Cumberland was responsible for the formulation, development and FDA approval of both Acetadote and Caldolor. Our Medical Advisory Board has helped us identify additional opportunities that address unmet or poorly met medical needs. As a result, Cumberland has successfully designed, formulated and completed the preclinical studies for a cholesterol reducing agent for use in the hospital setting. We have completed a successful Phase I study which defined the pharmacokinetic properties and supported a positive safety profile for this new product candidate. The study results and a proposed Phase II efficacy confirmation study will be discussed with the FDA.
Caldolor® Pediatric Study
We previously completed pediatric fever and pain studies leading to the FDA approval of Caldolor for use in children six months of age and older. We then reached agreement with the FDA to collect data on the use of Caldolor in children ranging in age from birth up to six months of age. As a result, a multicenter study is now underway at several United States centers to collect data from twenty-four patients in this age range.
Methotrexate Submission
We have held a meeting with the FDA to discuss the approval pathway for our injectable methotrexate products in the United States. As a result, we are now gathering the relevant information and preparing the submission for that approval. We previously entered into an agreement with the Nordic Group to commercialize their methotrexate product line in the United States which is designed for treating patients with arthritis and psoriasis. Cumberland is responsible for the registration and commercialization of these products while Nordic will handle the product’s supply. Nordic has registered and is selling these methotrexate products in several European countries.
Acetadote® Patent Defense
Acetadote is our injectable formulation of N-Acetylcysteine ("NAC") for the treatment of acetaminophen overdose. We developed a new formulation of Acetadote (as part of the Phase IV commitment in response to a request by the FDA regarding the role of EDTA in the product's formulation).
Since 2012, the USPTO has issued a series of patents associated with Acetadote. Additional information and discussion regarding our Acetadote patents and patent defense is contained in Part 1, Item 1, Business -Trademarks and Patents, of our Annual Report on Form 10-K for the year ended December 31, 2016, which is incorporated by reference herein.
In January 2017, the Appeals Court affirmed the District Court ruling in the Company's favor in its lawsuit against Mylan for infringement of the 445 Acetadote Patent. The Appeals Court opinion affirmed the District Court’s ruling upholding Cumberland's

16


445 Acetadote Patent and expressly rejected Mylan's validity challenge. Additional information on these developments is included in Part 1, Item 3, Legal Proceedings in our Form 10-K for the year ended December 31, 2016.
COMPETITION
The pharmaceutical industry is characterized by intense competition and rapid innovation. Our continued success in developing and commercializing pharmaceutical products will depend, in part, upon our ability to compete against existing and future products in our target markets. For more information see Part 1, Item 1, Business -Competitors in our Annual Report on Form 10-K for the year ended December 31, 2016 which is incorporated by reference and has been updated as follows:
Ethyol® 
Ethyol is our patented, branded amifostine product indicated to reduce xerostomia (dry mouth) as a side-effect in patients undergoing post-operative radiation treatment for head and neck cancer. It also reduces the cumulative renal toxicity associated with the repeated administration of cisplatin in patients with advanced ovarian cancer. We launched the product in late 2016, and the authorized generic form of the product was withdrawn by Clinigen who markets branded Ethyol internationally. We have an exclusive license to the product which includes patent number 5,994,409 which is FDA Orange Book listed with a term until December 9, 2017. We also have a license to several additional Ethyol patents associated with the subcutaneous administration of the product that are not yet Orange Book listed. In July 2017, Mylan Laboratories Ltd. (“Mylan”) received approval for an Abbreviated New Drug Application for a generic amifostine product. Sun Pharmaceuticals Industries Limited (“Sun”) had also previously received approval for a generic amifostine product. Both the Mylan and Sun approvals appear to be only for the ovarian cancer indication but not the xerostomia indication. Therefore, we believe that Ethyol is currently the only amifostine product with FDA approval for both the xerostomia and ovarian cancer indications.
Totect® 
Totect is our patented, branded dexrazoxane injection product indicated for the treatment of the extravasation associated with anthracycline chemotherapy. We have an exclusive license to the product which includes patent number 6,727,253 which is FDA Orange Book listed and has a term until March 13, 2020. Pfizer Inc.’s Zinecard® brand is a dexrazoxane product with FDA approval for a different indication - the cardiac complications associated with certain chemotherapeutic agents. Mylan, Gland Pharma Ltd and West-Ward Pharmaceuticals Corp appear to have previously received FDA approval for a generic dexrazoxane with the Zinecard cardiac protection indication. When we launched Totect, the FDA reported a national dexrazoxane shortage with both the Pfizer and Mylan products unavailable. Both companies indicated that their products may again be available in the U.S. in the future.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
Please see a discussion of our critical accounting policies and significant judgments and estimates on pages 49 through 51 in “Management’s Discussion and Analysis” of our Annual Report on Form 10-K for the year ended December 31, 2016.
Accounting Estimates and Judgments
The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. We base our estimates on past experience and on other factors we deem reasonable given the circumstances. Past results help form the basis of our judgments about the carrying value of assets and liabilities that cannot be determined from other sources. Actual results could differ from these estimates. These estimates, judgments and assumptions are most critical with respect to our accounting for revenue recognition, fair value of marketable securities, inventories, provision for income taxes, share-based compensation, research and development expenses and intangible assets.


17


RESULTS OF OPERATIONS
Three months ended September 30, 2017 compared to the three months ended September 30, 2016
The following table presents the unaudited interim statements of operations for the three months ended September 30, 2017 and 2016:
 
Three months ended September 30,
 
2017
 
2016
 
Change
 
Net revenues
$
11,196,961

 
$
8,791,753

 
$
2,405,208

 
Costs and expenses:
 
 
 
 
 
 
Cost of products sold
2,166,353

 
1,973,948

 
192,405

 
Selling and marketing
6,226,438

 
3,614,714

 
2,611,724

 
Research and development
943,162

 
644,662

 
298,500

 
General and administrative
2,090,785

 
1,865,575

 
225,210

 
Amortization
609,572

 
562,722

 
46,850

 
Total costs and expenses
12,036,310

 
8,661,621

 
3,374,689

 
Operating income (loss)
(839,349
)
 
130,132

 
(969,481
)
 
Interest income
94,833

 
51,636

 
43,197

 
Interest expense
(8,902
)
 
(29,088
)
 
20,186

 
Income (loss) before income taxes
(753,418
)
 
152,680

 
(906,098
)
 
Income tax (expense) benefit
(3,822
)
 
(57,192
)
 
53,370

 
Net income (loss)
$
(757,240
)
 
$
95,488

 
$
(852,728
)
 

The following table summarizes net revenues by product for the periods presented:
 
Three months ended September 30,
 
2017
 
2016
 
Change
Products:
 
 
 
 
 
Acetadote
$
1,342,457

 
$
1,807,495

 
$
(465,038
)
Omeclamox-Pak
190,835

 
752,808

 
(561,973
)
Kristalose
2,749,966

 
3,671,397

 
(921,431
)
Vaprisol
385,541

 
496,279

 
(110,738
)
Caldolor
896,640

 
1,357,289

 
(460,649
)
Ethyol
2,566,611

 
519,400


2,047,211

Totect
2,916,425

 
—

 
2,916,425

Other
148,486

 
187,085

 
(38,599
)
Total net revenues
$
11,196,961

 
$
8,791,753

 
$
2,405,208

Net revenues. Net revenues for the three months ended September 30, 2017 were $11.2 million compared to $8.8 million for the three months ended September 30, 2016, representing an increase of $2.4 million, or 27.4%.
The increase in total net revenues from the prior year period included net revenue of $2.9 million for our newest brand, Totect and a $2.0 million increase in Ethyol revenue compared to the third quarter of 2016.
The Company began shipments of Totect in July of 2017, resulting in $2.9 million in sales during the quarter, with Cardioxane contributing $0.3 million. The launch of Totect was impacted by a national shortage of dexrazoxane, resulting in strong initial demand for the product.
Ethyol revenue increased $2.0 million or 394% for the three months ended September 30, 2017 and benefited by increased sales volume.
Kristalose revenue decreased by $0.9 million during the third quarter of 2017 when compared to the prior year period. The product's net revenue was negatively impacted by higher Medicaid rebates that resulted from changes to the products rebate formula effective

18


January 1, 2017. We also experienced a decrease in sales volumes and an increase in our fee for service paid to wholesalers. These decreases in revenues were slightly offset by improved pricing during the third quarter of 2017.
Omeclamox-Pak revenue decreased $0.6 million primarily due to lower sales volumes as well as increases in managed care rebates and coupon discounts.
Acetadote revenue includes net sales of our Acetadote brand and our share of net sales from our Authorized Generic. During the quarter, there was a $0.2 million decrease in revenue from our Authorized Generic when compared to the prior year period. We experienced a decrease of $0.2 million in our branded Acetadote net revenue from the prior year period.
Caldolor revenue decreased $0.5 million for the three months ended September 30, 2017 primarily due to decreased international sales revenue in the third quarter of 2017 compared to the third quarter of 2016. International sales for the third quarter of 2016 were particularly strong while the third quarter of 2017 was partially impacted by an international shipment that was delivered during the fourth quarter of 2017. The decrease in international sales were partially offset by improvements in domestic net revenue.
Vaprisol revenue decreased $0.1 million during the third quarter of 2017 when compared to the prior year period due to lower sales volumes.
Cost of products sold. Cost of products sold for the third quarter of 2017 increased $0.2 million compared to the prior year as a result of increased sales. Cost of products sold, as a percentage of net revenues, improved to 19.3% during the three months ended September 30, 2017 compared to 22.5% during the three months ended September 30, 2016. This improvement in costs of products sold as a percentage of revenue was attributable to a change in the product sales mix during the quarter compared to the prior year.
Selling and marketing. Selling and marketing expense for the third quarter of 2017 increased $2.6 million compared to the prior year period. This increase was the result of additional royalties, related to increased product sales during the third quarter of 2017.
Research and development. Research and development costs for the third quarter of 2017 were $0.9 million, compared to $0.6 million for the same period last year. A portion of our research and development costs are variable based on the number of trials, study sites and patients involved in the development of our new product candidates. The increase was the result of additional investments in our ongoing clinical and manufacturing initiatives associated with our pipeline products.
General and administrative. General and administrative expense for the third quarter of 2017 was $2.1 million, compared to $1.9 million for the same period last year. The $0.2 million increase from the prior year was primarily driven by increases in legal and other professional fees for all our business development initiatives. There was also an increase in non-cash stock based compensation during the third quarter of 2017.
Amortization. Amortization expense is the ratable use of our capitalized intangible assets including product and license rights, patents, trademarks and patent defense costs. Amortization for both the three months ended September 30, 2017 and the three months ended September 30, 2016 totaled approximately $0.6 million.
Income taxes. Income tax expense for the three months ended September 30, 2017 was less than $0.1 million. As a percentage of income (loss) before income taxes, income tax expense was 0.5% for the three months ended September 30, 2017 compared to 37.5% for the three months ended September 30, 2016. The difference in effective tax rate during the three months ended September 30, 2017 compared to the three months ended September 30, 2016 is a result of recording a full valuation allowance for deferred tax assets during 2017.
As of September 30, 2017, we have approximately $44 million of net operating loss carryforwards resulting from the exercise of nonqualified stock options in 2009 that have historically been used to significantly offset future income tax obligations. Since they were generated during 2009, we have utilized these net operating loss carryforwards to pay minimal income taxes. We will continue to pay minimal income taxes during 2017 and beyond, through the continued utilization of these net operating loss carryforwards, as we are able to achieve taxable income through our operations.


19


Nine months ended September 30, 2017 compared to the nine months ended September 30, 2016
The following table presents the unaudited interim statements of operations for the nine months ended September 30, 2017 and 2016:
 
Nine months ended September 30,
 
2017
 
2016
 
Change
 
Net revenues
$
29,500,843

 
$
23,944,120

 
$
5,556,723

 
Costs and expenses:
 
 
 
 
 
 
Cost of products sold
5,216,776

 
4,353,148

 
863,628

 
Selling and marketing
16,174,391

 
10,585,955

 
5,588,436

 
Research and development
2,921,951

 
2,029,914

 
892,037

 
General and administrative
6,554,158

 
5,817,943

 
736,215

 
Amortization
1,811,589

 
1,632,920

 
178,669

 
Total costs and expenses
32,678,865

 
24,419,880

 
8,258,985

 
Operating income (loss)
(3,178,022
)
 
(475,760
)
 
(2,702,262
)
 
Interest income
216,849

 
160,248

 
56,601

 
Interest expense
(70,646
)
 
(77,777
)
 
7,131

 
Income (loss) before income taxes
(3,031,819
)
 
(393,289
)
 
(2,638,530
)
 
Income tax (expense) benefit
(4,196,192
)
 
159,282

 
(4,355,474
)
 
Net income (loss)
$
(7,228,011
)
 
$
(234,007
)
 
$
(6,994,004
)
 

The following table summarizes net revenues by product for the periods presented:
 
Nine months ended September 30,
 
2017
 
2016
 
Change
Products:
 
 
 
 
 
Acetadote
$
4,331,675

 
$
5,532,893

 
$
(1,201,218
)
Omeclamox-Pak
1,213,635

 
2,154,596

 
(940,961
)
Kristalose
8,037,994

 
10,915,276

 
(2,877,282
)
Vaprisol
1,346,793

 
1,286,126

 
60,667

Caldolor
2,762,790

 
3,060,441

 
(297,651
)
Ethyol
8,325,254

 
519,400

 
7,805,854

Totect
2,916,425

 
—

 
2,916,425

Other
566,277

 
475,388

 
90,889

Total net revenues
$
29,500,843

 
$
23,944,120

 
$
5,556,723

Net revenues. Net revenues for the nine months ended September 30, 2017 were $29.5 million compared to $23.9 million for the nine months ended September 30, 2016, representing an increase of $5.6 million, or 23.2%.
Ethyol revenue for the nine months ended September 30, 2017 was $8.3 million, which is an increase of $7.8 million from the nine months ended September 30, 2016. The Company began generating revenue from the sale of Ethyol during the third quarter of 2016.
The Company began shipments of Totect in July of 2017, resulting in $2.9 million in sales during the nine months ended September 30, 2017 with Cardioxane contributing $0.3 million. The launch of Totect was impacted by a national shortage of dexrazoxane, resulting in strong initial demand for the product.
Vaprisol revenue increased $0.1 million during the nine months ended September 30, 2017 compared to the prior year period primarily due to increased sales volume, partially offset by an increase in our fee for service paid to wholesalers and sales returns related to short-dated product.

20


Kristalose revenue decreased by $2.9 million primarily as a result of reduced sales volume. The product's net revenue was negatively impacted by higher Medicaid rebates due to changes to this products reimbursement. We also experienced an increase in our fee for service paid to wholesalers. This reduction was partially offset by improved pricing during the nine months ended September 30, 2017.
Acetadote revenue included net sales of our branded product and our share of net sales from our Authorized Generic. During the nine months ended September 30, 2017 the Acetadote net revenue included $3.0 million in revenue from sales of our Authorized Generic, compared to $3.5 million for the same period last year. Our branded Acetadote product net revenue decreased $0.7 million due to a reduction in sales volume as a result of generic competition during the nine months ended September 30, 2017.
Omeclamox-Pak revenue decreased $0.9 million during the nine months ended September 30, 2017 compared to the prior year. The decrease was primarily the result of lower sales volume partially offset by improved pricing.
Caldolor revenue experienced a decrease of $0.3 million during the nine months ended September 30, 2017 compared to the same period last year. Caldolor revenue in the nine months ended September 30, 2017 was primarily impacted by decreased international sales revenue. The decrease in international sales were partially offset by improvements in domestic net revenue and lower expired product sales returns.
Cost of products sold. Cost of products sold for the nine months ended September 30, 2017 were $5.2 million, compared to $4.4 million for the same period last year, representing an increase of approximately $0.9 million, or 19.8%. Cost of products sold, as a percentage of net revenues, improved to 17.7% compared to 18.2% during the prior year. This improvement in costs of products sold as a percentage of revenue was attributable to a change in the product sales mix during the period compared to the prior year.
Selling and marketing. Selling and marketing expenses for the nine months ended September 30, 2017 were $16.2 million, compared to $10.6 million for the prior year period, representing an increase of approximately $5.6 million. This increase was the result of additional royalties, related to increased product sales for the nine months ended September 30, 2017.
Research and development. Research and development costs for the nine months ended September 30, 2017 were $2.9 million, compared to $2.0 million for the same period last year, representing an increase of approximately $0.9 million. A portion of our research and development costs are variable based on the number of trials, study sites and patients involved in the development of our product candidates. The increase was the result of additional investments in our ongoing clinical initiatives associated with our pipeline products.
General and administrative. General and administrative expenses were $6.6 million for the nine months ended September 30, 2017, compared to $5.8 million during the same period last year. The $0.7 million increase from the prior year was primarily driven by increases in legal and other professional fees for all our business development initiatives. There was also an increase in non-cash stock based compensation.
Amortization. Amortization expense is the ratable use of our capitalized intangible assets including product and license rights, patents, trademarks and patent defense costs. Amortization for the nine months ended September 30, 2017 totaled approximately $1.8 million, which was an increase of $0.2 million over the prior year. The increase in amortization was attributable to additional product and license rights, capitalized patents and patent defense costs.
Income taxes. Income tax expense for the nine months ended September 30, 2017 totaled $4.2 million, compared to income tax benefit of $0.2 million in the nine months ended September 30, 2016. As a percentage of income (loss) before income taxes, income taxes were 138.4% for the nine months ended September 30, 2017 compared to 40.5% for the nine months ended September 30, 2016. As discussed in Note 7 to our unaudited condensed consolidated interim financial statements, the effective tax rate for the nine months ended September 30, 2017 was primarily impacted by a valuation allowance of $1.0 million for our federal Orphan Drug and Research and Development tax credits and an additional valuation allowance of $3.5 million for our remaining deferred tax assets. These non-cash valuation allowance adjustments impacted our effective tax rate during the nine months ended September 30, 2017.

LIQUIDITY AND CAPITAL RESOURCES
Working Capital
Our primary sources of liquidity are cash flows provided by our operations, the availability under our line of credit and the cash proceeds from our initial public offering of common stock that was completed in August 2009. We believe that our internally generated cash flows and amounts available under our line of credit will be adequate to finance internal growth and fund capital expenditures.
We have historically invested a portion of our cash reserves in variable rate demand notes ("VRDNs") and a portfolio of government-backed securities (including U.S. Treasuries, government-sponsored enterprise debentures and government-sponsored adjustable rate, mortgage-backed securities). The VRDNs are generally issued by municipal governments and are backed by a financial

21


institution letter of credit.  We hold a put right on the VRDNs, which allows us to liquidate the investments relatively quickly (less than one week).  The government-backed securities have an active secondary market that generally provides for liquidity in less than one week. At September 30, 2017 and December 31, 2016, we had approximately $8.1 million and $15.6 million, respectively, invested in marketable securities.
The following table summarizes our liquidity and working capital as of September 30, 2017 and December 31, 2016:
 
September 30, 2017
 
December 31, 2016
 
 
 
 
Cash and cash equivalents
$
42,018,953

 
$
34,510,330

Marketable securities
8,055,017

 
15,622,111

Total cash, cash equivalents and marketable securities
$
50,073,970

 
$
50,132,441

 
 
 
 
Working capital (current assets less current liabilities)
$
50,284,724

 
$
50,753,001

Current ratio (multiple of current assets to current liabilities)
4.2

 
4.4

 
 
 
 
Revolving line of credit availability
$
4,000,000

 
$
7,900,000

The following table summarizes our net changes in cash and cash equivalents for the nine months ended September 30, 2017 and September 30, 2016:
 
Nine months ended September 30,
 
2017
 
2016
 
 
Net cash provided by (used in):
 
 
 
Operating activities
$
(98,152
)
 
$
(250,316
)
Investing activities
6,600,632

 
(1,619,834
)
Financing activities
1,006,143

 
(786,665
)
Net increase (decrease) in cash and cash equivalents
$
7,508,623

 
$
(2,656,815
)
The net $7.5 million increase in cash and cash equivalents for the nine months ended September 30, 2017 was attributable to cash provided by investing and financing activities offset by cash used in operating activities. Cash used in operating activities of $0.1 million was primarily impacted by a net loss for the period of $7.2 million. These uses of operating cash were offset by deferred tax expenses of $4.3 million and non-cash expenses of depreciation and amortization and share-based compensation expense totaling $2.8 million. Changes in our working capital provided net cash of $0.1 million, including net reductions in accounts payable of $0.6 million offset by a decrease in other inventory and current assets of $0.9 million. Cash provided by investing activities included net proceeds from marketable securities of $7.6 million offset by additions to intangibles of $0.8 million. Our financing activities included $3.9 million in cash provided by borrowings under our line of credit and $2.9 million in cash used to repurchase shares of our common stock.
The net $2.7 million decrease in cash and cash equivalents for the nine months ended September 30, 2016 was attributable to cash used in operating, investing, and financing activities. Cash used in operating activities of $0.3 million was primarily impacted by changes in our working capital of $4.0 million, including net reductions in accounts payable and accrued liabilities of $1.7 million. Cash used in operating activities also includes the net loss for the period of $0.2 million. These uses of operating cash were offset by non-cash expenses of depreciation and amortization and share-based compensation expense totaling $2.4 million. Cash used in investing activities included a net cash investment in our intangible assets of $1.6 million. Our financing activities included $1.9 million in cash used to repurchase shares of our common stock and $2.0 million in cash provided by borrowings under our line of credit.

On July 31, 2017, we entered into a Revolving Credit Loan Agreement with Pinnacle Bank ("Pinnacle Agreement"). The new agreement replaced the June 2014 Revolving Credit Loan Agreement with SunTrust Bank ("SunTrust Agreement") which was to expire on June 30, 2018. The Pinnacle Agreement provides for an aggregate principal amount of up to $20 million and has a three-year term expiring on July 31, 2020. The initial revolving line of credit is up to $12 million with the ability to increase the borrowing amount up to $20 million, upon the satisfaction of certain conditions.

The interest rate on the Pinnacle Agreement is based on LIBOR plus an interest rate spread. There is no LIBOR minimum and the LIBOR pricing provides for an interest rate spread of 1.75% to 2.75% (representing an interest rate of 3.0% at September 30,

22


2017). In addition, a fee of 0.25% per year is charged on the unused line of credit. Interest and the unused line fee are payable quarterly. Borrowings under the line of credit are collateralized by substantially all of our assets.

Under the Pinnacle Agreement, we are subject to one financial covenant, the maintenance of a Funded Debt Ratio, as such term is defined in the agreement and determined on a quarterly basis. We achieved compliance with the Funded Debt Ratio covenant as of September 30, 2017 through the utilization of the covenant cure section of the agreement.

We had $8.0 million in borrowings under the SunTrust Agreement at September 30, 2017.
OFF-BALANCE SHEET ARRANGEMENTS
During the nine months ended September 30, 2017 and 2016, we did not engage in any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We are exposed to market risk related to changes in interest rates on our cash on deposit in highly-liquid money market accounts and revolving credit facility. We do not utilize derivative financial instruments or other market risk-sensitive instruments to manage exposure to interest rate changes. The main objective of our cash investment activities is to preserve principal while maximizing interest income through low-risk investments. Our investment policy focuses on principal preservation and liquidity.
We believe that our interest rate risk related to our cash and cash equivalents is not material. The risk related to interest rates for these accounts would produce less income than expected if market interest rates fall. Based on current interest rates, we do not believe we are exposed to significant downside risk related to a change in interest on our money market accounts.
We have historically invested in VRDNs and a portfolio of government backed securities (including U.S. Treasuries, government sponsored enterprise debentures and government sponsored adjustable rate mortgage backed securities) to obtain a higher return while preserving our capital. The VRDNs are generally issued by municipal governments and are backed by a financial institution letter of credit. The VRDNs allow us the ability to liquidate the investment relatively quickly (less than one week). The government backed securities have an active secondary market that generally provides for liquidity in less than one week. The primary risk related to interest rates for these accounts are that they will produce less income than expected if market interest rates fall. Based on the $8.1 million in marketable securities outstanding at September 30, 2017, a 1% decrease in the fair value of the securities would result in a reduction in pretax net income (loss) of $0.1 million.
The interest rate related to our revolving credit facility is a variable rate based on LIBOR plus an interest rate spread. As of September 30, 2017, we had $8.0 million in borrowings outstanding under our revolving credit facility.
Exchange Rate Risk
While we operate primarily in the United States, we are exposed to foreign currency risk. A portion of our research and development is performed abroad.
Currently, we do not utilize financial instruments to hedge exposure to foreign currency fluctuations. We believe our exposure to foreign currency fluctuation is minimal as our purchases in foreign currency have a maximum exposure of 90 days based on invoice terms with a portion of the exposure being limited to 30 days based on the due date of the invoice. Foreign currency exchange gains and losses were immaterial for the nine months ended September 30, 2017 and 2016. Neither a 10% increase nor decrease from current exchange rates would have a significant effect on our operating results or financial condition.
Item 4. Controls and Procedures
Our principal executive and principal financial officers evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2017. Based on that evaluation, our disclosure controls and procedures are considered effective to ensure that material information relating to us and our consolidated subsidiaries is made known to officers within these entities in order to allow for timely decisions regarding required disclosure. During the nine months ended September 30, 2017, there has not been any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


23


PART II – OTHER INFORMATION
Item 1. Legal Proceedings
See the discussion of our Acetadote patent defense legal proceedings contained in Part 1, Item 1, Business -Trademarks and Patents, of our Annual Report on Form 10-K for the year ended December 31, 2016, which is incorporated by reference herein.
Item 1A. Risk Factors
Information regarding risk factors appears on pages 24 through 41 in our Annual Report on Form 10-K for the year ended December 31, 2016 under the section titled “Risk Factors.” The following risk factor was included in our Form 10-K for the year ended December 31, 2016 and has been updated for recent developments:
Our strategy to secure and extend marketing exclusivity or patent rights may provide only limited or no protection from competition.
We seek to secure and extend marketing exclusivity for our products through a variety of means, including FDA exclusivity and patent rights. Additional barriers for competitors seeking to enter the market include the time and cost associated with the development, regulatory approval and manufacturing of a similar product formulation.
Acetadote is indicated to prevent or lessen hepatic (liver) injury when administered intravenously within eight to ten hours after ingesting quantities of acetaminophen that are potentially toxic to the liver. As discussed in Part I, Item 1, Business - Trademarks, Patents and Proprietary Rights, of this Form 10-K, during April 2012, the United States Patent and Trademark Office (the “USPTO”) issued U.S. Patent number 8,148,356 (the “356 Acetadote Patent”) which is assigned to us. 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.
Following the issuance of the 356 Acetadote Patent, we received separate Paragraph IV certification notices from InnoPharma, Inc., Paddock Laboratories, LLC ("Paddock") and Mylan Institutional LLC challenging the 356 Acetadote Patent on the basis of non-infringement and/or invalidity. On May 17, 2012, we responded to the Paragraph IV certification notices by filing three separate lawsuits for infringement of the 356 Acetadote Patent. The first lawsuit was filed against Mylan Institutional LLC and Mylan Inc. ("Mylan") in the United States District Court for the Northern District of Illinois, Eastern Division. The second lawsuit was filed against InnoPharma, Inc. in the United States District Court for the District of Delaware. The third lawsuit was also filed in the United States District Court for the District of Delaware against Paddock and Perrigo Company ("Perrigo"). On May 20, 2012, we received a Paragraph IV certification notice from Sagent Agila LLC challenging the 356 Acetadote Patent. On June 26, 2012, we filed a lawsuit for infringement of the 356 Acetadote Patent against Sagent Agila LLC and Sagent Pharmaceuticals, Inc. ("Sagent") in the United States District Court for the District of Delaware. On July 9, 2012, we received a Paragraph IV certification notice from Perrigo. On August 9, 2012, we filed a lawsuit for infringement of the 356 Acetadote Patent against Perrigo in the United States District Court for the Northern District of Illinois, Eastern Division.
On November 12, 2012, we entered into a Settlement Agreement (the “Settlement Agreement”) with Paddock and Perrigo to resolve the challenges and the pending litigation with each of Paddock and Perrigo involving the 356 Acetadote Patent. Under the Settlement Agreement, Paddock and Perrigo admit that the 356 Acetadote Patent is valid and enforceable and that any Paddock or Perrigo generic Acetadote product (with or without EDTA) would infringe upon the 356 Acetadote Patent. In addition, Paddock and Perrigo will not challenge the validity, enforceability, ownership or patentability of the 356 Acetadote Patent through its expiration currently scheduled for May 2026. On November 12, 2012, in connection with the execution of the Settlement Agreement, we entered into a License and Supply Agreement with Paddock and Perrigo (the “License and Supply Agreement”). Under the terms of the License and Supply Agreement, if a third party receives final approval from the FDA for an ANDA to sell a generic Acetadote product and such third party has made such generic version available for purchase in commercial quantities in the United States, we will supply Perrigo with an Authorized Generic version of our Acetadote product.
On May 18, 2012, we also submitted a Citizen Petition to the FDA requesting that the FDA refrain from approving any applications for acetylcysteine injection that contain EDTA, based in part on the FDA's request that we evaluate the reduction or removal of EDTA from its original Acetadote formulation. On November 7, 2012, the FDA responded to the Citizen Petition denying our request and stating that ANDAs referencing Acetadote that contain EDTA may be accepted and approved provided they meet all applicable requirements. We believe this response contradicts the FDA's request to evaluate the reduction or removal of EDTA. On November 8, 2012, we learned that the FDA approved the ANDA referencing Acetadote filed by InnoPharma, Inc. On November 13, 2012, we brought suit against the FDA in the United States District Court for the District of Columbia alleging that the FDA's denial of our Citizen Petition and acceptance for review and approval of any InnoPharma, Inc. product containing EDTA was arbitrary and in violation of law.
We found during the resulting legal proceedings that the FDA initially concluded that the original Acetadote formulation was withdrawn for safety reasons and no generic versions should be approved. The FDA later reversed its position based on the

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possibility of drug shortages and the presence of EDTA in other formulations. At the same time, the FDA noted that exclusively marketing a non-EDTA containing product would be preferable because it would eliminate the potential risk of EDTA.
On January 7, 2013, Perrigo announced initial distribution of our Authorized Generic acetylcysteine injection product.
On March 19, 2013, the USPTO issued U.S. Patent number 8,399,445 (the “445 Acetadote Patent”) which is also assigned to us. The claims of the 445 Acetadote Patent encompass the use of the 200 mg/ml Acetadote formulation to treat patients with acetaminophen overdose. On April 8, 2013, the 445 Acetadote Patent was listed in the FDA Orange Book. The 445 Acetadote Patent is scheduled to expire in August 2025. Following the issuance of the 445 Acetadote Patent we have received separate Paragraph IV certification notices from Perrigo, Sagent, and Mylan challenging the 445 Acetadote Patent on the basis of non-infringement, unenforceability and/or invalidity.
On June 10, 2013, we became aware of a Paragraph IV certification notice from Akorn, Inc. challenging the 445 Acetadote Patent and the 356 Acetadote Patent on the basis of non-infringement. On July 12, 2013, we filed a lawsuit for infringement of the 356 Acetadote Patent against Akorn, Inc. in the United States District Court for the District of Delaware.
On June 10, 2013, we announced that the FDA approved updated labeling for Acetadote. The new labeling revises the product's indication and offers new dosing guidance for specific patient populations.
On September 30, 2013, the United States District Court for the District of Columbia filed an opinion granting a Summary Judgment in favor of the FDA regarding Cumberland’s November 13, 2012 suit.  On November 1, 2013, the United States District Court for the District of Delaware filed opinions granting Sagent’s and InnoPharma’s motions to dismiss our May 2012 and June 2012 suits.
On February 18, 2014, the USPTO issued U.S. Patent number 8,653,061 (the “061 Acetadote Patent”) which is assigned to us. The claims of the 061 Acetadote Patent encompass the use of the 200 mg/ml Acetadote formulation to treat patients with acetaminophen overdose. Following its issuance, the 061 Acetadote Patent was listed in the FDA Orange Book. The 061 Acetadote Patent is scheduled to expire in August 2025.
On May 13, 2014, the USPTO issued U.S. Patent number 8,722,738 (the “738 Acetadote Patent”) which is assigned to us. The claims of the 738 Acetadote Patent encompass administration methods of acetylcysteine injection, without specification of the presence or lack of EDTA in the injection. Following its issuance, the 738 Acetadote Patent was listed in the FDA Orange Book and it is scheduled to expire in April 2032.
On December 11, 2014 and March 3, 2015, we became aware of Paragraph IV certification notices from Aurobindo Pharma Limited and Zydus Pharmaceuticals (USA) Inc., respectively, challenging the 356, 445, 061, and 738 Acetadote Patents on the basis of non-infringement.
By statute, where the Paragraph IV certification is to a patent timely listed before an Abbreviated New Drug Application (“ANDA”) is filed, a company has 45 days to institute a patent infringement lawsuit during which period the FDA may not approve another application. In addition, such a lawsuit for patent infringement filed within such 45-day period may stay, or bar, the FDA from approving another product application for two and a half years or until a district court decision that is adverse to the asserted patents, whichever is earlier.
On February 10, 2015, the USPTO issued U.S. Patent number 8,952,065 (the “065 Acetadote Patent”) which is assigned to us. The claims of the 065 Acetadote Patent encompass the use of the 200 mg/ml Acetadote formulation to treat patients with acute liver failure. The 065 Acetadote Patent is scheduled to expire in August 2025.
On September 30, 2015, the United States District Court for the Northern District of Illinois, Eastern Division ("District Court") ruled in our favor in our lawsuit against Mylan for infringement of the 445 Acetadote Patent.  The opinion upheld our 445 Acetadote Patent and expressly rejected Mylan's validity challenge.   The District Court ruled that Mylan is liable to us for infringement of the 445 Acetadote patent in light of Mylan's Abbreviated New Drug Application in which Mylan sought to market a generic version of Acetadote. On November 17, 2015, the District Court entered an order enjoining Mylan and its affiliates from selling or using its generic version of Acetadote until August 2025, the date of expiration of the 445 Acetadote Patent. On October 30, 2015, Mylan filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit, (the "Appeals Court").
On May 3, 2016, the USPTO issued U.S. Patent number 9,327,028 (the “028 Acetadote Patent”) which is assigned to us. The claims of the 028 Acetadote Patent encompass administration methods of acetylcysteine injection, without specification of the presence or lack of EDTA in the injection. Following its issuance, the 028 Acetadote Patent was listed in the FDA Orange Book and is scheduled to expire in July 2031.
On January 26, 2017, the Appeals Court affirmed the District Court ruling in our favor in our lawsuit against Mylan for infringement of the 445 Acetadote Patent.  The Appeals Court opinion affirmed the District Court’s ruling upholding our 445 Acetadote Patent and expressly rejected Mylan's validity challenge.
On November 3, 2017, we became aware of a Paragraph IV certification notice from Exela Pharma Sciences, LLC challenging the 356, 445, 061, 738, and 028 Acetadote Patents on the basis of non-infringement.

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We also have additional patent applications relating to Acetadote which are pending with the USPTO and may or may not be issued. We intend to continue to vigorously defend and protect our Acetadote product and related intellectual property rights. If we are unsuccessful in protecting our Acetadote intellectual property rights, our competitors may be able to introduce products into the marketplace that reduce the sales and market share of our Acetadote product which may require us to take measures such as reducing prices or increasing our marketing expense, any of which may result in a material adverse effect to our financial condition and results of operations.
We have U.S. patents and related international patents which include composition of matter claims that encompass the Caldolor formulation, including methods of treating pain using intravenous ibuprofen and claims directed to ibuprofen solution formulations, methods of making the same, and methods of using the same, and which are related to our formulation and manufacture of Caldolor. Additionally, the active ingredient in Caldolor, ibuprofen, is in the public domain, and a competitor could try to develop, test and seek FDA approval for a sufficiently distinct formulation for another ibuprofen product that competes with Caldolor. The U.S. patents are listed in the FDA Orange Book, with one expiring in November 2021, six others expiring in September 2029 and one other expiring in September 2030. On November 20, 2015, the FDA awarded three years of marketing exclusivity to Caldolor in connection with the approval of the Caldolor supplemental new drug application. Such exclusivity extends through November 20, 2018.
We have numerous U.S. patents and related international patents for Vaprisol. These patents were acquired in our February 2014 acquisition of certain product rights, intellectual property and related assets of Vaprisol from Astellas. The primary patent is U.S. Patent No. 5,723,606 (the “606 Vaprisol Patent”) which includes composition of matter claims that encompass the Vaprisol formulation as well as methods for the intravenous treatment of patients with euvolemic hyponatremia. The 606 Vaprisol Patent is listed in the FDA Orange Book and expires in December 2019.
While we consider patent protection when evaluating product acquisition opportunities, any products we acquire in the future may not have significant patent protection. Neither the USPTO nor the courts have a consistent policy regarding the breadth of claims allowed or the degree of protection afforded under many pharmaceutical patents. Patent applications in the U.S. and many foreign jurisdictions are typically not published until 18 months following the filing date of the first related application, and in some cases not at all. In addition, publication of discoveries in scientific literature often lags significantly behind actual discoveries. Therefore, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in our issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications. In addition, changes in either patent laws or in interpretations of patent laws in the U.S. and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. Furthermore, our competitors may independently develop similar technologies or duplicate technology developed by us in a manner that does not infringe our patents or other intellectual property. As a result of these factors, our patent rights may not provide any commercially valuable protection from competing products.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities
We currently have a share repurchase program to purchase up to $10.0 million of our common stock pursuant to Rule 10b-18 of the Securities Exchange Act. In January 2016, our Board of Directors established the current $10.0 million repurchase program to replace the prior authorizations for repurchases of our outstanding common stock.
The following table summarizes the activity, by month, during the three months ended September 30, 2017:
 
Period
Total
Number of
Shares (or
Units)
Purchased
 
Average
Price Paid
per Share
(or Unit)
 
Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs
 
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
        Programs (1)
July
35,392
  
$
7.03

 
35,392
 
$
5,477,764

August
78,948
(1)
6.77

 
78,948
 
4,943,079

September
41,519
 
7.04

 
41,519
 
4,650,608

Total
155,859
 
 
 
155,859
 
 

(1) Of this amount, 36,000 shares were repurchased directly through private purchases at the then-current fair market value of common stock.

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Item 6. Exhibits
 
 
 
 
No.
  
Description
 
 
 
10.34
 
 
 
 
31.1
  
 
 
31.2
  
 
 
32.1
  
 
 
 
101.INS
 
XBRL INSTANCE DOCUMENT
 
 
 
101.SCH
 
XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
 
 
 
101.CAL
 
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
 
 
 
101.DEF
 
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
 
 
 
101.LAB
 
XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
 
 
 
101.PRE
 
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT
 
 
 
 
 
 
 
 
 


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SIGNATURES
Pursuant to the requirements 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.
 
 
 
 
 
 
 
 
 
 
 
 
Cumberland Pharmaceuticals Inc.
 
 
 
 
November 8, 2017
 
 
 
By:
 
/s/ Michael Bonner
 
 
 
 
 
 
Michael Bonner
 
 
 
 
 
 
Chief Financial Officer


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