# Cumberland Pharmaceuticals Inc: Form 10-Q for the period ended Jun 30, 2017

- Company: [Cumberland Pharmaceuticals Inc](/companies/cpix.md) (CIK 1087294)
- Form: 10-Q
- Filed: 2017-08-09
- Accepted by EDGAR: Aug 9, 2017, 17:01 ET
- Period: 2017-06-30
- Accession: 0001628280-17-008470
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1087294/000162828017008470/q2201710q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1087294/000162828017008470/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 6 months, 2017-01-01 to 2017-06-30 | $18.3m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2017-04-01 to 2017-06-30 | $1.7m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2017-01-01 to 2017-06-30 | $3.1m | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2017-04-01 to 2017-06-30 | $1.1m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2017-01-01 to 2017-06-30 | $2.0m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2017-04-01 to 2017-06-30 | −$1.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2017-01-01 to 2017-06-30 | −$2.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-04-01 to 2017-06-30 | $30.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2017-01-01 to 2017-06-30 | $61.7k | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-04-01 to 2017-06-30 | $3.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2017-01-01 to 2017-06-30 | $4.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-04-01 to 2017-06-30 | −$5.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2017-01-01 to 2017-06-30 | −$6.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-04-01 to 2017-06-30 | −$0.32 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2017-01-01 to 2017-06-30 | −$0.40 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-04-01 to 2017-06-30 | −$0.32 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2017-01-01 to 2017-06-30 | −$0.40 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-04-01 to 2017-06-30 | 16,011,758 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2017-01-01 to 2017-06-30 | 16,026,935 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2017-01-01 to 2017-06-30 | −$1.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2017-01-01 to 2017-06-30 | $143.2k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2017-01-01 to 2017-06-30 | $1.8m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2017-06-30 | $34.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-06-30 | $63.3m | us-gaap:AssetsCurrent |
| Total assets | at 2017-06-30 | $87.8m | us-gaap:Assets |
| Current liabilities | at 2017-06-30 | $13.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-06-30 | $21.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2017-06-30 | $66.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 41,071 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 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 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 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 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");
- **Vasculan™** *(ifetroban)* oral capsules, a Phase II candidate for the treatment of patients with the systemic sclerosis (SSc) form of autoimmune disease;
- **Portaban™** *(ifetroban)* oral formulation, 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 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. 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 expect to grow 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 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 acquisitions of rights to Ethyol and Totect in the U.S. represent recent examples of our implementation 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. 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, positive cash flow from operations, and a strong balance sheet. We use excess cash flow for our ongoing share repurchase program.

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 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

### New Kristalose® Growth Driver Established Through Co-Promotion Agreement

On April 26, 2017, Cumberland and Poly Pharmaceuticals, Inc. ("Poly"), a privately-held U.S. specialty pharmaceutical company, announced a co-promotion partnership for Kristalose within the United States. Poly's sales force results in more than double the number of nationwide physicians called upon in support of the product.

Poly and Cumberland's multi-year co-promotion partnership will expand current promotional support for Kristalose across the United States. Poly's sales organization will promote the features of Kristalose, provide amplified sales promotion, and increased communication to thousands of additional medical professionals. Cumberland will continue to manage national marketing, distribution, regulatory, and medical support for the brand.

Under the terms of the agreement, Cumberland will provide co-promotional payments to Poly based on the incremental prescriptions generated by Poly's sales organization. Poly projects their efforts will significantly grow the sales of Kristalose during the multi-year agreement term. Cumberland will provide sales training and promotional materials for Poly's sales professionals who will focus on new physician segments in support of the brand.

### Totect® Distribution

On July 31, 2017, we initiated distribution and sale of Totect in the United States. This followed the FDA approval of the product manufacturer and updated labeling for the product.

Totect is an FDA approved emergency oncology intervention which is indicated to treat the toxic effects of anthracycline chemotherapy in case of extravasation. Extravasation occurs when an injected medicine 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 and procedures, enabling patients to continue their essential anti-cancer treatment.

In January 2017, we announced an agreement to acquire the exclusive rights to the oncology support drug Totect in the United States. This was the second product Clinigen has licensed to us under our strategic alliance. Under the terms of the agreement, Cumberland is managing all marketing, promotion, and distribution of the product in the United States.

### Hepatoren®

#### Phase II Study Results

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 completed the data analysis and reports from this study, filed them with the FDA, and are planning the next steps for this development program, which are expected to include a Phase II efficacy trial.

### Boxaban®

#### 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.

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 Boxaban was well tolerated and safe for subjects with a history of AERD.

We have completed the data analysis and filed the report with the FDA for this study. During the first quarter, we submitted and obtained FDA clearance for an investigational new drug (IND) for the AERD program. We subsequently began the process of initiating the trial at medical centers across the United States.

### VasculanTM

#### Vasculan Program

In April 2016, we announced the addition of Vasculan to our pipeline. Cumberland has initiated the clinical development of Vasculan for the treatment of systemic sclerosis. Systemic sclerosis (SSc), also called scleroderma, is a rare autoimmune disorder that affects the skin and internal organs. The FDA has cleared our IND for a Phase II clinical program for Vasculan in patients with systemic sclerosis and enrollment is underway in that trial.

### PortabanTM

#### Portaban Program

In September 2016, we announced the addition of Portaban to our pipeline. Cumberland has initiated the clinical development of Portaban for the treatment of portal hypertension associated with liver disease. Portaban is an oral formulation of ifetroban and the fourth development candidate in our pipeline. The FDA has cleared our IND for a Phase II clinical program for Portaban and enrollment is underway. Preclinical studies have shown ifetroban can reduce portal pressure, necrosis, inflammation, and fibrosis in multiple models of liver injury.

### 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. The FDA cleared the IND and we have completed a Phase I study to determine the pharmacokinetic and safety profile for this new product candidate. The study results will next be discussed with the FDA along with clinical plans and regulatory pathway for the product.

### Acetadote®

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.

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 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.

A number of our competitors possess research and development and sales and marketing capabilities as well as financial resources greater than ours. These competitors, in addition to emerging companies and academic research institutions, may be developing, or in the future could develop, new technologies that could compete with our current and future products or render our products obsolete. *Part 1, Item 1, Business -Competitors* appears on pages 17 through 19 in our Annual Report on Form 10-K for the year ended December 31, 2016 and is incorporated by reference. The following competition information was included in our Form 10-K for the year ended December 31, 2016 and has been updated for recent developments as follows:

### Ethyol®

Ethyol is a patented, prescription brand 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 patent number 5,994,409 for Ethyol. This Ethyol patent 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 in which Mylan seeks to market a generic version of Ethyol. We are evaluating this recent development with Clinigen who is responsible for defending the intellectual property associated with the Ethyol brand.

### 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.

### RESULTS OF OPERATIONS

### Three months ended June 30, 2017 compared to the three months ended June 30, 2016

The following table presents the unaudited interim statements of operations for the three months ended June 30, 2017 and 2016:

|  | Three months ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: |
| Net revenues | $8,667,127 | $7,414,835 | $1,252,292 |
| Costs and expenses: |  |  |  |
| Cost of products sold | 1,668,926 | 1,155,261 | 513,665 |
| Selling and marketing | 4,654,933 | 3,272,279 | 1,382,654 |
| Research and development | 1,080,426 | 678,780 | 401,646 |
| General and administrative | 2,353,140 | 1,874,396 | 478,744 |
| Amortization | 590,573 | 539,428 | 51,145 |
| Total costs and expenses | 10,347,998 | 7,520,144 | 2,827,854 |
| Operating income (loss) | (1,680,871) | (105,309) | (1,575,562) |
| Interest income | 69,481 | 31,483 | 37,998 |
| Interest expense | (30,029) | (28,247) | (1,782) |
| Income (loss) before income taxes | (1,641,419) | (102,073) | (1,539,346) |
| Income tax (expense) benefit | (3,535,783) | 41,135 | (3,576,918) |
| Net income (loss) | $(5,177,202) | $(60,938) | $(5,116,264) |

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

| Products: | Three months ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: |
| Acetadote | $1,723,984 | $1,895,199 | $(171,215) |
| Omeclamox-Pak | 377,470 | 641,469 | (263,999) |
| Kristalose | 2,901,440 | 3,626,076 | (724,636) |
| Vaprisol | 276,705 | 421,800 | (145,095) |
| Caldolor | 1,052,917 | 631,893 | 421,024 |
| Ethyol | 2,091,836 | — | 2,091,836 |
| Other | 242,775 | 198,398 | 44,377 |
| Total net revenues | $8,667,127 | $7,414,835 | $1,252,292 |

*Net revenues.* Net revenues for the three months ended June 30, 2017 were approximately $8.7 million compared to $7.4 million for the three months ended June 30, 2016, representing an increase of $1.3 million, or 16.9%.

The increase in total net revenues from the prior year period was driven primarily by net revenue of $2.1 million for our newest brand, Ethyol and an increase in Caldolor revenue of $0.4 million compared to the second quarter of 2016. Kristalose revenue decreased by $0.7 million compared to the second quarter of 2016, Omeclamox-Pak decreased $0.3 million, Acetadote revenue decreased by $0.2 million and Vaprisol net revenue decreased by $0.1 million compared to the second quarter of 2016.

Ethyol revenue for the second quarter of 2017 was $2.1 million. The Company began generating revenue from the sale of Ethyol during the third quarter of 2016.

The Caldolor product revenue increase of $0.4 million for the three months ended June 30, 2017 was benefited by increased domestic and international sales revenue in the second quarter of 2017 compared to the second quarter of 2016.

Kristalose revenue decreased by $0.7 million during the second 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 January 1, 2017. We also experienced an increase in our fee for service paid to wholesalers. The decreases in revenues were slightly offset by improved pricing during the second quarter of 2017.

Vaprisol revenue decreased $0.1 million during the second quarter of 2017 when compared to the prior year period due to lower gross revenue and higher expired product sales returns.

Acetadote net revenue includes net sales of our Acetadote brand and our share of net sales from our Authorized Generic. During the quarter, there was a $0.1 million increase 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.

Omeclamox-Pak revenue decreased $0.3 million due to lower sales volumes. This decrease was partially offset by improved net pricing.

*Cost of products sold*. Cost of products sold for the second quarter of 2017 increased $0.5 million compared to the prior year as a result of increased sales. As a percentage of net revenues, cost of products sold experienced an increase to 19.3% during the three months ended June 30, 2017 compared to 15.6% during the three months ended June 30, 2016. This increase 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 second quarter of 2017 increased $1.4 million compared to the prior year. This increase was the result of additional royalties, primarily a result of increased product sales during the second quarter of 2017. Selling and marketing expense was a 53.7% of net revenues during the three months ended June 30, 2017 compared to 44.1% during the three months ended June 30, 2016.

*Research and development*. Research and development costs for the second quarter of 2017 were $1.1 million, compared to $0.7 million for the same period last year. 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. The increase was the result of additional investments in our ongoing clinical and manufacturing initiatives for developing pipeline products.

*General and administrative*. General and administrative expense for the second quarter of 2017 was $2.4 million, compared to $1.9 million for the same period last year. The $0.5 million increase from the prior year was primarily driven by increases in legal and other professional fees for our business development initiatives. There was also an increase in non-cash stock based compensation during the second 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 the three months ended June 30, 2017 and June 30, 2016 totaled approximately $0.6 million and $0.5 million, respectively.

*Income taxes*. Income tax expense for the three months ended June 30, 2017 was $3.5 million. As a percentage of income (loss) before income taxes, income tax expense was 215.4% for the three months ended June 30, 2017 compared to 40.3% for the three months ended June 30, 2016. During the second quarter of 2017, we recorded an additional valuation allowance of $3.5 million for our remaining deferred tax assets. This additional non-cash valuation allowance impacted our effective tax rate during the second quarter of 2017.

As of June 30, 2017, we have approximately $44.1 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. Effective as of January 1, 2017, we adopted the current accounting guidance that resulted in the recording of $1.1 million in net noncurrent deferred tax assets and retained earnings related to these net operating loss carryforwards.

### Six months ended June 30, 2017 compared to the six months ended June 30, 2016

The following table presents the unaudited interim statements of operations for the six months ended June 30, 2017 and 2016:

|  | Six months ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: |
| Net revenues | $18,303,882 | $15,152,367 | $3,151,515 |
| Costs and expenses: |  |  |  |
| Cost of products sold | 3,050,423 | 2,379,200 | 671,223 |
| Selling and marketing | 9,947,953 | 6,971,241 | 2,976,712 |
| Research and development | 1,978,789 | 1,385,252 | 593,537 |
| General and administrative | 4,463,373 | 3,952,368 | 511,005 |
| Amortization | 1,202,017 | 1,070,198 | 131,819 |
| Total costs and expenses | 20,642,555 | 15,758,259 | 4,884,296 |
| Operating income (loss) | (2,338,673) | (605,892) | (1,732,781) |
| Interest income | 122,016 | 108,612 | 13,404 |
| Interest expense | (61,744) | (48,689) | (13,055) |
| Income (loss) before income taxes | (2,278,401) | (545,969) | (1,732,432) |
| Income tax (expense) benefit | (4,192,370) | 216,474 | (4,408,844) |
| Net income (loss) | $(6,470,771) | $(329,495) | $(6,141,276) |

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

| Products: | Six months ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: |
| Acetadote | $2,989,424 | $3,732,661 | $(743,237) |
| Omeclamox-Pak | 1,022,795 | 1,401,788 | (378,993) |
| Kristalose | 5,288,031 | 7,243,882 | (1,955,851) |
| Vaprisol | 961,253 | 789,848 | 171,405 |
| Caldolor | 1,865,944 | 1,703,861 | 162,083 |
| Ethyol | 5,758,644 | — | 5,758,644 |
| Other | 417,791 | 280,327 | 137,464 |
| Total net revenues | $18,303,882 | $15,152,367 | $3,151,515 |

*Net revenues.* Net revenues for the six months ended June 30, 2017 were approximately $18.3 million compared to $15.1 million for the six months ended June 30, 2016, representing an increase of $3.2 million, or 20.8%.

Ethyol revenue for the six months ended June 30, 2017 was $5.8 million. The Company began generating revenue from the sale of Ethyol during the third quarter of 2016.

The Caldolor product revenue experienced an increase of 9.5% or $0.2 million during the six months ended June 30, 2017 compared to the same period last year. Caldolor revenue in the six months ended June 30, 2017 was positively impacted by improved pricing and lower expired product sales returns, offset by lower international sales than the prior year period.

Kristalose revenue decreased by $2.0 million primarily by reduced sales volume. The product's net revenue was negatively impacted by higher Medicaid rebates that resulted from changes to the products rebate formula effective January 1, 2017. This reduction was partially offset by improved pricing during the six months ended June 30, 2017.

Vaprisol revenue increased $0.2 million during the six months ended June 30, 2017 compared to the prior year period primarily due to higher sales volume partially offset by an increase in expired product sales returns.

Acetadote net revenue included net sales of our branded product and our share of net sales from our Authorized Generic. During the first six months of 2017, net sales of our Acetadote brands and our share of net sales from our Authorized Generic decreased $0.3 million and $0.5 million respectively from the prior year period, primarily due to generic competition.

Omeclamox-Pak revenue declined $0.4 million during the six months ended June 30, 2017 compared to the prior year. The decrease was primarily the result of lower sales volume partially offset by improved pricing.

*Cost of products sold*. Cost of products sold for the first six months of 2017 was $3.1 million, compared to $2.4 million for the same period last year, representing an increase of approximately $0.7 million, or 28.2%. As a percentage of net revenues, cost of products sold was 16.7% compared to 15.7% 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 the first six months of 2017 was $9.9 million, compared to $7.0 million for the same period last year, representing an increase of approximately $3.0 million, or 42.7%. This increase was the result of additional royalties, primarily a result of increased product sales during the first six months of 2017. Selling and marketing expense was 54.3% of net revenues during the six months ended June 30, 2017 compared to 46.0% during the six months ended June 30, 2016.

*Research and development*. Research and development costs for the first six months of 2017 were $2.0 million, compared to $1.4 million for the same period last year, representing an increase of approximately $0.6 million, or 42.8%. 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. The increase was the result of additional investments in our ongoing clinical initiatives for developing pipeline products.

*General and administrative*. General and administrative expense was $4.5 million for the six months ended June 30, 2017, compared to $4.0 million during the same period last year. The $0.5 million increase from the prior year was primarily driven by increases in legal and other professional fees for 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 six months ended June 30, 2017 totaled approximately $1.2 million, which was an increase of $0.1 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 six months ended June 30, 2017 totaled $4.2 million, compared to income tax benefit of $0.2 million in the six months ended June 30, 2016. As a percentage of income (loss) before income taxes, income taxes were 184.0% for the six months ended June 30, 2017 compared to 39.6% for the six months ended June 30, 2016. As discussed in Note 7 to our condensed consolidated financial statements, the effective tax rate for the six months ended June 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 six months ended June 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 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 June 30, 2017 and December 31, 2016, we had approximately $14.4 million and $15.6 million, respectively, invested in marketable securities.

The following table summarizes our liquidity and working capital as of June 30, 2017 and December 31, 2016:

|  | June 30, 2017 | December 31, 2016 |
| --- | ---: | ---: |
| Cash and cash equivalents | $34,616,105 | $34,510,330 |
| Marketable securities | 14,356,326 | 15,622,111 |
| Total cash, cash equivalents and marketable securities | $48,972,431 | $50,132,441 |
| Working capital (current assets less current liabilities) | $50,311,863 | $50,753,001 |
| Current ratio (multiple of current assets to current liabilities) | 4.9 | 4.4 |
| Revolving line of credit availability | $5,300,000 | $7,900,000 |

The following table summarizes our net changes in cash and cash equivalents for the six months ended June 30, 2017 and June 30, 2016:

| Net cash provided by (used in): | Six months ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| Operating activities | $(1,090,995) | $(543,936) |
| Investing activities | 387,441 | (1,097,827) |
| Financing activities | 809,329 | (724,056) |
| Net increase (decrease) in cash and cash equivalents | $105,775 | $(2,365,819) |

The net $0.1 million increase in cash and cash equivalents for the six months ended June 30, 2017 was attributable to cash provided by investing and financing activities offset by cash used in operating activities. Cash used by operating activities of $1.1 million was primarily impacted by a net loss for the period of $6.5 million. These uses of operating cash were offset by non-cash expenses of depreciation and amortization and share-based compensation expense totaling $1.9 million. Changes in our working capital used cash of $0.7 million, including a reduction in accounts payable of $1.9 million offset by a decrease in accounts receivable of $1.2 million. Cash provided by investing activities included net proceeds from marketable securities of $1.3 million offset by additions to intangibles of $0.8 million. Our financing activities included $2.6 million in cash provided by borrowings under our line of credit and $1.8 million in cash used to repurchase shares of our common stock.

The net $2.4 million decrease in cash and cash equivalents for the six months ended June 30, 2016 was attributable to cash used

in operating, investing, and financing activities. Cash used in operating activities of $0.5 million was primarily impacted by changes in our working capital of $3.1 million, including net reductions in accounts payable and accrued liabilities of $4.1 million. Cash used in operating activities also include the net loss for the period of $0.3 million. These uses of operating cash were offset by non-cash expenses of depreciation and amortization and share-based compensation expense totaling $1.6 million. Cash used in investing activities included a net cash investment in our intangible assets of $1.1 million and $0.1 million associated with our investing activities in marketable securities. Our financing activities included $1.7 million in cash used to repurchase shares of our common stock and $1.8 million in cash provided by borrowings under our line of credit.

On July 31, 2017, the Company 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%. 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. In addition, we are subject to standard general covenants.

We had $6.7 million in borrowings under the SunTrust Agreement at June 30, 2017.

### OFF-BALANCE SHEET ARRANGEMENTS

During the six months ended June 30, 2017 and 2016, we did not engage in any off-balance sheet arrangements.

## Market risk

As filed, 2,886 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 $14.4 million in marketable securities outstanding at June 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 June 30, 2017, we had $6.7 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 six months ended June 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.

## Controls and procedures

As filed, 713 characters.

Our principal executive and principal financial officers evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 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 six months ended June 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.

## Risk factors

As filed, 177 characters.

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.”

Filed Aug 9, 2017.
Source: SEC EDGAR, the filing index for accession 0001628280-17-008470. Last ingested by Listed: Nov 11, 2026, 03:05 ET. No prices; not investment advice.