# Cumberland Pharmaceuticals Inc: Form 10-Q for the period ended Sep 30, 2016

- Company: [Cumberland Pharmaceuticals Inc](/companies/cpix.md) (CIK 1087294)
- Form: 10-Q
- Filed: 2016-11-03
- Accepted by EDGAR: Nov 3, 2016, 17:17 ET
- Period: 2016-09-30
- Accession: 0001628280-16-020795
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1087294/000162828016020795/q3201610q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1087294/000162828016020795/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-07-01 to 2016-09-30 | $8.8m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2016-01-01 to 2016-09-30 | $23.9m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2016-07-01 to 2016-09-30 | $2.0m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2016-01-01 to 2016-09-30 | $4.4m | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2016-07-01 to 2016-09-30 | $644.7k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2016-01-01 to 2016-09-30 | $2.0m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2016-07-01 to 2016-09-30 | $130.1k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2016-01-01 to 2016-09-30 | −$475.8k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-07-01 to 2016-09-30 | $29.1k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2016-01-01 to 2016-09-30 | $77.8k | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-07-01 to 2016-09-30 | $57.2k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2016-01-01 to 2016-09-30 | −$159.3k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-07-01 to 2016-09-30 | $106.2k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2016-01-01 to 2016-09-30 | −$195.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-07-01 to 2016-09-30 | $0.01 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2016-01-01 to 2016-09-30 | −$0.01 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-07-01 to 2016-09-30 | $0.01 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2016-01-01 to 2016-09-30 | −$0.01 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-07-01 to 2016-09-30 | 16,504,568 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2016-01-01 to 2016-09-30 | 16,268,579 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2016-01-01 to 2016-09-30 | −$250.3k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2016-01-01 to 2016-09-30 | $98.3k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2016-01-01 to 2016-09-30 | $1.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2016-09-30 | $35.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-09-30 | $67.0m | us-gaap:AssetsCurrent |
| Total assets | at 2016-09-30 | $91.1m | us-gaap:Assets |
| Current liabilities | at 2016-09-30 | $11.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-09-30 | $16.7m | us-gaap:Liabilities |
| Shareholders' equity | at 2016-09-30 | $74.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 42,282 characters.

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 22 through 37, and “Special Note Regarding Forward-Looking Statements” on pages 37 and 38 of our Annual Report on Form 10-K for the year ended December 31, 2015. 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 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 markets are hospital acute care and gastroenterology. 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 market and sell 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 product portfolio includes:

- **Acetadote® (***acetylcysteine*) Injection, for the treatment of acetaminophen poisoning;
- **Caldolor® (***ibuprofen*) Injection, for the treatment of pain and fever; recently approved for use in pediatric patients;
- **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, and
- **Ethyol®** *(amifostine)* Injection for the reduction of xerostomia (dry mouth) as a side-effect in patients undergoing post-operative radiation treatment for head and neck cancer. It also reduces renal toxicity associated with the repeated administration of cisplatin in patients with advanced ovarian cancer.

Our pipeline of product candidates includes:

- **Hepatoren® (***ifetroban*) Injection, a Phase II candidate for the treatment of critically ill hospitalized patients suffering from liver and kidney failure associated with hepatorenal syndrome (“HRS”);
- **Boxaban™** *(ifetroban)* oral capsules, a Phase II candidate for the treatment of patients with aspirin-exacerbated respiratory disease (AERD);
- **Vasculan™** *(ifetroban)* oral capsules, a Phase II candidate for the treatment of patients with systemic sclerosis (SSc); and
- **Portaban™** *(ifetroban)* oral formulation, a Phase II candidate for the treatment of patients with portal hypertension associated with liver disease.

We have both product development and commercial capabilities, and believe we can leverage our existing infrastructure to support our expected growth. Our 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, in-licensing and out-licensing opportunities. Our product development team develops proprietary product formulations, manages our clinical trials, prepares all regulatory submissions and manages our medical call center. Our quality and manufacturing professionals oversee the manufacture and release 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 six products approved for sale in the United States. Through our international partners, we are working to bring our products to patients in countries outside the U.S. 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. Further, we are supplementing these activities with the pipeline drug development activities at Cumberland Emerging Technologies ("CET"), our majority-owned subsidiary. CET partners with universities and other research organizations to identify and develop promising, early-stage product candidates, which Cumberland has the opportunity to further develop and commercialize. Specifically, we expect to grow by executing the following plans:

- **Continue to build a high-performance sales organization to address our target markets.** We believe that our commercial infrastructure can help drive prescription volume and product sales. We currently utilize two distinct sales teams to address our primary target markets: a hospital sales force for the acute care market and a field sales force for the gastroenterology market. We believe that active promotion of our products, supported by non-personal promotional activities developed and implemented by our marketing team, can maximize the opportunity for our brands.
- **Further develop our existing products and develop new late stage product candidates.** We continue to evaluate our products following FDA approval to determine if further clinical work could expand the potential market opportunities for our products and help new patient populations. We will also 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. Our clinical team is also working to develop late stage product candidates that could further expand our product portfolio if approved by the FDA.
- **Expand our product portfolio by acquiring rights to additional products and late-stage product candidates.** 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 plan to 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 acquisition of rights to Ethyol in the U.S. represents a recent example of our implementation of this strategy.
- **Expand our global presence through select international partnerships.** We have established our own commercial capabilities, including a sales organization to cover the U.S. market for our products. We are 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. The launch of Caldolor in Australia by CSL's Seqirus is an example of our international partnerships.
- **Develop a pipeline of early-stage products through Cumberland Emerging Technologies ("CET").** In order to build our product pipeline, we are supplementing our acquisition and late-stage development activities with the early-stage drug development activities at CET. 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.

We were incorporated in 1999 and have 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 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 and Highlights

### Board of Directors Appointment

Caroline Young's appointment to Cumberland’s Board of Directors was effective September 13, 2016. She is the prior President of the Nashville Health Care Council and founding Executive Director of the Tennessee Biotechnology Association.

### Ethyol® Agreement

During August 2016, we began distribution of Ethyol for injection to wholesalers within the United States and in September 2016, we launched the national promotional support for the brand. Ethyol is Cumberland's first oncology product and complements our current hospital product line. We entered into an exclusive agreement earlier this year with Clinigen Group plc whereby Cumberland is responsible for all distribution, promotion, and medical support of Ethyol in the United States.

Ethyol is an FDA approved cytoprotective drug indicated as an adjuvant therapy to reduce the incidence of 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.

### Portaban™ Program

In September 2016, we announced the addition of Portaban to our pipeline. Cumberland has initiated the clinical development of Portaban (ifetroban) oral formulation for the treatment of portal hypertension associated with liver disease. The U.S. Food and Drug Administration (FDA) has cleared our investigational new drug application (IND) for a Phase II clinical program for Portaban. Preclinical studies have shown ifetroban can reduce portal pressure, necrosis, inflammation, and fibrosis in multiple models of liver injury.

### Caldolor®

#### Caldolor® Pediatric Launch

We launched the promotion of Caldolor for the treatment of pain and fever in children in March 2016. Caldolor has been approved for use in adults for the management of pain, as well as the reduction of fever, since 2009. We received approval and three-year exclusivity from the FDA in November 2015 for the use of Caldolor in children six months of age and older. Cumberland seeks to maximize the potential of its FDA approved product line and expand the use of its products into new patient populations. The pediatric approval and launch of Caldolor for use in children is an example of the successful execution of that strategy.

### Hepatoren®

#### Phase II Study Results

We are developing Hepatoren as a potential treatment for Hepatorenal Syndrome ("HRS") - a life threatening condition, 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.

The study was designed to evaluate escalating dose levels of Hepatoren in HRS patients. Progression to higher dose levels is reviewed and approved by an independent safety committee. The study was stratified into Type I or Type II patients with HRS based upon the progression of their disease.

Top line results from this study indicated that Hepatoren was overall well tolerated in the HRS patients with no safety concerns noted. Furthermore, the Type II patients receiving the higher dose levels of Hepatoren were more likely to experience increases in urine output, a signal of improved kidney function, compared to patients who received placebo.

We are completing the data analysis and reports from this study and are planning the next steps for this development program which are expected to include a Phase IIb efficacy trial.

### BoxabanTM

#### Phase II Study Results

We are developing Boxaban for the treatment of Aspirin-Exacerbated Respiratory Disease ("AERD"), a respiratory disease involving chronic asthma and nasal polyposis that is worsened by aspirin. AERD is characterized by sharp increases in inflammatory mediators and platelet activity within the respiratory system. Ifetroban, an active thromboxane receptor antagonist, may interfere with these pathways to modify the disease and provide symptomatic relief.

We completed manufacturing of Boxaban oral capsules and completed a Phase II clinical study to evaluate Boxaban in patients suffering AERD. The study was designed to gather initial safety and tolerability data on ifetroban in AERD patients. It was a multicenter study of sixteen patients with enrollment at several U.S. medical centers including the Scripps Clinic. Results indicate that no adverse events were experienced by patients receiving Boxaban when compared to those receiving placebo. Boxaban was well tolerated and safe for subjects with a history of AERD.

We are completing the data analysis and reports for this study while also planning the next steps for this program which are expexted to also include a Phase IIb 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, we have targeted a cholesterol reducing agent for use in the hospital setting. Cumberland has successfully designed, formulated and completed the preclinical studies for such a product candidate. In late October, the FDA cleared the related IND and we are now initiating a Phase I study in healthy volunteers to determine the pharmacokinetic and safety profile for this new product candidate.

### Acetadote®

#### Acetadote Litigation and Arbitration updates

Information and discussion of Acetadote's competing products are included in *Part 1, Item 1, Business - Competition*, of our Form 10-K for the year ended December 31, 2015. As noted, Acetadote is our injectable formulation of N-Acetylcysteine ("NAC") for the treatment of acetaminophen overdose. NAC is accepted worldwide as the standard of care for acetaminophen overdose. Our competitors in the acetaminophen overdose market are those companies selling orally administered NAC as well as injectable products. Our branded Acetadote and Authorized Generic Acetadote products contain the new formulation that does not include ethylene diamine tetra acetic acid ("EDTA").

As included in *Part 2, Item 1, Legal Proceedings* in our Form 10-Q for the quarter ended March 31, 2016, on September 14, 2015, the arbitrator issued a final award in our favor, enjoining Mylan Pharma Group Limited and Mylan Teoranta, together with all their affiliates, from selling, delivering, or giving away any acetylcysteine injectable drug product to another entity or person until April 30, 2018. The award notes that as the prevailing party, we are entitled to reimbursement of our attorney’s fees and related costs associated with the arbitration.

As included in *Part 2, Item 1a, Risk Factors,* in our Form 10-Q for the quarter ended June 30, 2016, on September 30, 2015, the United States District Court for the Northern District of Illinois, Eastern Division ruled in our favor in our lawsuit against Mylan for infringement of our 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 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 October 30, 2015, Mylan filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit.

#### Acetadote Patents

We 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 products formulation. During the second quarter of 2016, we obtained an additional patent for Acetadote. 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 it is scheduled to expire in July 2031. Since 2012, the USPTO has issued the following patents to us associated with Acetadote:

| Date issued | U.S. Patent number | Expiration | Patent claims |
| --- | ---: | --- | --- |
| April 2012 | 8,148,356 | May 2026 | Acetadote formulation and composition of matter |
| March 2013 | 8,399,445 | August 2025 | 200 mg/ml Acetadote formulation to treat patients with acetaminophen overdose |
| February 2014 | 8,653,061 | August 2025 | 200 mg/ml Acetadote formulation to treat patients with acetaminophen overdose |
| May 2014 | 8,722,738 | April 2032 | Administration method of acetylcysteine injection, without specification of the presence or lack of EDTA in the formulation |
| February 2015 | 8,952,065 | August 2025 | 200 mg/ml Acetadote formulation to treat patients with acetaminophen overdose |
| May 2016 | 9,327,028 | July 2031 | Administration methods of acetylcysteine injection, without specification of the presence or lack of EDTA in the injection |

We continue to seek additional claims to protect our intellectual property associated with Acetadote and have additional patent applications relating to Acetadote which are pending with the USPTO. We intend to defend and protect our Acetadote product and related intellectual property rights. Additional information and discussion regarding our Acetadote patents and defense is contained in *Part 1, Item 1, Business -Trademarks and Patents*, of our Form 10-K for the year ended December 31, 2015, which is incorporated by reference herein.

### CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

Please see a discussion of our critical accounting policies and significant judgments and estimates on pages 44 through 47 in “Management’s Discussion and Analysis” of our Annual Report on Form 10-K for the year ended December 31, 2015.

### 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.

### RESULTS OF OPERATIONS

### Three months ended September 30, 2016 compared to the three months ended September 30, 2015

The following table presents the unaudited interim statements of operations for the three months ended September 30, 2016 and 2015:

|  | Three months ended September 30, 2016 | 2015 | Change |
| --- | ---: | ---: | ---: |
| Net revenues | $8,791,753 | $7,885,048 | $906,705 |
| Costs and expenses: |  |  |  |
| Cost of products sold | 1,973,948 | 980,176 | 993,772 |
| Selling and marketing | 3,614,714 | 3,608,828 | 5,886 |
| Research and development | 644,662 | 757,442 | (112,780) |
| General and administrative | 1,865,575 | 1,794,279 | 71,296 |
| Amortization | 562,722 | 473,439 | 89,283 |
| Total costs and expenses | 8,661,621 | 7,614,164 | 1,047,457 |
| Operating income | 130,132 | 270,884 | (140,752) |
| Interest income | 51,636 | 64,072 | (12,436) |
| Interest expense | (29,088) | (19,815) | (9,273) |
| Income before income taxes | 152,680 | 315,141 | (162,461) |
| Income tax expense | (57,192) | (193,439) | 136,247 |
| Net income | $95,488 | $121,702 | $(26,214) |

*Net revenues.* Net revenues for the three months ended September 30, 2016 were approximately $8.8 million compared to $7.9 million for the three months ended September 30, 2015, representing an increase of $0.9 million, or 11.5%.

The following table summarizes net revenues by product for the periods presented:

| Products: | Three months ended September 30, 2016 | 2015 | Change |
| --- | ---: | ---: | ---: |
| Acetadote | $1,807,495 | $2,065,081 | $(257,586) |
| Omeclamox-Pak | 752,808 | 691,120 | 61,688 |
| Kristalose | 3,671,397 | 3,939,294 | (267,897) |
| Vaprisol | 496,279 | 670,621 | (174,342) |
| Caldolor | 1,357,289 | 352,343 | 1,004,946 |
| Ethyol | 519,400 | — | 519,400 |
| Other | 187,085 | 166,589 | 20,496 |
| Total net revenues | $8,791,753 | $7,885,048 | $906,705 |

The increase in total net revenues from the prior year period was driven primarily by an increase in Caldolor net revenue of $1.0 million and net revenue for our newest brand, Ethyol of $0.5 million. Omeclamox-Pak revenue increased $0.1 million or 9%. Acetadote revenue decreased by $0.3 million compared to the third quarter of 2015 and Kristalose revenue decreased by $0.3 million compared to the third quarter of 2015.

The Caldolor product revenue increase of $1.0 million for the three months ended September 30, 2016 was a 285.2% improvement compared to the same period last year. Caldolor revenue in the third quarter of 2016 was positively impacted by growth in both international sales and domestic net revenue.

Ethyol revenue for the third quarter of 2016 was $0.5 million. The Company began generating revenue from the sale of Ethyol during the third quarter of 2016.

Kristalose revenue decreased by $0.3 million during the third quarter of 2016 when compared to the prior year period. The product's net revenue was impacted by reduced sales volume. It was positively impacted from improved pricing.

Our Authorized Generic distributed by Perrigo experienced a $0.1 million increase in revenue when compared to the prior year period. Authorized Generic sales were consistent on a sequential basis when compared to the second quarter of 2016. We experienced a decrease of $0.4 million in our branded Acetadote net revenue from the prior year period. Our branded Acetadote revenue was consistent on a sequential basis when compared to the second quarter of 2016.

Vaprisol revenue decreased during the third quarter of 2016 when compared to the prior year period due primarily to lower sales volumes.

Omeclamox-Pak revenue increased $0.1 million or 9% due to improved net pricing and customer mix. This increase was partially offset by slightly lower sales volumes.

*Cost of products sold*. Cost of products sold for the third quarter of 2016 increased $1.0 million compared to the prior year. As a percentage of net revenues, cost of products sold experienced an increase to 22.5% during the three months ended September 30, 2016 compared to 12.4% during the three months ended September 30, 2015. This increase in costs of products sold as a percentage of revenue was attributable to the increase in international sales and a change in the product sales mix during the quarter compared to the prior year. The costs of products sold during the three months ended September 30, 2016 included the new Caldolor inventory received and sold during the period. These new Caldolor units had a higher cost than our previous inventory as well as a higher cost than the future shipments we will receive from this supplier. As such, we expect this to be a temporary increase in the costs of products sold for the domestic Caldolor market.

*Selling and marketing*. Selling and marketing expense for the three months ended September 30, 2016 and September 30, 2015 remained consistent totaling approximately $3.6 million.

*Research and development*. Research and development costs for the third quarter of 2016 were $0.6 million, compared to $0.8 million for the same period last year, representing a decrease of approximately 14.9%. A portion of our research and development costs are variable based on the number of studies, sites and participants involved in our product development activities.

*General and administrative*. General and administrative expense increased 4.0% to $1.9 million for the three months ended September 30, 2016 compared to $1.8 million for the prior year. The $0.1 million increase from the prior year was primarily driven by increases in compensation and benefit expense during the period.

*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 three months ended September 30, 2016 and September 30, 2015 totaled approximately $0.6 million and $0.5 million, respectively.

*Income taxes*. Income taxes for the three months ended September 30, 2016 decreased $0.1 million, compared to the third quarter of 2015. The change was the result of lower pretax income in the third quarter of 2016 compared to the same period last year. As a percentage of income before income taxes, income taxes were 37.5% for the three months ended September 30, 2016 compared to 61.4% for the three months ended September 30, 2015. The income tax rate for the three months ended September 30, 2015 was impacted by adjustments to our valuation allowance and increases in our state income tax expense, including changes from legislation.

As of September 30, 2016, we have approximately $44.0 million of unrecognized net operating loss carryforwards resulting from the exercise of nonqualified stock options in 2009 that will be used to significantly offset future income tax obligations. These benefits will be recognized in the year in which they are able to reduce current income taxes payable.

### Nine months ended September 30, 2016 compared to the nine months ended September 30, 2015

The following table presents the unaudited interim statements of operations for the nine months ended September 30, 2016 and 2015:

|  | Nine months ended September 30, 2016 | 2015 | Change |
| --- | ---: | ---: | ---: |
| Net revenues | $23,944,120 | $25,481,563 | $(1,537,443) |
| Costs and expenses: |  |  |  |
| Cost of products sold | 4,353,148 | 3,379,018 | 974,130 |
| Selling and marketing | 10,585,955 | 10,645,229 | (59,274) |
| Research and development | 2,029,914 | 3,444,524 | (1,414,610) |
| General and administrative | 5,817,943 | 5,591,982 | 225,961 |
| Amortization | 1,632,920 | 1,471,879 | 161,041 |
| Total costs and expenses | 24,419,880 | 24,532,632 | (112,752) |
| Operating income (loss) | (475,760) | 948,931 | (1,424,691) |
| Interest income | 160,248 | 178,320 | (18,072) |
| Interest expense | (77,777) | (53,854) | (23,923) |
| Income (loss) before income taxes | (393,289) | 1,073,397 | (1,466,686) |
| Income tax (expense) benefit | 159,282 | (530,885) | 690,167 |
| Net income (loss) | $(234,007) | $542,512 | $(776,519) |

*Net revenues.* Net revenues for the nine months ended September 30, 2016 were approximately $23.9 million compared to $25.5 million for the nine months ended September 30, 2015, representing a decrease of $1.5 million, or 6.0%.

The following table summarizes net revenues by product for the periods presented:

| Products: | Nine months ended September 30, 2016 | 2015 | Change |
| --- | ---: | ---: | ---: |
| Acetadote | $5,532,893 | $6,386,767 | $(853,874) |
| Omeclamox-Pak | 2,154,596 | 2,393,495 | (238,899) |
| Kristalose | 10,915,276 | 12,160,037 | (1,244,761) |
| Vaprisol | 1,286,126 | 2,199,645 | (913,519) |
| Caldolor | 3,060,441 | 2,007,076 | 1,053,365 |
| Ethyol | 519,400 | — | 519,400 |
| Other | 475,388 | 334,543 | 140,845 |
| Total net revenues | $23,944,120 | $25,481,563 | $(1,537,443) |

19

The Caldolor product revenue experienced an increase of 52.5% or $1.1 million during the nine months ended September 30, 2016 compared to the same period last year. While we expect Caldolor annual product revenue to continue to grow, we anticipate quarterly fluctuations due to wholesaler and hospital buying patterns and other factors. Caldolor revenue in the nine months ended September 30, 2016 was positively impacted by international sales.

Ethyol revenue for the nine months ended September 30, 2016 was $0.5 million. The Company began generating revenue from the sale of Ethyol during the third quarter of 2016.

Kristalose revenue decreased by $1.2 million or 10.2% primarily by reduced sales volume. This reduction was partially offset by improved pricing during the nine months ended September 30, 2016. We also experienced improvements in the level of net revenue deductions from managed care as a result of new managed care agreements entered into during 2016 that lowered the amount of rebates.

Vaprisol revenue decreased $0.9 million during the nine months ended September 30, 2016 compared to the prior year period primarily due to lower sales volume but partially offset by improved pricing.

Acetadote net revenue for the first nine months of 2016 included $3.5 million in revenue from sales of our Authorized Generic distributed by Perrigo, compared to $3.3 million for the same period last year. This increase in sales of our Authorized Generic product partially offset the decrease in total Acetadote revenue. Our branded Acetadote product net revenue decreased $1.1 million due to a reduction in sales volume as a result of generic competition. The reduced sales volume revenue decrease was partially offset by a decrease in revenue deductions related to expired products during the nine months ended September 30, 2016.

Omeclamox-Pak revenue declined $0.2 million during the nine months ended September 30, 2016 compared to the prior year. The decrease was primarily the result of lower sales volume.

*Cost of products sold*. Cost of products sold for the first nine months of 2016 were $4.4 million, compared to $3.4 million for the same period last year, representing an increase of approximately $1.0 million, or 28.8%. As a percentage of net revenues, cost of products sold were 18.2% compared to 13.3% during the prior year. This increase 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 expense for both the nine months ended September 30, 2016 and the nine months ended September 30, 2015 totaled approximately $10.6 million. There were increases in certain promotional spending categories including print materials, direct mailings and product samples, offset by decreases in compensation and benefits expense. During the period we also incurred incremental expenses as we prepared our Ethyol product launch. We continue to actively align our selling and marketing efforts and expenses to efficiently support our commercial brands.

*Research and development*. Research and development costs for the first nine months of 2016 were $2.0 million, compared to $3.4 million for the same period last year, representing a decrease of approximately $1.4 million, or 41.1%. This change was primarily the result of a $1.2 million required fee that accompanied the Caldolor sNDA filed with the FDA during the first quarter of 2015. This submission was successful and the FDA approved Caldolor for a pediatric indication. A portion of our research and development costs are variable based on the number of studies, sites and participants involved in our product development activities.

*General and administrative*. General and administrative expense was $5.8 million for the nine months ended September 30, 2016, compared to $5.6 million during the same period last year. The $0.2 million increase from the prior year was primarily driven by a $0.3 million reduction in contingent consideration during the prior year as the result of a decrease in the cost of the Vaprisol acquisition. We also experienced increases in legal and professional fees during 2016. The general and administrative expense increases were partially offset by decreases in compensation and benefit expense during the period.

*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, 2016 totaled approximately $1.6 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 benefit for the nine months ended September 30, 2016 totaled $0.2 million, compared to income tax expense of $0.5 million in the nine months ended September 30, 2015. The change was the result of the pretax loss during the nine months ended September 30, 2016 compared to income in the same period last year. As a percentage of income (loss) before income taxes, income taxes were 40.5% for the nine months ended September 30, 2016 compared to 49.5% for the nine months ended September 30, 2015. The income tax rate for the nine months ended September 30, 2015 was impacted by adjustments to our valuation allowance and increases in our state income tax expense, including changes from legislation.

### 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 invest 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 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 both September 30, 2016 and December 31, 2015, we had approximately $14.6 million invested in marketable securities.

The following table summarizes our liquidity and working capital as of September 30, 2016 and December 31, 2015:

|  | September 30, 2016 | December 31, 2015 |
| --- | ---: | ---: |
| Cash and cash equivalents | $35,546,244 | $38,203,059 |
| Marketable securities | 14,600,404 | 14,564,115 |
| Total cash, cash equivalents and marketable securities | $50,146,648 | $52,767,174 |
| Working capital (current assets less current liabilities) | $55,277,061 | $54,700,327 |
| Current ratio (multiple of current assets to current liabilities) | 5.7 | 5.4 |
| Revolving line of credit availability | $8,300,000 | $10,300,000 |

The following table summarizes our net changes in cash and cash equivalents for the nine months ended September 30, 2016 and September 30, 2015:

| Net cash provided by (used in): | Nine months ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Operating activities | $(250,316) | $4,553,496 |
| Investing activities | (1,619,834) | (2,006,336) |
| Financing activities | (786,665) | (4,096,906) |
| Net decrease in cash and cash equivalents | $(2,656,815) | $(1,549,746) |

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.

Operating activities provided $4.6 million in cash during the nine months ended September 30, 2015. The net $1.5 million decrease in cash and cash equivalents for the nine months ended September 30, 2015 was attributable to cash used in investing and financing activities, which was partly offset by the $4.6 million in cash generated from operations. Cash used in investing activities included a net cash investment in our intangible assets of $2.4 million, which was partially offset by net proceeds of $0.5 million associated with our investing activities in marketable securities. Our financing activities included $4.7 million in cash used to repurchase shares of our common stock, $1.6 million used to settle the remaining cash consideration for Vaprisol and $1.7 million in cash provided by borrowings under our line of credit. Cash provided by operating activities benefited from the non-cash expenses of depreciation and amortization and share-based compensation expense totaling $2.1 million and included positive changes in our working capital of $2.4 million.

As of September 30, 2016, we have approximately $44.0 million of unrecognized net operating loss carryforwards resulting from the exercise of nonqualified stock options in 2009 that will be used to significantly offset future income tax obligations. These benefits will be recognized in the year in which they are able to reduce current income taxes payable.

On June 26, 2014, Cumberland entered into a Revolving Credit Loan Agreement (“Loan Agreement”) with SunTrust Bank, which replaced the agreement with a previous lender. We had $3.7 million and $1.7 million in borrowings under the Loan Agreement at September 30, 2016 and 2015. On July 29, 2016, Cumberland amended the agreement to extend the original three-year term by an additional year. The agreement provides for an aggregate principal amount up to $20 million. 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 Loan 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 1.0% to 2.85% (representing an interest rate of 1.5% at September 30, 2016). 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 Cumberland's assets.

Under the Loan Agreement, Cumberland is subject to certain financial covenants, including, but not limited to, maintaining a Funded Debt Ratio, as such term is defined in the Loan Agreement and determined on a quarterly basis. On July 29, 2016, we obtained a compliance waiver for a financial covenant as of June 30, 2016. On October 28, 2016, Cumberland obtained a compliance waiver and amended the agreement to modify a financial covenant, replacing the EBIT to interest ratio covenant with a minimum liquidity requirement. As a result of the covenant waiver and modification in the October 28, 2016 amendment, we achieved compliance with all covenants as of September 30, 2016.

### OFF-BALANCE SHEET ARRANGEMENTS

During the nine months ended September 30, 2016 and 2015, we did not engage in any off-balance sheet arrangements.

## Market risk

As filed, 2,895 characters.

### 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 invest 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 $14.6 million in marketable securities outstanding at September 30, 2016, a 1% decrease in the fair value of the securities would result in a reduction in pretax net income 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, 2016, we had $3.7 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, 2016 and 2015. Neither a 10% increase nor decrease from current exchange rates would have a significant effect on our operating results or financial condition.

## Controls and procedures

As filed, 724 characters.

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, 2016. 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, 2016, 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.

## Risk factors

As filed, 340 characters.

Information regarding risk factors appears on pages 22 through 37 in our Annual Report on Form 10-K for the year ended December 31, 2015 under the section titled “Risk Factors.” There is an update to the information included in the risk factors found in *Part 2, Item 1a, Risk Factors,* in our Form 10-Q for the quarter ended June 30, 2016.

Filed Nov 3, 2016.
Source: SEC EDGAR, the filing index for accession 0001628280-16-020795. Last ingested by Listed: Nov 11, 2026, 03:05 ET. No prices; not investment advice.