# Cumberland Pharmaceuticals Inc: Form 10-Q for the period ended Mar 31, 2018

- Company: [Cumberland Pharmaceuticals Inc](/companies/cpix.md) (CIK 1087294)
- Form: 10-Q
- Filed: 2018-05-09
- Accepted by EDGAR: May 9, 2018, 17:13 ET
- Period: 2018-03-31
- Accession: 0001628280-18-006417
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1087294/000162828018006417/cpix-20180331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1087294/000162828018006417/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Research and development | 3 months, 2018-01-01 to 2018-03-31 | $1.9m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2018-01-01 to 2018-03-31 | −$2.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-01-01 to 2018-03-31 | $18.3k | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-01-01 to 2018-03-31 | −$4.2k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-01-01 to 2018-03-31 | −$2.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-01-01 to 2018-03-31 | −$0.15 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-01-01 to 2018-03-31 | −$0.15 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-01-01 to 2018-03-31 | 15,689,240 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2018-01-01 to 2018-03-31 | $235.6k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2018-01-01 to 2018-03-31 | $94.9k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2018-01-01 to 2018-03-31 | $1.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-03-31 | $35.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-03-31 | $66.8m | us-gaap:AssetsCurrent |
| Total assets | at 2018-03-31 | $91.1m | us-gaap:Assets |
| Current liabilities | at 2018-03-31 | $16.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-03-31 | $30.2m | us-gaap:Liabilities |
| Shareholders' equity | at 2018-03-31 | $61.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 33,060 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 the sections entitled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” of our Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 Annual Report on Form 10-K”). We do not undertake to publicly update or revise any of our forward-looking statements, even in the event that experience or future changes indicate that the anticipated results will not be realized. The following presentation of management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this report on Form 10-Q.

### OVERVIEW

### Our Business

Cumberland Pharmaceuticals Inc. (“Cumberland,” the “Company,” or as used in the context of “we,” “us,” or “our”), is a specialty pharmaceutical company focused on the acquisition, development and commercialization of branded prescription products. Our primary target markets are hospital acute care, gastroenterology, and oncology supportive care. These medical specialties are characterized by relatively concentrated prescriber bases that we believe can be penetrated effectively by small, targeted sales forces. Cumberland is dedicated to providing innovative products that improve quality of care for patients and address unmet or poorly met medical needs. We promote our approved products through our hospital and gastroenterology sales forces in the United States and are establishing a network of international partners to bring our products to patients in their countries.

Our portfolio of FDA approved brands includes:

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

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

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

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

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

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

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

Our pipeline of product candidates includes:

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

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

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

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

**RediTrexTM (***methotrexate*) Injection, an approval submission candidate for the treatment of active rheumatoid, juvenile idiopathic and severe psoriatic arthritis, as well as severe disabling psoriasis.

We have both product development and commercial capabilities, and believe we can leverage our existing infrastructure to support our expected growth. Cumberland's management team consists of pharmaceutical industry veterans experienced in business development, product development, regulatory, manufacturing, sales, marketing and finance. Our business development team identifies, evaluates and negotiates product acquisition, licensing and co-promotion opportunities. Cumberland's product development team creates proprietary product formulations, manages our clinical studies, prepares all regulatory submissions and manages our medical call center. The Company's quality and manufacturing professionals oversee the manufacture, release, and shipment of our products. Our marketing and sales professionals are responsible for our commercial activities, and we work closely with our distribution partners to ensure availability and delivery of our products.

### Growth Strategy

Our growth strategy involves maximizing the potential of our existing brands while continuing to build a portfolio of differentiated products. We currently market seven FDA approved products for sale in the United States. Through our international partners, we are working to bring our products to patients in their countries. We also look for opportunities to expand our products into additional patient populations through clinical trials, new indications, and select investigator-initiated studies. We actively pursue opportunities to acquire additional marketed products as well as late-stage development product candidates in our target medical specialties. Our clinical team is developing a pipeline of new product candidates to address unmet medical needs. Further, we are supplementing these activities with the pipeline drug development activities at Cumberland Emerging Technologies ("CET"), our majority-owned subsidiary. Specifically, we are seeking long term sustainable growth by executing the following plans:

**Support and expand the use of our marketed products.** We continue to evaluate our products following their FDA approval to determine if further clinical work could expand the potential market opportunities. We will continue to explore opportunities for label expansion to bring our products to new patient populations. The Caldolor pediatric approval reflects our successful implementation of this strategy.

**Selectively add complementary brands.** In addition to our product development activities, we are also seeking to acquire products or late-stage development product candidates to continue to build a portfolio of complementary brands. We focus on under-promoted, FDA approved drugs as well as late-stage development products that address poorly met medical needs. We will continue to target product acquisition candidates that are competitively differentiated, have valuable intellectual property or other protective features, and allow us to leverage our existing infrastructure. Our acquisitions of the product rights to Ethyol and Totect in the U.S. represent recent examples of our execution of this strategy.

**Progress clinical pipeline and incubate future product opportunities at CET.** We believe it is important to build a pipeline of innovative new product opportunities. Our ifetroban Phase II development programs represent the implementation of this strategy. At CET, we are supplementing our acquisition and late-stage development activities with the early-stage drug development activities. CET partners with universities and other research organizations to develop promising, early-stage product candidates, and Cumberland has the opportunity to negotiate rights to further develop and commercialize them in the U.S and other markets.

**Leverage our infrastructure through co-promotion partnerships.** We believe that our commercial infrastructure can help drive prescription volume and product sales. We look for strategic partners that can accentuate our operational effectiveness and maximize the opportunity for our brands. Our recent co-promotion partnership with Poly Pharmaceuticals, Inc. allows us to expand current promotional support for Kristalose across the United States.

**Continue to build the international contribution to our business.** We have established our own commercial capabilities, including two sales divisions to cover the U.S. market for our products. We are also building a network of select international partners to register our products and make them available to patients in their countries. We will continue to expand our network of international partners and continue to support our partners’ registration and commercialization efforts in their respective territories.

**Continue to manage our operations with financial discipline.** We continually work to manage our expenses in line with our revenues in order to deliver positive cash flow from operations. We remain in a strong financial position, with high margins, and a strong balance sheet.

Cumberland was incorporated in 1999 and has been headquartered in Nashville, Tennessee since inception. During 2009, we completed an initial public offering of our common stock and listing on the NASDAQ exchange. Our website address is www.cumberlandpharma.com. We make available through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all other material press releases, filings and amendments to those reports as soon as reasonably practicable after their filing with the SEC. These filings are also available to the public at *www.sec.gov.*

### RECENT DEVELOPMENTS

### Shelf Registration

In November 2017, the Company filed a Shelf Registration on Form S-3 with the SEC associated with the sale of up to $100 million in corporate securities. The Shelf Registration was declared effective in January 2018. It also included an At-The-Market ("ATM") feature enabling the Company to sell common shares at market prices, along with an agreement with B. Riley FBR to support such a placement of shares.

### GEL Agreement

In March 2018, we reached agreement with Gastro-Entero-Logic LLC ("GEL"), to acquire the assets associated with Omeclamox-Pak including the product’s FDA approved New Drug Application, trademarks and other assets. As a result of this acquisition we will no longer be obligated to provide GEL with royalty or fees for overseeing the product’s manufacturing. As part of this transaction, we will become responsible for maintaining the FDA approval and for overseeing the product’s packaging.

### New CET Collaboration Agreements

At CET, we are working with a select group of academic research institutions located in the mid-south region of the U.S. These relationships enable CET to identify therapeutic compounds addressing poorly met medical needs and partner with university-based researchers to advance their scientific discoveries through pre-clinical development. CET contributes product design and development support services to help our collaborators bridge the gap between discovery and clinical investigation.

In February 2018, CET and Louisiana State University entered into an agreement, adding to CET’s roster of academic collaborations which also includes Vanderbilt University, the University of Mississippi, and the University of Tennessee Research Foundation. These partnerships combine the strengths and capabilities of each organization by working together to identify, formulate, and develop attractive new biomedical products.

### Ethyol Study Publication

In January 2018, the Company announced a new publication in Leukemia & Lymphoma, with study results showing that amifostine decreases gastro-intestinal (GI) toxicity in patients who receive treatment for their multiple myeloma. Cumberland markets branded amifostine in the U.S. under the name Ethyol.

### Omeclamox-Pak Study Publication

In March 2018, the Company announced a publication of an open access article in Infection and Drug Resistance, with results demonstrating an 85% eradication rate of Helicobacter pylori (H. pylori) infection using clarithromycin-based triple therapy. Cumberland markets a branded clarithromycin-based triple therapy in the U.S. under the name Omeclamox-Pak.

### Caldolor

During the first quarter, the Company completed and filed the application for FDA approval of its Next Generation Caldolor product featuring an improved package and formulation. Cumberland continued to advance its study of Caldolor in patients ranging from newborn to six months of age. The Company also learned that Caldolor was approved for sale in India during the first quarter. Cumberland is preparing for the launch of the brand with its partner for that market.

### RediTrex Approval Submission

We also held a meeting with the FDA during 2017 to discuss the approval pathway for our injectable methotrexate products in the United States. As a result, we are now gathering the relevant information and preparing the submission for that approval during 2018.

### Ifetroban Phase II Studies

In early 2017, the FDA cleared Cumberland’s investigational new drug (“IND”) application for Boxaban - the Company’s AERD clinical program. Following this clearance, we initiated a follow-on multicenter Phase II efficacy study to evaluate the efficacy of Boxaban in seventy-six patients with symptomatic AERD. Enrollment in this multi-center, placebo controlled study is now underway at a growing number of allergy and asthma centers across the United States. We also continued to advance our Vasculan and Portaban clinical pipeline programs, with patient enrollment progressing in each of those Phase II studies.

### New Hospital Product Candidate

Cumberland was responsible for the formulation, development and FDA approval of both Acetadote and Caldolor. Our Medical Advisory Board has helped us identify additional opportunities that address unmet or poorly met medical needs. As a result, Cumberland has successfully designed, formulated and completed the preclinical studies for a cholesterol reducing agent for use in the hospital setting. During 2017, we completed a Phase I study which defined the pharmacokinetic properties and provided a favorable safety profile for this new product candidate. The study results and a proposed clinical development plan were discussed with the FDA and, as a result, a Phase II study is being designed.

### COMPETITION

The pharmaceutical industry is characterized by intense competition and rapid innovation. Our continued success in developing and commercializing pharmaceutical products will depend, in part, upon our ability to compete against existing and future products in our target markets. For more information see Part 1, Item 1, Business-Competitors in our Annual Report on Form 10-K for the year ended December 31, 2017 which is incorporated by reference and has been updated as follows:

### Ethyol®

Ethyol is our patented, branded amifostine product indicated to reduce xerostomia (dry mouth) as a side-effect in patients undergoing post-operative radiation treatment for head and neck cancer. It also reduces the cumulative renal toxicity associated with the repeated administration of cisplatin in patients with advanced ovarian cancer. We launched the product in late 2016, and the authorized generic form of the product was withdrawn by Clinigen who markets branded Ethyol internationally. We have an exclusive license to promote, sell and distribute Ethyol in the United States, under various patents. There are several Ethyol patents associated with the subcutaneous administration of the product that are not yet Orange Book listed. In July 2017, Mylan Laboratories Ltd. (“Mylan”) received approval for an Abbreviated New Drug Application for a generic amifostine product. Sun Pharmaceuticals Industries Limited (“Sun”) had also previously received approval for a generic amifostine product. Both the Mylan and Sun approvals appear to be only for the ovarian cancer indication but not the xerostomia indication. Therefore, we believe that Ethyol is currently the only amifostine product with FDA approval for both the xerostomia and ovarian cancer indications.

### Totect®

Totect is our patented, branded dexrazoxane injection product indicated for the treatment of the extravasation associated with anthracycline chemotherapy. We have an exclusive license to promote, sell and distribute Totect in the United States, under U.S. Patent number 6,727,253 which has claims directed to methods of preventing or treating local tissue damage in patients receiving topoisomerase II poison. This Totect patent is listed in the FDA Orange Book and is scheduled to expire in March

2020\. Pfizer Inc.’s Zinecard® brand is a dexrazoxane product with FDA approval for a different indication - the cardiac complications associated with certain chemotherapeutic agents. Mylan, Gland Pharma Ltd and West-Ward Pharmaceuticals Corp have previously received FDA approval for a generic dexrazoxane with the Zinecard cardiac protection indication. When we launched Totect, the FDA reported a national dexrazoxane shortage with both the Pfizer and Mylan products unavailable.

Following our launch, supplies of dexrazoxane became available from Mylan, Pfizer, and two approved generic suppliers, all with labeling for the cardiac indication. Totect is the only dexrazoxane available in the U.S. FDA approved for the extravasation indication.

### CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

Please see a discussion of our critical accounting policies and significant judgments and estimates in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2017 Annual Report on Form 10-K.

### 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.

### Three months ended March 31, 2018 compared to the three months ended March 31, 2017

The following table presents the unaudited interim statements of operations for the three months ended March 31, 2018 and 2017:

|  | Three months ended March 31, 2018 | 2017 | Change |
| --- | ---: | ---: | ---: |
| Net revenues | $8,587,605 | $9,636,755 | $(1,049,150) |
| Costs and expenses: |  |  |  |
| Cost of products sold | 1,527,961 | 1,381,497 | 146,464 |
| Selling and marketing | 4,670,511 | 5,293,020 | (622,509) |
| Research and development | 1,874,939 | 898,363 | 976,576 |
| General and administrative | 2,330,281 | 2,110,233 | 220,048 |
| Amortization | 636,135 | 611,444 | 24,691 |
| Total costs and expenses | 11,039,827 | 10,294,557 | 745,270 |
| Operating income (loss) | (2,452,222) | (657,802) | (1,794,420) |
| Interest income | 82,494 | 52,535 | 29,959 |
| Interest expense | (18,302) | (31,715) | 13,413 |
| Income (loss) before income taxes | (2,388,030) | (636,982) | (1,751,048) |
| Income tax (expense) benefit | (4,159) | (656,587) | 652,428 |
| Net income (loss) | $(2,392,189) | $(1,293,569) | $(1,098,620) |

16

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

| Products: | Three months ended March 31, 2018 | 2017 | Change |
| --- | ---: | ---: | ---: |
| Acetadote | $1,273,764 | $1,265,440 | $8,324 |
| Omeclamox-Pak | 141,392 | 645,325 | (503,933) |
| Kristalose | 3,269,901 | 2,386,591 | 883,310 |
| Vaprisol | 93,890 | 684,548 | (590,658) |
| Caldolor | 1,039,747 | 813,027 | 226,720 |
| Ethyol | 2,256,073 | 3,666,808 | (1,410,735) |
| Totect | 412,774 | — | 412,774 |
| Other | 100,064 | 175,016 | (74,952) |
| Total net revenues | $8,587,605 | $9,636,755 | $(1,049,150) |

*Net revenues.* Net revenues for the three months ended March 31, 2018 were $8.6 million compared to $9.6 million for the three months ended March 31, 2017, representing a decrease of $1.0 million, or 10.9%. As detailed in the table above, four of our seven marketed products experienced increases in net revenue: Acetadote, Kristalose, Caldolor and Totect. These increases partially offset the revenue decreases that were attributed primarily to Ethyol and Vaprisol.

Kristalose revenue increased by $0.9 million primarily as a result of increased sales volume during the three months ended March 31, 2018. The product's 37.0% increase in net revenue was also partially attributable to a modest improvement in net pricing during the period.

The Company began shipments of Totect in July of 2017, resulting in $0.4 million in sales during the three months ended March 31, 2018. The 2017 launch of Totect was positively impacted by a national shortage of dexrazoxane, resulting in strong initial demand for the product. Following our launch, supplies of dexrazoxane became available from competing suppliers, all with labeling for the cardiac indication. Totect is the only dexrazoxane available in the U.S. FDA approved for the extravasation indication.

Caldolor revenue experienced an increase of $0.2 million during the three months ended March 31, 2018 compared to the same period last year. This 27.9% increase in revenue in the three months ended March 31, 2018 primarily resulted from an increase in domestic and international shipments and also impacted by a modest increase in pricing.

Acetadote revenue included net sales of our branded product and our share of net sales from our Authorized Generic. During the three months ended March 31, 2018 the Acetadote net revenue grew 1% as a result of increased sales volumes.

Ethyol revenue for the three months ended March 31, 2018 was $2.3 million, which is a decrease of $1.4 million from the three months ended March 31, 2017. The decrease was primarily the result of lower sales volume when compared to the prior year period, when wholesalers began to increase their inventory to meet hospital demand. The Ethyol shipments for the three months ended March 31, 2018 are consistent with the quarterly shipments experienced during the second half of 2017.

Vaprisol revenue decreased $0.6 million during the three months ended March 31, 2018 compared to the prior year period primarily due to decreased sales volume. We experienced decreased sales volume during the three months ended March 31, 2018 as the manufacturer was temporarily unable to provide requested supplies of Vaprisol which led to limited inventory and sales of the product. During April 2018, the Vaprisol inventory supply issue was resolved as we received new shipments from our manufacturer.

Omeclamox-Pak revenue decreased $0.5 million during the three months ended March 31, 2018 compared to the prior year. The decrease was primarily the result of lower sales volume and higher expired product sales returns.

*Cost of products sold.* Cost of products sold for the three months ended March 31, 2018 were $1.5 million, compared to $1.4 million for the same period last year, representing an increase of approximately $0.1 million, or 10.6%. Cost of products sold, as a percentage of net revenues were 17.8% compared to 14.3% during the prior year. The 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 expenses for the three months ended March 31, 2018 were $4.7 million, compared to $5.3 million for the prior year period, representing a decrease of approximately $0.6 million. This decrease was primarily the result of decreased royalties related to decreased product sales as well as lower promotional spending for the three months ended March 31, 2018.

*Research and development.* Research and development costs for the three months ended March 31, 2018 were $1.9 million, compared to $0.9 million for the same period last year, representing an increase of approximately $1.0 million. A portion of our research and development costs are variable based on the number of trials, study sites and patients involved in the development of our product candidates. The increase was primarily the result of additional investment in our ongoing clinical initiatives associated with our pipeline products as well as increases in our FDA fees.

*General and administrative.* General and administrative expenses were $2.3 million for the three months ended March 31, 2018, compared to $2.1 million during the same period last year. The $0.2 million increase from the prior year was primarily driven by increases an increase in compensation and benefits, including 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 three months ended March 31, 2018 totaled approximately $0.6 million, which was an increase of $0.02 million over the prior year. The increase in amortization was attributable to additional product and license rights and capitalized patents.

*Income taxes.* Income tax expense for the three months ended March 31, 2018 totaled $4,159 compared to $656,587 in the three months ended March 31, 2017. As a percentage of income (loss) before income taxes, income taxes were 0.2% for the three months ended March 31, 2018 compared to 103.1% for the three months ended March 31, 2017. The effective tax rate for the three months ended March 31, 2017 was primarily impacted by a valuation allowance of $1.0 million for our federal Orphan Drug and Research and Development tax credits. The additional valuation allowance was the result of our adoption of the FASB guidance on stock based compensation and our continued evaluation of our utilization of net operating loss carryforwards, including updates to our forecasts of future taxable income. These non-cash valuation allowance adjustments impacted our effective tax rate during the three months ended March 31, 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 our line of credit will be adequate to finance internal growth and fund capital expenditures for the foreseeable future.

We invest a portion of our cash reserves in marketable securities including short-term cash investments, U.S. Treasury notes and bonds, U.S. government agency notes and bonds, corporate bonds, and other marketable securities. At March 31, 2018 and December 31, 2017, we had approximately $15.6 million and $4.7 million, respectively, invested in marketable securities.

The following table summarizes our liquidity and working capital as of March 31, 2018 and December 31, 2017:

|  | March 31, 2018 | December 31, 2017 |
| --- | ---: | ---: |
| Cash and cash equivalents | $35,262,976 | $45,412,868 |
| Marketable securities | 15,610,105 | 4,672,476 |
| Total cash, cash equivalents and marketable securities | $50,873,081 | $50,085,344 |
| Working capital (current assets less current liabilities) | $50,533,316 | $50,990,102 |
| Current ratio (multiple of current assets to current liabilities) | 4.1 | 3.9 |
| Revolving line of credit availability | $— | $2,200,000 |

18

The following table summarizes our net changes in cash and cash equivalents for the three months ended March 31, 2018 and March 31, 2017:

| Net cash provided by (used in): | Three months ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Operating activities | $235,589 | $1,439,371 |
| Investing activities | (11,522,126) | (429,535) |
| Financing activities | 1,136,645 | (545,924) |
| Net increase (decrease) in cash and cash equivalents | $(10,149,892) | $463,912 |

The net $10.1 million decrease in cash and cash equivalents for the three months ended March 31, 2018 was attributable to cash used in investing activities partially offset by cash provided by financing and operating activities. Cash provided by operating activities of $0.2 million was primarily impacted by changes in our working capital which provided net cash of $1.6 million, including net collections of accounts receivable of $2.1 million and non-cash expenses of depreciation and amortization and share-based compensation expense totaling $1.0 million. The generation of operating cash was offset by a net loss for the period of $2.4 million. Cash used in investing activities included net cash investment in marketable securities of $10.9 million and additions to intangibles of $0.5 million. Our financing activities included $2.2 million in net cash provided by borrowings under our line of credit offset by $1.0 million in cash used to repurchase shares of our common stock.

The net $0.5 million increase in cash and cash equivalents for the three months ended March 31, 2017 was attributable to cash provided by operating activities offset by cash used in investing and financing activities. Cash provided by operating activities of $1.4 million was primarily impacted by changes in our working capital of $1.1 million, including a decrease in accounts receivable of $2.4 million and non-cash expenses of depreciation and amortization and share-based compensation expense totaling $0.9 million. These were offset by net reductions in accounts payable and accrued liabilities of $1.2 million. Cash provided by operating activities also includes the net loss for the period of $1.3 million. Cash used by investing activities included a net cash investment in our intangible assets of $0.5 million. Our financing activities included $0.5 million in cash used to repurchase shares of our common stock.

### Debt Agreement

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

The interest rate on the Pinnacle Agreement is based on LIBOR plus an interest rate spread. There is no LIBOR minimum and the LIBOR pricing provides for an interest rate spread of 1.75% to 2.75% (representing an interest rate of 3.3% at March 31, 2018). In addition, a fee of 0.25% per year is charged on the unused line of credit. Interest and the unused line fee are payable quarterly. Borrowings under the line of credit are collateralized by substantially all of our assets.

Under the Pinnacle Agreement, we are subject to one financial covenant, the maintenance of a Funded Debt Ratio, as such term is defined in the agreement and determined on a quarterly basis. We achieved compliance with the Funded Debt Ratio covenant as of March 31, 2018 through the utilization of the covenant cure section of the agreement. We expect to maintain compliance with this covenant in future periods, including the use of the covenant cure section of the agreement.

### OFF-BALANCE SHEET ARRANGEMENTS

During the three months ended March 31, 2018 and 2017, we did not engage in any off-balance sheet arrangements.

## Market risk

As filed, 2,322 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.

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. Based on the $15.6 million in marketable securities outstanding at March 31, 2018, a 1% decrease in the fair value of the securities would result in a reduction in pretax net income (loss) of $0.2 million.

Based on current interest rates, we do not believe we are exposed to significant downside risk related to change in interest on our investment accounts.

The interest rate risk related to borrowings under our line of credit is based on LIBOR plus an interest rate spread. There is no LIBOR minimum and the LIBOR pricing provides for an interest rate spread of 1.75% to 2.75% (representing an interest rate of 3.3% at March 31, 2018). As of March 31, 2018, we had $12.0 million in borrowings outstanding under our revolving credit facility.

### Exchange Rate Risk

While we operate primarily in the United States, we are exposed to foreign currency risk. 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 three months ended March 31, 2018 and 2017. Neither a five percent increase nor decrease from current exchange rates would have a material effect on our operating results or financial condition.

## Controls and procedures

As filed, 1,070 characters.

We maintain disclosure controls and procedures that are designed with the objective of providing reasonable assurance that information required to be disclosed in our reports filed or submitted to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2018. Based on that evaluation, our CEO and CFO concluded that, 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 in order to allow for timely decisions regarding required disclosure.

During the three months ended March 31, 2018, there has not been any change in our internal control over financial reporting that has materially affected, or is likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 122 characters.

Information regarding risk factors appears in the 2017 Annual Report on Form 10-K under the section titled "Risk Factors."

Filed May 9, 2018.
Source: SEC EDGAR, the filing index for accession 0001628280-18-006417. Last ingested by Listed: Nov 11, 2026, 03:05 ET. No prices; not investment advice.