# Cumberland Pharmaceuticals Inc: Form 10-Q for the period ended Sep 30, 2019

- Company: [Cumberland Pharmaceuticals Inc](/companies/cpix.md) (CIK 1087294)
- Form: 10-Q
- Filed: 2019-11-13
- Accepted by EDGAR: Nov 13, 2019, 17:19 ET
- Period: 2019-09-30
- Accession: 0001628280-19-014133
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1087294/000162828019014133/cpix-20190930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1087294/000162828019014133/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-07-01 to 2019-09-30 | $10.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2019-01-01 to 2019-09-30 | $33.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-07-01 to 2019-09-30 | $1.9m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2019-01-01 to 2019-09-30 | $5.9m | us-gaap:CostOfGoodsAndServicesSold |
| Research and development | 3 months, 2019-07-01 to 2019-09-30 | $1.3m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2019-01-01 to 2019-09-30 | $4.0m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2019-07-01 to 2019-09-30 | −$1.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2019-01-01 to 2019-09-30 | −$2.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-07-01 to 2019-09-30 | $64.9k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2019-01-01 to 2019-09-30 | $217.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-07-01 to 2019-09-30 | $4.5k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2019-01-01 to 2019-09-30 | −$72.5k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-07-01 to 2019-09-30 | −$2.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2019-01-01 to 2019-09-30 | −$2.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-07-01 to 2019-09-30 | −$0.13 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2019-01-01 to 2019-09-30 | −$0.17 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-07-01 to 2019-09-30 | −$0.13 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2019-01-01 to 2019-09-30 | −$0.17 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-07-01 to 2019-09-30 | 15,368,027 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2019-01-01 to 2019-09-30 | 15,454,159 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2019-01-01 to 2019-09-30 | $2.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2019-01-01 to 2019-09-30 | $166.4k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2019-01-01 to 2019-09-30 | $2.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-09-30 | $27.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-09-30 | $49.4m | us-gaap:AssetsCurrent |
| Total assets | at 2019-09-30 | $103.8m | us-gaap:Assets |
| Current liabilities | at 2019-09-30 | $21.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-09-30 | $52.1m | us-gaap:Liabilities |
| Shareholders' equity | at 2019-09-30 | $51.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 42,478 characters.

#### Disclosure regarding forward-looking statements

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. While forward-looking statements reflect our beliefs and best judgment based upon current information, they are not guarantees of future performance. 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, 2018 (“2018 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 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 the quality of care for patients and address unmet or poorly met medical needs. We promote our approved products through our hospital and field sales forces in the United States and are establishing a network of international partners to bring our medicines 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;
- **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); and
- **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.

We have submitted a New Drug Application for the approval of **RediTrexTM** (methotrexate) Injection, for the treatment of active rheumatoid, juvenile idiopathic and severe psoriatic arthritis, as well as disabling psoriasis.

Additionally, Phase II clinical studies are underway evaluating our ifetroban product candidate in patients with cardiomyopathy associated with Duchenne Muscular Dystrophy (“DMD”), a rare and fatal genetic neuromuscular disease; Systemic Sclerosis (“SSc”), the deadliest autoimmune disease; and Aspirin-Exacerbated Respiratory Disease ("AERD"), a respiratory disease involving chronic asthma and nasal polyposis that is worsened by aspirin.

The Company has also completed Phase II clinical programs with ifetroban in patients with Hepatorenal Syndrome (“HRS”), a life-threatening condition involving reduced liver function and progressive kidney failure, and patients with Portal Hypertension (“PH”), a potentially life-threatening complication of liver cirrhosis, and is awaiting results from the other Phase II studies before determining the development plan for this new chemical entity.

We have both product development and commercial capabilities and believe we can leverage our existing infrastructure to support our expected growth. Our management team consists of pharmaceutical industry veterans experienced in business development, product development, regulatory, manufacturing, sales, marketing, and finance. Our business development team identifies, evaluates, and negotiates product acquisition, licensing, and co-promotion opportunities. Our product development team creates proprietary product formulations, manages our clinical studies, prepares all regulatory submissions, and manages our medical call center. Our 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 eight 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 poorly met medical needs. Further, we are supplementing these activities with the early stage 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 additional clinical data could expand their market and use. We will continue to explore opportunities for label expansion to bring our products to new patient populations. We have secured pediatric approval, expanding the labeling for both our Acetadote and Caldolor brands.

**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 acquisition of Vibativ represents our largest product acquisition.

**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, which Cumberland has the opportunity to further develop and commercialize. We expanded our network of university collaborations with the addition of Louisiana State University and the Medical University of South Carolina.

**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 co-promotion partners that can complement our capabilities and enhance the opportunity for our brands. Our co-promotion arrangements with Poly Pharmaceuticals, Inc. and Foxland Pharmaceuticals, Inc allow us to expand current promotional support for Kristalose across the United States.

**Build an international contribution to our business.** We have established our own commercial capabilities, including two sales divisions to address 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 develop and expand our network of international partners while supporting our partners’ registration and commercialization efforts in their respective territories. The acquisition of Vibativ resulted in several new international partners and market opportunities.

**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 favorable gross margins, and a strong balance sheet. We continue to use cash flow from operations for our ongoing share repurchase program.

We were incorporated in 1999 and have been headquartered in Nashville, Tennessee since inception. During 2009, we completed an initial public offering of our common shares and listing on the Nasdaq stock 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 material press releases and other reports as soon as reasonably practicable after their filing with the U.S. Securities and Exchange Commission, (“SEC”). These filings are also available to the public at *www.sec.gov.*

### RECENT DEVELOPMENTS

### Strategic Review Update

Earlier this year, we announced a strategic review of our brands, capabilities, and international partners. This review followed our accelerated business development initiative, which resulted in a series of transactions. Because of that progress, we felt that it was prudent to take a fresh look at our product portfolio, partners, and organization to ensure we have the proper focus and capabilities. As a result, we:

- Expanded our international arrangements with several new agreements, including a license with WinHealth Pharma for Vibativ in China and a license with R-Pharma JSC for Vibativ for the Russian market.
- Added personnel to our corporate, sales, and medical teams.

During the third quarter we:

- Completed the assignment and amendment of a Commercialization Agreement with Dr. Reddy’s Laboratories Limited (“Dr. Reddy’s”) for the registration and distribution of Vibativ in India. Dr. Reddy's is a multinational pharmaceutical company based in Hyderabad, India. The company currently markets over 190 medications through their commercial operations in over 35 countries. Combined with their extensive network of manufacturing capabilities, Dr. Reddy’s generated over $2.2 billion in sales during their 2018 – 2019 fiscal year.
- Extended the arrangements with Clinigen for Ethyol and Totect. On May 13, 2019, a Dissolution of the Strategic Alliance and underlying U.S. In-Licensing agreements for Ethyol and Totect with Clinigen Healthcare Limited was executed. The Agreement provided for a conclusion of the Company's current arrangements with Clinigen effective September 30, 2019. In early September 2019, Clinigen and Cumberland completed an Amendment to the Agreement whereby the transition date has changed to late December 2019. Under the terms of the Agreement, Cumberland will no longer distribute Ethyol or Totect after the transition date and will receive $5 million in financial consideration from Clinigen, paid over a two-year period.
- Agreed to conclude our co-promotion agreement with Piramal Critial Care effective November 2, 2019. Piramal had been promoting our Caldolor and Vaprisol in hospitals that we do not cover. A transition plan has been agreed and implemented to return those accounts from Piramal to Cumberland.

### RediTrex™

In November 2018, the Company completed and filed with the U.S. Food and Drug Administration ("FDA"), a New Drug Application (“NDA”) for its methotrexate product line proposing the brand name Reditrex™. These products are designed for the treatment of adult and pediatric patients with rheumatoid arthritis, as well as adults with psoriasis.

In January 2019, the FDA determined that the application was complete and notified us of their acceptance for its review, setting September 2019 as the Prescription Drug User Fee (“PDUFA”) action date for an approval decision. Since that time, the Company has had a number of communications with the FDA and addressed their questions through multiple amendments that were submitted to the application.

On August 22, 2019, the FDA sent us a goal extension letter in order to provide them with additional time to review the application with a new PDUFA action date of early December 2019.

### Vibativ Clinical Manuscript

During the third quarter, a new study was published revealing the superiority of Vibativ (telavancin) over vancomycin in select patients with bacterial pneumonia. Study results were published in *Infectious Diseases and Therapy*, and it showed numerically superior cure rates of telavancin compared to vancomycin within a subset of patients who were enrolled in phase 3 ATTAIN trials and had hospital-acquired pneumonia caused by bacteria with low susceptibility to vancomycin.

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. In November 2018, Cumberland reached an agreement to acquire Vibativ from Theravance Biopharma and assume global responsibility for the product.

### Caldolor

In February 2018, Cumberland completed and filed with the FDA an application for approval. The product features a new, patented formulation in a more convenient to use package. In April 2018, the FDA determined that the application was complete and notified us of their acceptance for review. In August 2018, we received a complete response from the FDA outlining additional quality and nonclinical data needed for the application’s approval. In September 2018, the Company submitted an amendment to our application containing additional quality and nonclinical data.

In January 2019, the FDA approved the application, and in April 2019, the Company began initial shipments of the product to select customers. During the third quarter, there was a growing demand for the product from these select accounts, and a full-scale launch of this next generation product is planned for early 2020.

In addition, we completed a submission to the FDA an application in support of an update to our Caldolor approval that included new geriatric, shortened infusion, pediatric, and safety data. Aiming to further expand the product’s label, we provided important data generated from our clinical studies regarding an optimal infusion time, additional safety information, as well as geriatric and pediatric administration. The revised label will also include class label update on the use of NSAIDs with aspirin.

In early September 2019, the FDA informed us that our submission was not accepted for their review because of the number of new claims. The FDA recommended splitting up the submission into several separate submissions, each containing a single proposed labeling claim or group of related labeling claims, with additional data in support of each claim. We are evaluating the FDA’s response. They have offered a Type A meeting to discuss their recommendations, which we intend to schedule.

Meanwhile, we completed enrollment in our study of Caldolor in newborns with ages ranging from birth to six months of age. Once the data gathering and evaluation is complete, we will provide top-line results from this trial.

### Ifetroban

We have been evaluating our ifetroban product candidate in a series of clinical studies. We have completed three pilot Phase II studies involving 1) patients suffering from hepatorenal syndrome, a life-threatening condition involving liver and kidney failure, 2) patients with portal hypertension associated with chronic liver disease and 3) patients suffering from aspirin-exacerbated respiratory disease, a severe form of asthma. A follow-up Phase II study is currently underway for this asthma indication. In addition, we are currently evaluating ifetroban in a pilot Phase II study of patients with systemic sclerosis or scleroderma, a debilitating autoimmune disorder characterized by diffuse fibrosis of the skin and internal organs.

On September 24, 2019, Cumberland announced U.S. Food and Drug Administration ("FDA") Orphan Drug Grant funding for a new Phase II clinical program. The Company has initiated the clinical development of ifetroban for the treatment of cardiomyopathy associated with Duchenne Muscular Dystrophy (DMD). Based on pre-clinical findings, the FDA has cleared Cumberland’s application to study ifetroban in DMD patients, 7 years of age and older. In addition, Cumberland has been awarded just over $1 million in funding from the FDA through their Orphan Drug Grant program to support this Phase II DMD clinical study. It’s the first DMD clinical study approved for FDA Orphan Product Development funding.

DMD is a rare, fatal, genetic neuromuscular disease and is characterized by the progressive loss of muscle which results in deterioration of the skeletal, heart and lung muscles. This deterioration leads to loss of movement and wheelchair dependency. Heart muscle disease is now the leading cause of death in patients with DMD. There is currently no universally effective treatment for the cardiomyopathy associated with DMD.

Additional pilot studies of ifetroban are underway including several investigator-initiated trials. We are awaiting further study results before deciding on the best path for approval for ifetroban, our first new chemical entity.

### 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.

### New H. Pylori Product

On November 4, 2019, RedHill Biopharma Ltd. announced that the FDA had approved their Talicia® product for treatment of H. pylori infection in adults. The product combines omeprazole, amoxicillin and rifabutin into four delayed-release capsules, dosed every eight hours for fourteen days. It will be a new competitor to our Omeclamox® -Pak brand. RedHill expects to launch the product in the U.S during the first quarter of 2020.

### CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

Please see a discussion of our critical accounting policies and significant judgments and estimates in Note 1 to the Company's Condensed Consolidated Financial Statements accompanying this report and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2018 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, fair value of contingent consideration liability, share-based compensation, research and development expenses and intangible assets.

### RESULTS OF OPERATIONS

### Three months ended September 30, 2019 compared to the three months ended September 30, 2018

The following table presents the unaudited interim statements of operations for the three months ended September 30, 2019 and 2018:

|  | Three months ended September 30, 2019 | 2018 | Change |
| --- | ---: | ---: | ---: |
| Net revenues | $10,371,918 | $8,492,530 | $1,879,388 |
| Costs and expenses: |  |  |  |
| Cost of products sold | 1,921,875 | 1,460,463 | 461,412 |
| Selling and marketing | 5,562,443 | 4,803,112 | 759,331 |
| Research and development | 1,278,013 | 1,306,055 | (28,042) |
| General and administrative | 2,422,886 | 2,067,981 | 354,905 |
| Amortization | 1,033,786 | 661,802 | 371,984 |
| Total costs and expenses | 12,219,003 | 10,299,413 | 1,919,590 |
| Operating income (loss) | (1,847,085) | (1,806,883) | (40,202) |
| Interest income | (50,511) | 166,220 | (216,731) |
| Interest expense | (64,877) | (19,199) | (45,678) |
| Income (loss) before income taxes | (1,962,473) | (1,659,862) | (302,611) |
| Income tax (expense) benefit | (4,462) | (4,159) | (303) |
| Net income (loss) | $(1,966,935) | $(1,664,021) | $(302,914) |

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

| Products: | Three months ended September 30, 2019 | 2018 | Change |
| --- | ---: | ---: | ---: |
| Acetadote | $777,185 | $1,122,544 | $(345,359) |
| Omeclamox-Pak | 116,063 | 278,017 | (161,954) |
| Kristalose | 2,924,237 | 3,017,803 | (93,566) |
| Vaprisol | 224,940 | (67,436) | 292,376 |
| Caldolor | 1,170,567 | 1,318,109 | (147,542) |
| Ethyol | 3,299,136 | 2,593,830 | 705,306 |
| Totect | 137,344 | 45,249 | 92,095 |
| Vibativ | 1,451,595 | — | 1,451,595 |
| Other | 270,851 | 184,414 | 86,437 |
| Total net revenues | $10,371,918 | $8,492,530 | $1,879,388 |

*Net revenues.* Net revenues for the three months ended September 30, 2019 were $10.4 million, an increase of 22% over the $8.5 million for the three months ended September 30, 2018. The increase was due primarily to our newest product, Vibativ, which delivered $1.5 million in net revenue. As detailed in the table above, net revenue increased for three of our marketed products: Vaprisol, Ethyol and Totect during the quarter. These increases were partially offset by the decreases in Acetadote, Omeclamox-Pak, Kristalose and Caldolor net revenue.

Ethyol revenue increased by $0.7 million for the three months ended September 30, 2019 compared to three months ended September 30, 2018. This 27.2% increase is primarily a result of higher sales volume and improved net pricing of the product.

Vaprisol revenue was $0.2 million for the third quarter of 2019, an increase of net sales of $0.3 million compared to the third quarter of 2018. The revenue growth is a result of a 53% increase in gross sales and a decrease in expired product returns in the current period compared to the prior year period.

Kristalose revenue decreased by $0.1 million or 3% during the third quarter of 2019 when compared to the prior year period. The decrease was primarily the result of lower sales volume.

Omeclamox-Pak revenue decreased $0.2 million for the third quarter of 2019 compared to the third quarter of 2018 primarily due to higher expired product returns, partially offset by an increase in sales volume.

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 decrease of $0.3 million in the product's revenue when compared to the prior year period as a result of lower sales volumes, partially offset by improved net pricing.

Caldolor revenue was $1.2 million for the third quarter of 2019, a decrease of $0.1 million compared to the same period last year. While there were higher domestic shipments of the product and improved net pricing, these changes were offset by a reduction in international shipments of Caldolor when compared to the prior year period.

*Cost of products sold.* Cost of products sold for the third quarter of 2019 increased $0.5 million compared to the prior year period as a result of increased sales. Cost of products sold, as a percentage of net revenues, were 18.5% during the three months ended September 30, 2019 compared to 17.2% during the three months ended September 30, 2018. This change in costs of products sold as a percentage of revenue was attributable to a change in the product sales mix, including the sales of Vibativ.

*Selling and marketing*. Selling and marketing expense for the third quarter of 2019 increased $0.8 million compared to the prior year period. This increase is primarily attributable to higher royalties related to the increased product sales during the third quarter of 2019.

*Research and development*. Research and development costs were $1.3 million for the third quarter of 2019 and for the same period last year. A portion of our research and development costs is variable based on the number of trials, study sites, cost of the per patient study protocol and patients involved in the development of our new product candidates. We continue to fund our ongoing clinical initiatives associated with our pipeline products.

*General and administrative*. General and administrative expense for the third quarter of 2019 increased to $2.4 million from $2.1 million during the third quarter of 2018 as a result of increases in advisory, legal, professional fees and compensation and benefits, including non-cash stock based compensation, during the period. A portion of these increased costs were related to our acquisition of Vibativ.

*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, 2019 and the three months ended September 30, 2018 totaled approximately $1.0 million and $0.7 million, respectively. This increase was driven primarily by the amortization of the intangible assets acquired in the Vibativ transaction.

*Income taxes*. Income tax expense for the three months ended September 30, 2019 as a percentage of income (loss) before income taxes was 0.2% for the three months ended September 30, 2019 compared to 0.3% for the three months ended September 30, 2018.

As of September 30, 2019, we had approximately $44 million of net operating loss carryforwards resulting from the exercise of nonqualified stock options that have historically been used to significantly offset income tax obligations. We expect to continue to pay minimal income taxes during 2019 and beyond, through the continued utilization of these net operating loss carryforwards, on any taxable income generated from our operations.

### Nine months ended September 30, 2019 compared to the nine months ended September 30, 2018

The following table presents the unaudited interim statements of operations for the nine months ended September 30, 2019 and 2018:

|  | Nine months ended September 30, 2019 | 2018 | Change |
| --- | ---: | ---: | ---: |
| Net revenues | $33,855,265 | $27,243,859 | $6,611,406 |
| Costs and expenses: |  |  |  |
| Cost of products sold | 5,933,807 | 4,511,743 | 1,422,064 |
| Selling and marketing | 15,836,077 | 14,549,873 | 1,286,204 |
| Research and development | 4,003,980 | 4,631,384 | (627,404) |
| General and administrative | 7,621,858 | 6,732,485 | 889,373 |
| Amortization | 3,085,139 | 1,946,457 | 1,138,682 |
| Total costs and expenses | 36,480,861 | 32,371,942 | 4,108,919 |
| Operating income (loss) | (2,625,596) | (5,128,083) | 2,502,487 |
| Interest income | 195,915 | 398,420 | (202,505) |
| Interest expense | (216,988) | (59,520) | (157,468) |
| Income (loss) before income taxes | (2,646,669) | (4,789,183) | 2,142,514 |
| Income tax (expense) benefit | 72,504 | (12,477) | 84,981 |
| Net income (loss) | $(2,574,165) | $(4,801,660) | $2,227,495 |

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

| Products: | Nine months ended September 30, 2019 | 2018 | Change |
| --- | ---: | ---: | ---: |
| Acetadote | $2,608,160 | $3,238,284 | $(630,124) |
| Omeclamox-Pak | 794,205 | 509,358 | 284,847 |
| Kristalose | 9,720,434 | 9,490,901 | 229,533 |
| Vaprisol | 724,143 | 1,712,353 | (988,210) |
| Caldolor | 3,543,166 | 3,458,881 | 84,285 |
| Ethyol | 8,398,564 | 7,659,594 | 738,970 |
| Totect | 373,150 | 727,211 | (354,061) |
| Vibativ | 6,156,653 | — | 6,156,653 |
| Other | 1,536,790 | 447,277 | 1,089,513 |
| Total net revenues | $33,855,265 | $27,243,859 | $6,611,406 |

*Net revenues.* Net revenues for the nine months ended September 30, 2019 were $33.9 million, an increase of $6.6 million, or 24% compared to $27.2 million for the nine months ended September 30, 2018. The increase was due primarily to our newest product, Vibativ, which delivered $6.2 million in net revenue. As detailed in the table above, net revenue increased for four of our marketed products: Omeclamox-Pak, Kristalose, Caldolor and Ethyol during the nine months ended September 30, 2019. These increases were partially offset by the decreases to Acetadote, Vaprisol and Totect net revenue.

Kristalose revenue increased by 2% or $0.2 million during the nine months ended September 30, 2019. The product's net revenue was positively impacted by lower managed care rebates, resulting in improved net pricing.

Caldolor revenue experienced an increase of $0.1 million during the nine months ended September 30, 2019 compared to the same period last year. This 2% positive change in revenue in the nine months ended September 30, 2019 compared to the prior year period was the result of a 20% increase domestic shipments of the product and improved net pricing. These changes were partially offset by a reduction in international shipments of Caldolor when compared to the prior year period.

Omeclamox-Pak revenue increased $0.3 million during the nine months ended September 30, 2019 compared to the prior year, primarily due to an increase in sales volumes and improved net pricing during the period. This improvement in net pricing included a decrease in managed care percentage for the current year.

Ethyol revenue was $8.4 million for the nine months ended September 30, 2019 and $7.7 million for the nine months ended September 30, 2018. The product's $0.7 million increase was the result of a 7% increase in gross sales and a decrease in chargebacks that resulted in an improvement in net pricing.

Acetadote revenue includes net sales of our Acetadote brand and our share of net sales from our Authorized Generic. During the nine months ended September 30, 2019 the Acetadote net revenue decreased $0.6 million as a result of lower sales volumes.

Vaprisol revenue decreased $1.0 million during the nine months ended September 30, 2019 compared to the prior year period primarily due to decreased sales volume. The prior year period sales were higher as a result of the arrival of a new lot of the product during April 2018 resolving temporary supply issues associated with the product.

Totect revenue decreased to $0.4 million during the nine months ended September 30, 2019. 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.

Other revenue during the nine months ended September 30, 2019 includes $0.4 million in revenue related to non-refundable up-front payments associated with new agreements with International partners as well as $0.9 million in CET grant revenue.

*Cost of products sold*. Cost of products sold for the nine months ended September 30, 2019 and nine months ended September 30, 2018 were $5.9 million and $4.5 million, respectively. Cost of products sold, as a percentage of net revenues were 17.5% compared to 16.6% during the same period for the prior year. This change in costs of products sold as a percentage of revenue was attributable to a change in the product sales mix, including the sales of Vibativ.

*Selling and marketing*. Selling and marketing expenses for the nine months ended September 30, 2019 were $15.8 million, compared to $14.5 million for the prior year period, representing an increase of approximately $1.3 million or 9% This increase was attributable to increased royalties related to product sales. There were also increases in sales and promotional spending during the nine months ended September 30, 2019 to promote Vibativ, our newest brand.

*Research and development*. Research and development costs for the nine months ended September 30, 2019 were $4.0 million, compared to $4.6 million for the same period last year, representing a decrease of approximately $0.6 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 decrease was primarily the result of lower expenditures in our ongoing clinical initiatives associated with our pipeline products as well as decreases in our FDA fees.

*General and administrative*. General and administrative expenses were $7.6 million for the nine months ended September 30, 2019, compared to $6.7 million during the same period last year. The $0.9 million increase from the same period for the prior year was primarily driven by an increase in compensation and benefits, including non-cash stock based compensation and deferred 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, 2019 totaled approximately $3.1 million, which was an increase of $1.1 million over the same period for the prior year. The increase in expense was attributable to the amortization of additional product rights and capitalized patents, including those assets associated with the Vibativ acquisition.

*Income taxes*. Income tax benefit for the nine months ended September 30, 2019 as a percentage of income (loss) before income taxes was 2.7%. This is compared to income tax expense as a percentage of loss before income taxes of 0.3% for the nine months ended September 30, 2018.

### 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, corporate bonds and commercial paper. At September 30, 2019 and December 31, 2018, we had approximately $2.3 million and $8.3 million, respectively, invested in marketable securities.

The following table summarizes our liquidity and working capital as of September 30, 2019 and December 31, 2018:

|  | September 30, 2019 | December 31, 2018 |
| --- | ---: | ---: |
| Cash and cash equivalents | $26,978,424 | $27,938,960 |
| Marketable securities | 2,265,839 | 8,290,679 |
| Total cash, cash equivalents and marketable securities | $29,244,263 | $36,229,639 |
| Working capital (current assets less current liabilities) | $28,344,634 | $31,311,813 |
| Current ratio (multiple of current assets to current liabilities) | 2.3 | 2.1 |
| Revolving line of credit availability | $— | $— |

The following table summarizes our net changes in cash and cash equivalents for the nine months ended September 30, 2019 and September 30, 2018:

| Net cash provided by (used in): | Nine months ended September 30, 2019 | 2018 |
| --- | ---: | ---: |
| Operating activities | $2,199,356 | $(610,452) |
| Investing activities | 394,733 | (6,313,016) |
| Financing activities | (3,554,625) | (230,167) |
| Net decrease in cash and cash equivalents | $(960,536) | $(7,153,635) |

The net $1.0 million decrease in cash and cash equivalents for the nine months ended September 30, 2019 was attributable to cash used in financing activities, partially offset by the $2.2 million and the $0.4 million in cash provided by operating and investing activities, respectively . Cash provided by operating activities of $2.2 million was positively impacted by the decrease in inventory of $2.2 million as well as the add back of non-cash expenses of depreciation, amortization and share-based compensation expense totaling $4.4 million. Cash provided by investing activities was increased by net sales of marketable securities of $6.1 million, partially offset by the $5.0 million payment to Theravance as part of the acquisition of Vibativ and the additions to intangibles of $0.5 million. Our financing activities reflected the $2.6 million in cash used to repurchase shares of our common stock.

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 $0.9 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 $0.9 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 $1.2 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.

### Debt Agreement

On May 10, 2019, we entered into a third amendment ("Third Amendment") to the Revolving Credit Loan Agreement, dated July 28, 2017, with Pinnacle Bank (“Pinnacle Agreement”). The Third Amendment extended the term of the Pinnacle Agreement through July 31, 2021 as well as modified certain definitions and terms of the existing financial covenants. On October 17, 2018, we entered into a second amendment (“Second Amendment”) which increased the maximum aggregate principal available for borrowing under the Pinnacle Agreement to $20.0 million. For a summary of the material terms of the Pinnacle Agreement, as amended, see Note 7 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. 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. The Third Amendment modified the definition of the Funded Debt Ratio and the compliance target of the Tangible Capital Ratio. Both Third Amendment modifications were related to the Vibativ transaction. We were in compliance with the Tangible Capital Ratio financial covenant as of September 30, 2019 through utilization of the covenant cure section of the Pinnacle Agreement. We expect to maintain compliance with the Tangible Capital Ratio financial covenant in future periods.

### OFF-BALANCE SHEET ARRANGEMENTS

During the nine months ended September 30, 2019 and 2018, we did not engage in any off-balance sheet arrangements.

## Market risk

As filed, 2,349 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 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 $2.3 million in marketable securities outstanding at September 30, 2019, a 1% decrease in the fair value of the securities would result in a reduction in pretax net income (loss) of less than $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 1.75% to 2.75% (representing an interest rate of 4.78% at September 30, 2019). As of September 30, 2019, we had $20 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, 2019 and 2018. 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, 1,096 characters.

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, 2019. Based on that evaluation, our CEO and CFO concluded that, as of September 30, 2019, 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, 2019, 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, 170 characters.

There have been no material changes to the information regarding risk factors that appears in the 2018 Annual Report on Form 10-K under the section titled "Risk Factors."

Filed Nov 13, 2019.
Source: SEC EDGAR, the filing index for accession 0001628280-19-014133. Last ingested by Listed: Nov 11, 2026, 03:05 ET. No prices; not investment advice.