Cumberland Pharmaceuticals Inc: Form 10-Q for the period ended Sep 30, 2018

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 the 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 and 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 patient’s tissues).
• **Vibativ® • (**telavancin) Injection, for the treatment of certain serious bacterial infections including hospital-acquired and ventilator-associated bacterial pneumonia, as well as complicated skin and skin structure infections.

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, maintains product approvals and manages our medical call center. The Company's quality and manufacturing professionals oversee the manufacture, packaging, 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 eight FDA approved brands 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 their potential markets. 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 product candidates that address poorly met medical needs. We will continue to target product acquisition candidates that are competitively differentiated, with attractive financial profiles, 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 RediTrex for 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 which emerged from CET 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. Cumberland has the opportunity to negotiate rights to further develop and commercialize these candidates 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 with the goal of delivering positive cash flow from operations. We remain in a favorable 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 (http://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 (http://www.sec.gov).

RECENT DEVELOPMENTS

New Product Acquisition

On November 6, 2018, the Company announced the acquisition of Vibativ® (telavancin) from Theravance Biopharma. Vibativ is a patented, FDA approved injectable anti-infective for the treatment of certain serious bacterial infections including hospital-acquired and ventilator-associated bacterial pneumonia and complicated skin and skin structure infections. It addresses a range of Gram-positive bacterial pathogens, including those that are considered difficult-to-treat and multidrug-resistant.

Under the terms of the agreement, which closed on November 12, 2018, Cumberland assumed full responsibility for the product including its marketing, distribution, manufacturing, and regulatory activities. Cumberland will support Vibativ in the U.S. through its established hospital sales organization. The Company expects to selectively expand its sales force, medical science liaison and corporate teams to ensure the needed support of Vibativ as well as its oncology and acute care brands.

The financial terms include a $20 million payment to Theravance Biopharma upon closing, a $5 million additional payment in early 2019, and tiered royalties of up to 20% on future U.S. net product sales. Cumberland has a Revolving Credit Loan with Pinnacle Bank that had an initial availability of up to $12 million with the ability to increase the principal amount available for borrowing up to $20 million. On October 17, 2018, Cumberland and Pinnacle Bank increased the maximum principal available for borrowing to $20 million which was used to fund the initial payment for the Vibativ acquisition.

Caldolor

In February 2018, we completed and filed the application for FDA approval of our Next Generation Caldolor product featuring an improved package and formulation. In April 2018, the FDA determined that the application was complete and notified us of their acceptance for review. On August 2, 2018, we received a complete response from the FDA outlining the additional information needed for the application’s approval. The requests were for additional quality and nonclinical data. We held a teleconference with the FDA to discuss their additional requirements. On September 26, 2018, the Company submitted an amendment to our application containing additional quality and nonclinical data. We now await the FDA's response and approval decision and prepare for the manufacture and launch of this new Caldolor product.

RediTrex Approval Submission

During November 2018, we completed the submission and filed with the FDA an application for the approval of our methotrexate product line which is designed for treating patients with arthritis and psoriasis. This filing follows two meetings held with the FDA to discuss the approval pathway and requirements for the submission. We now await FDA’s determination of acceptance of the submission for their review. We remitted a payment of $1.3 million to the FDA for the PDUFA Application Fee associated with the methotrexate product line application.

New Clinical Data Published

In September 2018 the Company and Clinigen, announced a new publication in Lung Cancer: Targets and Therapy of a contemporary retrospective series showing that subcutaneous amifostine administered before radiotherapy postponed the onset of acute esophagitis in stage 3 small cell lung cancer patients treated with concomitant doublet chemotherapy and hyperfractionated radiotherapy. Cumberland markets branded amifostine in the U.S territory under the name Ethyol on behalf of Clinigen who is the market authorization holder and owner of global rights.

Cumberland also recently announced two favorable Caldolor study publications, adding to the growing library of literature supporting the brand. A study at The Ohio State Wexner Medical Center, published in the journal Frontiers in Surgery, reveals more effective pain control and opioid-sparing activity with Caldolor when compared to ketorolac in patients undergoing arthroscopic knee surgery.

Additionaly, a clinical trial conducted at Tufts University School of Dental Medicine and published online in the Journal of Oral and Maxillofacial Surgery, concluded that preemptive analgesia with Caldolor (IV ibuprofen) is more effective than Ofirmev® (IV acetaminophen) in reducing post-surgical pain and opioid use.

Ifetroban Phase II Studies

During the third quarter, we completed study enrollment for Portaban - the Company’s Portal Hypertension clinical program. Thirty patients were enrolled in a randomized, double-blind, placebo-controlled pilot study to assess ifetroban for the treatment of portal hypertension in cirrhotic patients.

This study was primarily designed to evaluate the safety of ifetroban treatment in this population and was not powered for any efficacy measurement. An initial review of the data from the study shows ifetroban was safe and well tolerated with no unexpected safety findings. We also measured hepatic venous pressure. Patients enrolled had a greater degree of variability than expected in their hepatic venous pressure gradient, therefore no definitive conclusions could be made on the impact of ifetroban on modulating that gradient. A full analysis of the data to include biomarkers and exploratory endpoints is ongoing. We will now await results from our other Phase II ifetroban studies before deciding on the best path for approval of our first new chemical entity.

We also continued to advance our Vasculan and Boxaban clinical pipeline programs, with patient enrollment progressing in each of those Phase II studies.

New CET Small Business Grant Award

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 towards the market. CET contributes product design, development, and other support services to help our collaborators bridge the gap between discovery and clinical investigation.

In September 2018, CET announced that the U.S. National Cancer Institute awarded $2 million in support of a joint research program involving Cumberland Pharmaceuticals Inc., CET and researchers at Vanderbilt University. This Phase II grant is awarded under the Small Business Innovation Research funding mechanism and follows successful completion of an initial Phase I award.

The objective of the collaborative research program is to further develop a novel small molecule radiosensitizing agent for the treatment of certain lung cancers. By enhancing the cancer’s sensitivity to radiation therapy, this technology addresses a significant medical need of improving clinical outcomes for these oncology patients.

New Board Member

Effective September 19, 2018, the Company appointed Joseph C. Galante, American music industry executive, as its newest member of its Board of Directors. Mr. Galante is the former Chairman of Sony Music in Nashville and the Former President of RCA Records in New York City. Mr. Galante joins as the Company's seventh "independent director" as defined under applicable SEC and NASDAQ rules and he serves on the Company's Audit and Compensation Committees.

GEL Omeclamox-Pak Agreement

In March 2018, we reached an 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. Under the terms of the agreement, we will no longer be obligated to provide GEL with royalties 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. The closing of this agreement is pending.

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 has been initiated.

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 "Business - Competition" in our 2017 Annual Report on Form 10-K which is incorporated by reference and has been updated as follows:

Totect®

Totect is our patented, branded dexrazoxane injection product indicated for the treatment of the extravasation associated with anthracycline chemotherapy. We have an exclusive license to the product which includes patent number 6,727,253 which is FDA Orange Book listed and has a term until March 13, 2020. Pfizer Inc.’s Zinecard® brand is a dexrazoxane product with FDA approval for a different indication - the cardiac complications associated with certain chemotherapeutic agents. Mylan, Gland Pharma Ltd and West-Ward Pharmaceuticals Corp appear to have previously received FDA approval for a generic dexrazoxane with the Zinecard cardiac protection indication. When we launched Totect, the FDA reported a national dexrazoxane shortage with both the Pfizer and Mylan products unavailable.

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.

RESULTS OF OPERATIONS

Three months ended September 30, 2018 compared to the three months ended September 30, 2017

The following table presents the unaudited interim statements of operations for the three months ended September 30, 2018 and 2017:

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

Net revenues. Net revenues for the three months ended September 30, 2018 were $8.5 million compared to $11.2 million for the three months ended September 30, 2017, representing a decrease of $2.7 million, or 24%. The decrease is due primarily to a decrease in Totect product sales volume compared to the prior year period. We began shipments of Totect during 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. As detailed in the table above, four of our seven marketed products experienced increases in net revenue during the quarter: Omeclamox-Pak, Kristalose, Caldolor, and Ethyol.

Vaprisol revenue experienced a decrease of $0.5 million during the third quarter of 2018 when compared to the prior year period due to lower sales volumes and higher returns of expired product. Sales of the product surged during the second quarter of 2018 due to shipments of newly arrived inventory following a period of time when there were limited supplies of the product. The negative net sales during the third quarter of 2018 resulted from higher than usual expired product returns in the period.

Ethyol revenue remained consistent at $2.6 million for the three months ended September 30, 2018 and September 30, 2017.

Kristalose revenue increased by $0.3 million or 9.7% during the third quarter of 2018 when compared to the prior year period. The product's net revenue was positively impacted by increased sales volumes and lower managed care and Medicaid rebates, resulting in improved net pricing for the product.

Omeclamox-Pak revenue increased $0.1 million primarily due to higher sales volumes as well as lower managed care and Medicaid rebates during the period.

Acetadote revenue includes net sales of our Acetadote brand and our share of net sales from our Authorized Generic. During the quarter, there was a $0.2 million decrease in revenue from our Acetadote brand when compared to the prior year period as a result of increased competition.

Caldolor revenue increased $0.4 million for the three months ended September 30, 2018 primarily due to increased domestic and international sales revenue in the third quarter of 2018 compared to the third quarter of 2017. Domestic revenue of the brand grew due to improvement in deductions associated with shipment of the product.

Cost of products sold. Cost of products sold for the third quarter of 2018 decreased $0.7 million compared to the prior year period as a result of lower sales. Cost of products sold, as a percentage of net revenues, improved to 17.2% during the three months ended September 30, 2018 compared to 19.3% during the three months ended September 30, 2017. This improvement in costs of products sold as a percentage of revenue was attributable to a change in the product sales mix, including the decrease in Totect sales, during the quarter compared to the prior year period.

Selling and marketing. Selling and marketing expense for the third quarter of 2018 decreased $1.4 million compared to the prior year period. This decrease is attributable to less royalties related to product sales during the third quarter of 2018.

Research and development. Research and development costs for the third quarter of 2018 were $1.3 million, compared to $0.9 million for the same period last year. A portion of our research and development costs is variable based on the number of trials, study sites and patients involved in the development of our new product candidates. The $0.4 million increase was the result of additional investments in our ongoing clinical and manufacturing initiatives associated with our pipeline products as well as increases in our FDA fees.

General and administrative. General and administrative expense for both the third quarter of 2018 and third quarter of 2017 remained consistent at $2.1 million.

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, 2018 and the three months ended September 30, 2017 totaled approximately $0.7 million and $0.6 million, respectively.

Income taxes. Income tax expense for the three months ended September 30, 2018 was $4,159. As a percentage of income (loss) before income taxes, income tax expense was 0.3% for the three months ended September 30, 2018 compared to 0.5% for the three months ended September 30, 2017.

As of September 30, 2018, we have approximately $44 million of net operating loss carryforwards resulting from the exercise of nonqualified stock options in 2009 that have historically been used to significantly offset future income tax obligations. Since they were generated during 2009, we have utilized these net operating loss carryforwards to pay minimal income taxes. We will continue to pay minimal income taxes during 2018 and beyond, through the continued utilization of these net operating loss carryforwards, as we are able to achieve taxable income through our operations.

Nine months ended September 30, 2018 compared to the nine months ended September 30, 2017

The following table presents the unaudited interim statements of operations for the nine months ended September 30, 2018 and 2017:

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

Net revenues. Net revenues for the nine months ended September 30, 2018 were $27.2 million compared to $29.5 million for the nine months ended September 30, 2017, representing a decrease of $2.3 million, or 8%. The decrease is due primarily to a decrease in Totect product sales volume compared to the prior year period. We began shipments of Totect during 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. As detailed in the table above, three of our seven marketed products experienced increases in net revenue during the period: Kristalose, Vaprisol and Caldolor.

Kristalose revenue increased by 18.1% or $1.5 million during the nine months ended September 30, 2018. The product's net revenue was positively impacted by increased sales volumes and lower managed care and Medicaid rebates, resulting in improved net pricing for the product.

Vaprisol revenue increased 27.1% or $0.4 million during the nine months ended September 30, 2018 compared to the prior year period primarily due to increased sales volume. Sales of the product surged during the second quarter of 2018 due to shipments of newly arrived inventory following a period of time when there were limited supplies of the product. During April 2018, the Vaprisol supply issue was resolved as we received new shipments from our manufacturer.

Caldolor revenue experienced an increase of $0.7 million during the nine months ended September 30, 2018 compared to the same period last year. This 25% increase in revenue in the nine months ended September 30, 2018 compared to the prior year period resulted from increased international shipments, an increase in international sales volumes and an increase in the products price. The year over year net revenue increase was partially offset by lower expired product sales returns which positively impacted the nine months ended September 30, 2017.

Acetadote revenue included net sales of our branded product and our share of net sales from our Authorized Generic. During the nine months ended September 30, 2018 the Acetadote net revenue decreased $1.1 million as a result of increased competition.

Ethyol revenue for the nine months ended September 30, 2018 was $7.7 million, which is a decrease of $0.7 million from the nine months ended September 30, 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 nine months ended September 30, 2018 are consistent with the shipments experienced during the second half of 2017.

Omeclamox-Pak revenue decreased $0.7 million during the nine months ended September 30, 2018 compared to the prior year. The decrease was primarily due to lower sales volumes as well as increases in expired product sales returns during the period.

Cost of products sold. Cost of products sold for the nine months ended September 30, 2018 and nine months ended September 30, 2017 were $4.5 million and $5.2 million, respectively. Cost of products sold, as a percentage of net revenues were 16.6% compared to 17.7% during the prior year. The decrease in costs of products sold as a percentage of revenue was attributable to a change in the product sales mix during the period compared to the prior year.

Selling and marketing. Selling and marketing expenses for the nine months ended September 30, 2018 were $14.5 million, compared to $16.2 million for the prior year period, representing a decrease of approximately $1.6 million. This decrease was primarily attributable to less royalties related to product sales as well as lower promotional spending during the nine months ended September 30, 2018. Promotional spending was higher during 2017, primarily related to development of marketing materials.

Research and development. Research and development costs for the nine months ended September 30, 2018 were $4.6 million, compared to $2.9 million for the same period last year, representing an increase of approximately $1.7 million. A portion of our research and development costs is 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 $6.7 million for the nine months ended September 30, 2018, compared to $6.6 million during the same period last year. The $0.2 million increase from the prior year was primarily driven by 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 nine months ended September 30, 2018 totaled approximately $1.9 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 and capitalized patents.

Income taxes. Income tax expense for the nine months ended September 30, 2018 totaled $12,477 compared to $4,196,192 in the nine months ended September 30, 2017. As a percentage of income (loss) before income taxes, income taxes were 0.3% for the nine months ended September 30, 2018 compared to 138.4% for the nine months ended September 30, 2017. The effective tax rate for the nine months ended September 30, 2017 was primarily impacted by a valuation allowance of $1.0 million for our federal Orphan Drug and Research and Development tax credits as well as recording a full 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 nine months ended September 30, 2017.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital

Our primary sources of liquidity are cash flows provided by our operations, the amounts borrowed and available 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, existing working capital and our line of credit, including its recent expansion to $20 million, will be adequate to finance internal growth, finance business development initiatives, 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 September 30, 2018 and December 31, 2017, we had approximately $9.5 million and $4.7 million, respectively, invested in marketable securities.

The following table summarizes our liquidity and working capital as of September 30, 2018 and December 31, 2017:

As discussed below, our Revolving Credit Loan was expanded on October 17, 2018 from $12 million to $20 million. The $12 million outstanding under the Revolving Credit Loan was repaid during October 2018 and the Revolving Credit Loan was then used to fund the $20 million payment for the VIBATIV acquisition.

The following table summarizes our net changes in cash and cash equivalents for the nine months ended September 30, 2018 and September 30, 2017:

The net $7.2 million decrease in cash and cash equivalents for the nine months ended September 30, 2018 was attributable to cash used in investing, financing and operating activities. Cash used in operating activities of $0.6 million was primarily impacted by the net loss for the period of $4.8 million. This use of cash was offset by changes in our working capital which provided net cash of $1.2 million, including net collections of accounts receivable of $1.3 million. The use of operating cash was further offset by the add back of non-cash expenses of depreciation and amortization and share-based compensation expense totaling $3.1 million. Cash used in investing activities included net cash invested in marketable securities of $4.7 million and additions to intangibles of $1.4 million. Our financing activities included $2.2 million in net cash provided by borrowings under our line of credit offset by $2.4 million in cash used to repurchase shares of our common stock.

The net $7.5 million increase in cash and cash equivalents for the nine months ended September 30, 2017 was attributable to cash provided by investing and financing activities offset by cash used in operating activities. Cash used by operating activities of $0.1 million was primarily impacted by a net loss for the period of $7.2 million. These uses of operating cash were offset by non-cash expenses of depreciation and amortization and share-based compensation expense totaling $2.8 million. Changes in our working capital used cash of $0.1 million, including an increase in accounts payable of $0.6 million offset by a decrease in accounts receivable of $0.1 million. Cash provided by investing activities included net proceeds from marketable securities of

$7.6 million offset by additions to intangibles of $0.8 million. Our financing activities included $3.9 million in cash provided by borrowings under our line of credit and offset by $2.9 million in cash used to repurchase shares of our common stock.

Debt Agreement

On October 17, 2018, we entered into a second amendment ("Second Amendment") to amend the Revolving Credit Loan Agreement, dated July 28, 2017, with Pinnacle Bank (the "Pinnacle Agreement"). The Second Amendment increases the maximum aggregate principal available for borrowing under the Pinnacle Agreement to $20 million. We had $12 million in borrowings under that agreement at September 30, 2018. For a summary of the material terms of the Pinnacle Agreement, as amended, see Note 6 to the accompanying unaudited condensed consolidated financial statements

Under the Pinnacle Agreement, we were initially 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. On August 14, 2018 we amended the Pinnacle Agreement ("First Amendment") to replace the single financial covenant with the maintenance of either the Funded Debt Ratio or a Tangible Capital Ratio, as defined in the First Amendment. We were in compliance with the Tangible Capital Ratio covenant as of September 30, 2018 and expect to maintain compliance with this covenant in future periods.

OFF-BALANCE SHEET ARRANGEMENTS

During the nine months ended September 30, 2018 and 2017, we did not engage in any off-balance sheet arrangements.

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 our 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 $9.5 million in marketable securities outstanding at September 30, 2018, a 1% decrease in the fair value of the securities would result in a reduction in pretax net income (loss) of $0.1 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 2% to 3% (representing an interest rate of 4% at September 30, 2018). As of September 30, 2018, we had $12 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 nine months ended September 30, 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.

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 defined in Rules 13a-15(e) and 15-15(e) of the Exchange Act, as of September 30, 2018. Based on that evaluation, our CEO and CFO concluded that, as of September 30, 2018, our disclosure controls and procedures are considered effective to ensure that the information required to be disclosed by the Company in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to the Company's management, including the Company's CEO and CFO, as appropriate, to allow for timely decisions regarding required disclosure.

During the three months ended September 30, 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.

There have been no material changes to the information regarding risk factors that appears in the 2017 Annual Report on Form 10-K under the section titled "Risk Factors."