Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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. Actual results may differ significantly from the results discussed in these forward-looking statements. Some important factors which may cause results to differ from expectations include: availability of additional debt and equity capital; market conditions at the time additional capital is required; our ability to continue to acquire branded products; product sales; management of our growth and integration of our acquisitions and impacts on our business as well as national and international markets and economies resulting from the COVID-19 pandemic. 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, 2021, and our other filings with the SEC. 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 pharmaceutical products. We are dedicated to providing innovative products that improve the quality of care for patients and address poorly met medical needs.
Our primary target sectors are hospital acute care, oncology, gastroenterology and rheumatology. These medical specialties are characterized by relatively concentrated prescriber bases that we believe can be served effectively by small, targeted sales forces. We promote our approved products through our hospital, oncology and field sales forces in the United States. We have also established partnerships in Puerto Rico and the Middle East for our Vibativ® product and are continuing to build a network of international partners to register and provide 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) oral, a prescription laxative, for the treatment of constipation;
•Omeclamox®-Pak, (omeprazole, clarithromycin, amoxicillin) oral, for the treatment of Helicobacter pylori (H. pylori) infection and related duodenal ulcer disease;
•RediTrex® (methotrexate) injection, for the treatment of active rheumatoid, juvenile idiopathic and severe psoriatic arthritis, as well as disabling psoriasis;
•Sancuso® (granisetron) transdermal, for the prevention of nausea and vomiting in patients receiving certain types of chemotherapy treatment;
•Vaprisol® (conivaptan) injection, to raise serum sodium levels in hospitalized patients with euvolemic and hypervolemic hyponatremia; 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.
In addition to these commercial brands, we have Phase II clinical programs underway evaluating our ifetroban product candidates for patients with cardiomyopathy associated with 1) Duchenne Muscular Dystrophy (“DMD”), a fatal, genetic neuromuscular disease; 2) Systemic Sclerosis (“SSc”) or scleroderma, a debilitating autoimmune disorder characterized by fibrosis of the skin and internal organs; and 3) Aspirin-Exacerbated Respiratory Disease (“AERD”), a severe form of asthma.
Cumberland has built core competencies in the acquisition, development and commercialization of pharmaceutical products in the U.S. - and we believe we can leverage this existing infrastructure to support our continued growth both domestically and internationally. Our management team consists of pharmaceutical industry veterans with experience 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 agreements. Our product development team creates proprietary formulations, manages our clinical studies, prepares our FDA submissions and staffs our medical call center. Our quality and manufacturing professionals oversee the manufacturing, release and shipment of our products. Our marketing and sales organization is responsible for our commercial activities, and we work closely with our distribution partners to ensure the availability and delivery of our products.
GROWTH STRATEGY
Cumberland’s growth strategy involves maximizing the success of our existing brands while continuing to build a portfolio of differentiated products. We currently feature eight FDA products approved for sale in the United States. We are also continuing to explore international partnerships to bring our medicines to patients in other countries. Additionally, we look for opportunities to expand our products into additional patient populations through clinical trials, new presentations and our support of 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 largely to address poorly met medical needs.
We are supplementing these activities with the earlier-stage drug development at Cumberland Emerging Technologies (“CET”), our majority-owned subsidiary. CET partners with academic research institutions to identify and support the progress of promising new product candidates, which Cumberland could further develop and commercialize.
Specifically, we are seeking long-term sustainable growth by:
•Supporting and expanding 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. For example, we have secured pediatric approval of Acetadote and Caldolor and are expanding the labeling for both brands accordingly. We also recently further expanded the labeling for Caldolor to allow its use prior to surgery. We will continue to explore such opportunities to bring our products to new patient populations.
•Selectively adding 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 and Sancuso are examples of this strategy.
•Progressing our clinical pipeline and incubating future product opportunities at CET. We believe it is important to build a pipeline of innovative new product opportunities, as we are doing though our ifetroban Phase II development programs. We are also supplementing our acquisitions and late-stage development activities with early-stage drug development activities with CET.
•Leveraging 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 complement our capabilities and enhance opportunities for our brands. For example, our co-promotion partnerships have allowed us to expand the support for Kristalose and Sancuso across the U.S.
•Building an international contribution to our business. We have established our own commercial capabilities, including three 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 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.
•Managing our operations with financial discipline. We continually work to manage our expenses in line with our revenues to deliver cash flow from operations. We remain in a strong financial position, with favorable gross margins and a strong balance sheet.
RECENT DEVELOPMENTS
Sancuso Acquisition
In January 2022, Cumberland acquired the U.S. rights to the FDA-approved oncology-supportive care medicine Sancuso from Kyowa Kirin, Inc., the U.S. affiliate of Japan-based Kyowa Kirin Co., Ltd.
Sancuso is the first and only FDA-approved prescription patch for the prevention of nausea and vomiting in patients receiving certain types of chemotherapy treatment. The active drug in Sancuso, granisetron, slowly dissolves in the thin layer of adhesive that sticks to the patient’s skin and is released into their bloodstream over several days, working continuously to prevent chemotherapy-induced nausea and vomiting (“CINV”). It is applied 24 to 48 hours before receiving chemotherapy and can prevent CINV for up to five consecutive days. Alternative oral treatments must be taken several times (day and night) to deliver the same therapeutic doses.
Cumberland acquired U.S. rights to Sancuso and assumed full commercial responsibility for the product in the U.S. – including its marketing, promotion, distribution, manufacturing and medical support activities. We largely completed the transition of these responsibilities from Kyowa Kirin to Cumberland during the second quarter of 2022.
Sancuso Promotion
In April 2022, we entered into an agreement with Verity Pharmaceuticals International Limited (“Verity”) for the national co-promotion of Sancuso. Verity is a specialty pharmaceutical company that will utilize its established oncology commercial organization and customer network to co-promote Sancuso throughout the United States.
Verity will cover a majority of the U.S. market for an initial three-year term, with an option to extend for an additional two years. Verity and Cumberland will share in the incremental contribution margin resulting from Verity’s efforts.
In July 2022, Verity launched their national co-promotion efforts in support of Sancuso.
Ifetroban Clinical Studies
We have been evaluating our ifetroban product candidate, a selective thromboxane-prostanoid receptor (“TPr”) antagonist, in a series of clinical studies. It has been dosed in nearly 1,400 subjects and was found to be safe and well tolerated in healthy volunteers and various patient populations.
Cumberland is currently sponsoring three Phase II clinical programs to evaluate ifetroban in 1) Aspirin-Exacerbated Respiratory Disease, ("AERD") a severe form of asthma; 2) Systemic Sclerosis or scleroderma, a debilitating autoimmune disorder characterized by diffuse fibrosis of the skin and internal organs; and 3) patients with cardiomyopathy associated with Duchenne Muscular Dystrophy, a genetic neuromuscular disease that results in deterioration of the skeletal, heart and lung muscles.
We are awaiting results from the studies underway before deciding on the best development path for the registration of ifetroban.
We are also designing a fourth Phase II program to evaluate the use of ifetroban to treat patients with Progressive Fibrosing Interstitial Lung Diseases and we are currently preparing an application to the FDA to support the new program.
In addition to our Company-sponsored studies, Harvard clinical investigators have led a Phase II trial in patients with AERD. Their study is designed to understand the mechanism of ifetroban in those patients and therefore complements the work we have underway. Their work has been supported by a $5 million grant from the NIH. Patient enrollment in the study is now closed, and the data analysis is underway. We look forward to sharing the results of the study once we receive the study report from them in the coming months.
New Ifetroban Publication
In June 2022, the American Journal of Respiratory and Critical Care Medicine published preclinical studies that support the use of ifetroban as a promising therapeutic for patients with pulmonary fibrosis associated with lung disease.
Specifically, the researchers reported that ifetroban was used to block thromboxane receptor signaling in three preclinical models of lung fibrosis: bleomycin-induced lung fibrosis, Hermansky-Pudlak Syndrome mice and radiation-induced lung fibrosis. Ifetroban reduced pro-fibrotic signaling in the lungs and prevented lung fibrosis due to multiple causes (bleomycin, genetic, radiation).
Amendment to Revolving Credit Loan Agreement
On June 30, 2022, Cumberland entered into the eighth amendment to our revolving credit loan agreement with Pinnacle Bank permitting the Funded Debt Ratio to be calculated on a rolling four-quarter basis to be no more than 3.00 to 1.00 for the second and third quarters of 2022 and 2.50 to 1.00 for each quarter thereafter.
Nordic Pharma Arrangements
On July 12, 2022, we entered into an amendment to our agreement with Nordic Pharma (“Nordic”) that addresses the responsibilities and financial arrangements regarding our license to Nordic's methotrexate line of products for the U.S. (the “License”). Our line of prefilled methotrexate syringes, marketed under the brand name RediTrex® in the U.S., is covered by the License.
Based on the amendment, we are providing Nordic with the opportunity to assume responsibility for commercializing the methotrexate products in the U.S. after March 31, 2023. We will continue to distribute and support the RediTrex product line during a transition period until then. Following the return of the License, Nordic will provide us with a royalty on their future sales of the product through April 2035. The companies will continue to collaborate on any transition and ongoing commercialization of the product line.
Cumberland will transfer to Nordic the marketing authorization associated with the RediTrex product line.
Nordic will return the 180,000 shares we issued to them associated with the License and refund the $1 million we paid to them following the brand’s approval in the U.S. Nordic will also issue a credit note in favor of Cumberland in the amount of $1 million for the unpaid milestone payment due from us for our launch of the product line.
New Board Member
In July 2022, we were honored to welcome Martin Brown Jr. to Cumberland’s Board of Directors. His experience includes 10 years on the board of directors of Brown-Forman Corporation, a large American spirits and wine company whose shares are listed on the New York Stock Exchange. Additionally, he has served since 2018 on the board of directors of the parent company of Aegis Sciences Corporation, a federally certified health care laboratory headquartered in Nashville.
Mr. Brown is an attorney at Adams and Reese LLP. He has nearly 30 years of legal experience representing privately held businesses, counseling owners in complex business transactions, intellectual property licensing, international commerce, mergers and acquisitions, and estate planning. He has been listed since 2009 in the corporate law category of Best Lawyers®.
He has been an active board member for many community organizations, including the Land Trust for Tennessee, Nashville Public Radio, Montgomery Bell Academy, Nashville Public Television, Centerstone Mental Health Center, Cheekwood Estate and Gardens, and Tennessee chapter of the Nature Conservancy.
Mr. Brown brings significant legal, public company, health care and civic experience to our Board. We expect his contributions will be valuable in our efforts to acquire, develop and deliver innovative products to improve the quality of care for patients.
Board Special Committee
The Board has formed a Special Committee (the “Committee”) as an ad hoc committee of the Board of Directors to facilitate certain corporate development activities, including the review and evaluation of potential mergers, acquisitions, joint ventures, significant investments or divestitures of material assets. The Committee is composed solely of directors who meet the independence requirements of the NASDAQ Global Select Market. The Committee was activated so that the Company may properly consider and evaluate any corporate development opportunities that might arise as a result of the recent volatility in the financial markets associated with the biopharmaceutical industry.
Sustainability Report
In early August 2022, we announced the results of our 2021 Sustainability Report, outlining our activities pertaining to environmental, social and governance matters. As the largest biopharmaceutical company founded and headquartered in the Mid-South, we hold ourselves to the highest standards of ethical practices and understand the importance of recognizing and addressing our impact on our constituents, the community and the environment.
Highlights from the report include:
•We provided 2.43 million doses of our products for patients in 2021.
•We also safely disposed of over 6,200 pounds of expired or damaged products during the year.
•We had no products recalled, no Company marketed brands listed on the FDA’s MedWatch Safety Alerts for Human Medical Products, no marketed Company product issues identified by FDA from their Adverse Event Reporting System and no clinical trials terminated due to failure to practice good clinical standards.
The 2021 Sustainability Report also highlights our investment in our employees through our continuing education programs, employee development initiatives and employee recognition awards. Cumberland’s workforce is 44% women, and 15% of our employees are minorities.
State of Tennessee and Tennessee Valley Authority Grants
The State of Tennessee and the Tennessee Valley Authority have awarded Cumberland a total of $250,000 in grants to support the buildout of the new offices at 1600 West End Ave. and the relocation of the Company to this new headquarters. This new headquarters location keeps Cumberland near the Vanderbilt University Medical Center to enable our continued collaboration.
With our portfolio of FDA-approved drug brands, and a deep pipeline of new drugs under development, Cumberland is poised to attain significant milestones in the coming years. We believe this well-located, state-of-the-art new headquarters will play an important role in the Company’s future success.
Omeclamox-Pak Supply Update
The packager for our Omeclamox-Pak product has been unable to provide us with supplies of the product, having encountered difficulties and therefore suspending operations during the pandemic. We are currently awaiting the facility’s packaging to resume, while also exploring other alternatives to restart the product’s packaging before we build new inventory and resupply the market.
Vaprisol Supply Update
We are transitioning to a new manufacturer for our Vaprisol product. During 2021, we shipped all remaining inventory of the product and notified the FDA that supplies of the product were then not currently available. We have transferred manufacturing to a new facility and await the submission and FDA approval for that plant before resuming shipments. During the second quarter of 2022, the new manufacturer was issued an FDA Form 483 following an inspection of their facility. The FDA notified us that our application to manufacture Vaprisol at the new facility would need to be resubmitted once those 483 issues are satisfactorily resolved. Our new manufacturing partner is working with the FDA to address those issues on a timely basis. Meanwhile, the Company plans to provide an interim supply of compounded product to the market while awaiting the needed facility approval.
Summary
Cumberland remains committed to our mission of providing innovative products that improve the quality of care for patients and address poorly met medical needs. We are working to fulfill this mission by building a portfolio of innovative and differentiated products through a multifaceted strategy that includes the development of new candidates as well as the acquisition of established brands. Our resulting, diversified product line has enabled us to weather external challenges while our team remains responsive to the evolving medical market. We are prepared for and look forward to future opportunities to carry out our mission throughout the remainder of the year.
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 2021 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. The Company's most significant estimates include: (1) its allowances for chargebacks and accruals for rebates and product returns, (2) the allowances for obsolescent or unmarketable inventory and (3) valuation of contingent consideration liabilities associated with business combinations.
RESULTS OF OPERATIONS
Three months ended June 30, 2022 compared to the three months ended June 30, 2021
The following table presents the unaudited interim statements of operations for continuing operations for the three months ended June 30, 2022 and 2021: | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, |
| 2022 | | 2021 | | Change | |
| Net revenues | $ | 10,299,152 | | | $ | 9,055,483 | | | $ | 1,243,669 | | |
| Costs and expenses: | | | | | | |
| Cost of products sold | 2,031,884 | | | 1,740,649 | | | 291,235 | | |
| Selling and marketing | 4,556,685 | | | 4,121,817 | | | 434,868 | | |
| Research and development | 1,823,693 | | | 1,360,398 | | | 463,295 | | |
| General and administrative | 2,203,975 | | | 2,097,130 | | | 106,845 | | |
| Amortization | 1,529,453 | | | 1,171,218 | | | 358,235 | | |
| Total costs and expenses | 12,145,690 | | | 10,491,212 | | | 1,654,478 | | |
| Operating income (loss) | (1,846,538) | | | (1,435,729) | | | (410,809) | | |
| Interest income | 15,066 | | | 6,591 | | | 8,475 | | |
| Other income | — | | | 2,187,140 | | | (2,187,140) | | |
| Other income - gain on insurance proceeds | 611,330 | | | — | | | 611,330 | | |
| Interest expense | (137,624) | | | (25,859) | | | (111,765) | | |
| Income (loss) from continuing operations before income taxes | (1,357,766) | | | 732,143 | | | (2,089,909) | | |
| Income tax (expense) benefit | (6,900) | | | (7,459) | | | 559 | | |
| Net income (loss) from continuing operations | $ | (1,364,666) | | | $ | 724,684 | | | $ | (2,089,350) | | |
| | | | | | |
The following table summarizes net revenues by product for the periods presented: | | | | | | | | | | | | | | | | | |
| Three months ended June 30, |
| 2022 | | 2021 | | Change |
| Products: | | | | | |
| Kristalose | $ | 3,570,272 | | | $ | 5,275,065 | | | $ | (1,704,793) | |
| Sancuso | 3,398,548 | | | — | | | 3,398,548 | |
| Vibativ | 1,596,821 | | | 1,844,936 | | | (248,115) | |
| Caldolor | 1,193,916 | | | 938,328 | | | 255,588 | |
| Vaprisol | (134,621) | | | 399,952 | | | (534,573) | |
| Acetadote | 126,789 | | | 152,781 | | | (25,992) | |
| Omeclamox-Pak | (26,412) | | | (24,109) | | | (2,303) | |
| RediTrex | 93,676 | | | 7,382 | | | 86,294 | |
| Other revenue | 480,163 | | | 461,148 | | | 19,015 | |
| Total net revenues | $ | 10,299,152 | | | $ | 9,055,483 | | | $ | 1,243,669 | |
Net revenues. Net revenues for the three months ended June 30, 2022, were $10.3 million compared to $9.1 million for the three months ended June 30, 2021. As detailed in the table above, net revenue increased for two of our marketed products: Caldolor and RediTrex during the quarter. We also continued significant shipments of Sancuso which we launched earlier in the year.
Kristalose revenue of $3.6 million for the second quarter of 2022, represented a decrease of $1.7 million when compared to the prior year period. The decrease was primarily the result of timing of shipments to one of our co-promotion partners.
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 slight decrease in the branded product's revenue when compared to the prior year period.
Vaprisol revenue was $(0.1) million for the second quarter of 2022, a decrease of $0.5 million compared to the same period last year. This decrease is primarily due to the lack of inventory of the product, as we await FDA approval on a new manufacturer.
Caldolor revenue was $1.2 million for the second quarter of 2022, an increase of $0.3 million, or 27.2%, compared to the second quarter of 2021. The increase was the result of higher international shipments of the product.
Vibativ revenue was $1.6 million for the three months ended June 30, 2022, compared to $1.8 million for the same period last year. The decline was a result of increased purchases in 2021 associated in part with wholesaler stocking of our new packaged product.
Sancuso revenue was $3.4 million for the second quarter of 2022, which was $0.3 million higher than the second quarter of 2021 U.S. results reported by Kyowa Kirin, from whom Cumberland acquired the U.S. rights to Sancuso on January 3, 2022.
Omeclamox-Pak had no sales for the second quarter of 2022, as Cumberland is currently out of commercial inventory of this product. The packager for our Omeclamox-Pak product encountered financial difficulties, and currently is under new management and a reorganization. We are in discussions about the resumption of packaging the product. Net revenue for the three months ended June 30, 2022, was negatively impacted by various revenue adjustments.
Cost of products sold. Cost of products sold for the second quarter of 2022 and 2021 were $2.0 million and $1.7 million, respectively. Cost of products sold, as a percentage of net revenues, were 19.7% during the three months ended June 30, 2022, similar to 19.2% during the three months ended June 30, 2021.
Selling and marketing. Selling and marketing expense for the second quarter of 2022 increased $0.4 million compared to the same period last year. This increase is primarily attributable to an increase in marketing expenses associated with the Sancuso acquisition, including royalty costs, promotional spending and the costs associated with our new oncology sales division.
Research and development. Research and development costs for the second quarter of 2022 and 2021 were $1.8 million and $1.4 million, respectively. A portion of our research and development costs is variable based on the number of trials, study sites, number of patients and the cost per patient in each of our clinical programs. We continue to fund our ongoing clinical initiatives associated with our pipeline products.
General and administrative. General and administrative expense increased to $2.2 million for the second quarter of 2022, compared to $2.1 million for the second quarter of 2021, an increase of $0.1 million . The increase was primarily attributable to increases in compensation expenses.
The components of the statements of operations discussed above reflect the following impacts from Vibativ: | | | | | | | | | | | | | | |
| Financial Impact of Vibativ | | Three months ended June 30, |
| | 2022 | | 2021 |
| Net revenue | | $ | 1,596,821 | | | $ | 1,844,936 | |
Cost of products sold (1) | | 402,320 | | | 678,146 | |
| Royalty and operating expenses | | (17,957) | | | 767,813 | |
| Vibativ contribution | | $ | 1,212,458 | | | $ | 398,977 | |
(1)The Vibativ inventory included in the costs of product sold during the period was acquired and paid for by Cumberland as part of the acquisition of the brand during 2018.
The components of the statements of operations discussed above reflect the following impacts from Sancuso:
| | | | | | | | | | | | | | |
| Financial Impact of Sancuso | | Three months ended June 30, |
| | 2022 | | 2021 |
Net revenue (1) | | $ | 3,648,548 | | | $ | — | |
Cost of products sold (2) | | 360,572 | | | — | |
| Royalty and operating expenses | | 992,922 | | | — | |
| Sancuso contribution | | $ | 2,295,054 | | | $ | — | |
(1) 2022 net revenue includes a $250,000 payment to Cumberland required under the terms of a new licensee agreement.
(2) The Sancuso inventory included in the costs of product sold during the period was acquired and paid for by Cumberland as part of the acquisition of the brand during 2022.
Amortization. Amortization expense is the ratable use of our capitalized intangible assets including product and license rights, patents, trademarks and patent defense costs. Amortization for the three months ended June 30, 2022 and 2021, totaled approximately $1.5 million and $1.2 million, respectively. The increase in amortization expense is due to the acquisition of Sancuso.
Income taxes. Income tax expense for the three months ended June 30, 2022, was comparable to the income tax expense for the three months ended June 30, 2021.
As of June 30, 2022, we had approximately $56.6 million in federal net operating loss carryforwards including 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 2022 and beyond, through the continued utilization of these net operating loss carryforwards, on any taxable income generated from our operations.
Other income. In the second quarter of 2022, we recognized a gain on insurance proceeds of $0.6 million.
RESULTS OF OPERATIONS
Six months ended June 30, 2022 compared to the six months ended June 30, 2021
The following table presents the unaudited interim statements of operations for continuing operations for the six months ended June 30, 2022 and 2021: | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, |
| 2022 | | 2021 | | Change | | |
| Net revenues | $ | 21,474,197 | | | $ | 19,592,642 | | | $ | 1,881,555 | | | |
| Costs and expenses: | | | | | | | |
| Cost of products sold | 4,243,769 | | | 4,157,978 | | | 85,791 | | | |
| Selling and marketing | 9,171,114 | | | 7,909,157 | | | 1,261,957 | | | |
| Research and development | 3,568,829 | | | 2,617,765 | | | 951,064 | | | |
| General and administrative | 4,506,324 | | | 4,327,639 | | | 178,685 | | | |
| Amortization | 3,122,698 | | | 2,340,132 | | | 782,566 | | | |
| Total costs and expenses | 24,612,734 | | | 21,352,671 | | | 3,260,063 | | | |
| Operating income (loss) | (3,138,537) | | | (1,760,029) | | | (1,378,508) | | | |
| Interest income | 31,107 | | | 12,017 | | | 19,090 | | | |
| Other income | — | | | 2,187,140 | | | (2,187,140) | | | |
| Other income - gain on insurance proceeds | 611,330 | | | — | | | 611,330 | | | |
| Interest expense | (257,199) | | | (50,276) | | | (206,923) | | | |
| Income (loss) from continuing operations before income taxes | (2,753,299) | | | 388,852 | | | (3,142,151) | | | |
| Income tax (expense) benefit | (13,800) | | | (14,917) | | | 1,117 | | | |
| Net income (loss) from continuing operations | $ | (2,767,099) | | | $ | 373,935 | | | $ | (3,141,034) | | | |
| | | | | | | |
The following table summarizes net revenues by product for the periods presented: | | | | | | | | | | | | | | | | | |
| Six months ended June 30, |
| 2022 | | 2021 | | Change |
| Products: | | | | | |
| Kristalose | $ | 7,515,368 | | | $ | 8,269,443 | | | $ | (754,075) | |
| Sancuso | 6,795,758 | | | — | | | 6,795,758 | |
| Vibativ | 4,098,255 | | | 6,897,179 | | | (2,798,924) | |
| Caldolor | 2,153,546 | | | 2,477,824 | | | (324,278) | |
| Vaprisol | (251,623) | | | 1,534,216 | | | (1,785,839) | |
| Acetadote | 237,884 | | | 269,972 | | | (32,088) | |
| Omeclamox-Pak | (3,676) | | | (474,371) | | | 470,695 | |
| RediTrex | 152,904 | | | (24,870) | | | 177,774 | |
| Other revenue | 775,781 | | | 643,249 | | | 132,532 | |
| Total net revenues | $ | 21,474,197 | | | $ | 19,592,642 | | | $ | 1,881,555 | |
Net revenues. Net revenues for the six months ended June 30, 2022, were $21.5 million compared to $19.6 million for the six months ended June 30, 2021, an increase of $1.9 million. The addition of our newest product Sancuso contributed to an overall 9.6% revenue increase.
Kristalose revenue was $7.5 million during the first six months of 2022, a decrease of $0.8 million when compared with the prior year period. Revenue decreased due to slightly lower sales volume associated with one of our co-promotion partners in 2022.
Vibativ revenue was $4.1 million for the six months ended June 30, 2022, compared to $6.9 million for the same period last year. The decrease in net revenue was a result of improved sales volume for the product during the six months ended June 30, 2021. The decline was a result of increased purchases in 2021 associated in part with wholesaler stocking of our new packaged product.
Vaprisol revenue was $(0.3) million for the first six months of 2022 as Cumberland is currently out of commercial inventory of the product. Net revenue was negatively impacted by various sales adjustments.
Omeclamox-Pak had no sales for the six months ended June 30, 2022, as Cumberland is currently out of commercial inventory of this product. The packager for our Omeclamox-Pak product encountered financial difficulties and currently is under new management and a reorganization. We are in discussions about the resumption of packaging the product. Net revenue for the six months ended June 30, 2022, was negatively impacted by product returns during the period.
Acetadote revenue includes net sales of our Acetadote brand and our share of net sales from our Authorized Generic. There was a slight decrease in the product's year to date revenue for the six months ended June 30, 2022, when compared to the prior year period as a result of an increase in expired product returns in 2022.
Caldolor revenue was $2.2 million for the first two quarters of 2022, a decrease of $0.3 million compared to the same period last year. International shipments decreased in 2022.
Cost of products sold. Cost of products sold for first six months of 2022 and 2021 were consistent at $4.2 million for each period.
Selling and marketing. Selling and marketing expense for the six months ended June 30, 2022, increased $1.3 million compared to the prior year period. This increase is primarily attributable to an increase in marketing expenses associated with the Sancuso acquisition including royalty costs, promotional spending and the costs associated with our new oncology sales division.
Research and development. Research and development costs were $3.6 million for the first six months of 2022 compared to $2.6 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, 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 six months ended June 30, 2022, remained consistent with $4.5 million compared to $4.3 million during the six months ended June 30, 2021. In 2022, we experienced a slight increase in compensation expense.
The components of the statements of operations discussed above reflect the following impacts from Vibativ: | | | | | | | | | | | | | | |
| Financial Impact of Vibativ | | Six months ended June 30, |
| | 2022 | | 2021 |
Net revenue (1) | | $ | 4,248,255 | | | $ | 6,897,179 | |
Cost of products sold (2) | | 1,329,480 | | | 2,134,962 | |
| Royalty and operating expenses | | 663,360 | | | 1,170,165 | |
| Vibativ contribution | | $ | 2,255,415 | | | $ | 3,592,052 | |
(1) 2022 net revenue includes a $150,000 payment to Cumberland required under the terms of a new licensee agreement.
(2) The Vibativ inventory included in the costs of product sold during the period was acquired and paid for by Cumberland as part of the acquisition of the brand during 2018.
| | | | | | | | |
| Financial Impact of Vibativ | | Since Acquisition |
Net revenue (1) | | $ | 40,369,278 | |
Cost of products sold (2) | | 13,518,736 | |
| Royalty and operating expenses | | 7,117,405 | |
| Vibativ contribution | | $ | 19,733,137 | |
(1) Net revenue includes a $150,000 payment to Cumberland required under the terms of a new licensee agreement.
(2)The Vibativ inventory included in the costs of product sold during the period was acquired and paid for by Cumberland as part of the acquisition of the brand during 2018.
The components of the statements of operations discussed above reflect the following impacts from Sancuso: | | | | | | | | | | | | | | |
| Financial Impact of Sancuso | | Six months ended June 30, |
| | 2022 | | 2021 |
Net revenue (1) | | $ | 7,045,758 | | | $ | — | |
Cost of products sold (2) | | 748,836 | | | — | |
| Royalty and operating expenses | | 1,903,022 | | | — | |
| Sancuso contribution | | $ | 4,393,900 | | | $ | — | |
(1) 2022 net revenue includes a $250,000 payment to Cumberland required under the terms of a new licensee agreement.
(2) The Sancuso inventory included in the costs of product sold during the period was acquired and paid for by Cumberland as part of the acquisition of the brand during 2022.
Amortization. Amortization expense is the ratable use of our capitalized intangible assets including product and license rights, patents, trademarks and patent defense costs. Amortization for the six months ended June 30, 2022, and six months ended June 30, 2021, totaled approximately $3.1 million and $2.3 million, respectively. The increase was attributable to the Sancuso acquisition.
Income taxes. Income tax expense (benefit) for the six months ended June 30, 2022, as a percentage of income (loss) from continuing operations before income taxes, was 0.5% compared to 3.8% for the six months ended June 30, 2021.
Other income. In the second quarter of 2022, we recognized a gain on insurance proceeds of $0.6 million.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
Our primary sources of liquidity are cash equivalents, cash flows from operations and the amounts borrowed under our line of credit. We believe that our internally generated cash flows, existing working capital and our line of credit will be adequate to finance internal growth, finance business development initiatives, and fund capital expenditures for the foreseeable future.
The following table summarizes our liquidity and working capital as of June 30, 2022 and December 31, 2021: | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| | | |
| Cash and cash equivalents | $ | 18,216,565 | | | $ | 27,040,816 | |
| | | |
| Working capital (current assets less current liabilities) | $ | 19,496,529 | | | $ | 26,409,053 | |
| Current ratio (multiple of current assets to current liabilities) | 1.8 | | | 2.4 | |
| | | |
| Revolving line of credit availability | $ | 1,000,000 | | | $ | 5,000,000 | |
The following table summarizes our net changes in cash and cash equivalents for the six months ended June 30, 2022 and June 30, 2021: | | | | | | | | | | | |
| Six months ended June 30, |
| 2022 | | 2021 |
| |
| Net cash provided by (used in): | | | |
| Operating activities | $ | 2,180,038 | | | $ | 4,484,770 | |
| Investing activities | (13,714,489) | | | (366,854) | |
| Financing activities | 2,710,200 | | | (3,201,250) | |
| Net increase (decrease) in cash and cash equivalents | $ | (8,824,251) | | | $ | 916,666 | |
The net $8.8 million decrease in cash and cash equivalents for the six months ended June 30, 2022, was primarily attributable to cash used in investing and partially offset by cash provided by operating and financing activities. Cash provided by operating activities of $2.2 million was primarily the result of a decreases in inventory of $2.9 million, decrease in other assets of $1.2 million and increases in accounts payable and other liabilities of $4.7 million, as well as the add back of non-cash expenses of depreciation, amortization and share-based compensation expense totaling $3.4 million. This was partially offset by accounts receivable increasing by $5.5 million, mainly from the addition of Sancuso sales and the decrease in long-term liabilities of $1.7 million. Cash used in investing activities was the result of the acquisition of Sancuso. Our financing activities included the increase in our line of credit of $4.0 million partially offset by the $0.8 million in cash used to repurchase shares of our common stock as well as the $0.5 million used for the payment of royalties for sales of Vibativ.
The net $0.9 million increase in cash and cash equivalents for the six months ended June 30, 2021, was primarily attributable to cash provided by operating activities, partially offset by cash used in investing and financing activities. Cash provided by operating activities of $4.5 million was positively impacted by decreases in inventory of $2.3 million and accounts receivable of $3.2 million, as well as the add back of non-cash expenses of depreciation, amortization and share-based compensation expense totaling $2.8 million. Operating activities were also offset by the decrease in accounts payable of $3.0 million and the forgiveness of our PPP Loan of $2.2 million. Cash used in investing activities was the result of additions to intangibles of $0.1 million and the payment of $0.2 million to the WHC JV. Our financing activities included the $0.8 million in cash used to repurchase shares of our common stock as well as the $1.4 million used for the payment of royalties to Theravance for sales of Vibativ.
Debt Agreement
On June 30, 2022, the Company entered into the Eighth Amendment to the Revolving Credit Loan Agreement with Pinnacle Bank (the "Pinnacle Agreement") permitting the Maximum Funded Debt Ratio to be calculated on a rolling four-quarter basis to be no more than 3.00 to 1.00 for the second and third quarters of 2022 and 2.50 to 1.00 for each quarter thereafter. For the quarter ended June 30, 2022, we slightly exceeded the Maximum Funded Debt Ratio, but we relied on our provision in the latest amendment to address it.
On March 31, 2022, the Company and Pinnacle Bank entered into a Seventh Amendment to the Revolving Credit Loan Agreement to revise and update the Maximum Funded Debt Ratio financial covenant and to delete from the Pinnacle Agreement the Funded Debt to Tangible Capital Ratio financial covenant. These changes were made to more appropriately reflect the impact from the Sancuso acquisition.
On December 31, 2021, the Company and Pinnacle Bank entered into the Fifth Amendment to the Revolving Credit Note and the Sixth Amendment to the Revolving Credit Loan Agreement in order to increase the principal amount of the Note from $15 million to $20 million.
On October 28, 2021, the Company and Pinnacle Bank entered into a Fourth Amendment to the Revolving Credit Note and Fifth Amendment ("Fifth Amendment") to the Revolving Credit Loan Agreement to renew the Revolving Credit Loan.
The original Pinnacle Agreement was dated July 2017. Beginning on August 14, 2018, and continuing until October 7, 2020, the Company and Pinnacle Bank entered into a series of amendments to extend and update the Revolving Credit Note and Revolving Credit Agreement. The Fifth Amendment extends the maturity date three years through October 1, 2024.
The interest rate on the Pinnacle Agreement is based on LIBOR plus an interest rate spread. The current pricing under the Pinnacle Agreement provides for an interest rate spread of 1.75% to 2.75% above LIBOR with a minimum LIBOR of 0.90%. The applicable interest rate under the Pinnacle Agreement was 3.87% at June 30, 2022. In addition, a fee of 0.25% per year is charged on the unused line of credit. Interest and the unused line fee are payable quarterly. The parties have agreed on a process to determine a new interest rate benchmark at the point the LIBOR rate is expected to be discontinued over the next 12 to 24 months.
As of June 30, 2022 and December 31, 2021, the Company had $19.0 million and $15.0 million, respectively, in borrowings outstanding under its revolving credit facility.
Paycheck Protection Program Loan
On April 20, 2020, Cumberland received the funding of a loan from Pinnacle Bank in the aggregate amount of $2,187,140 pursuant to the Paycheck Protection Program (the “PPP”) under the Federal Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which was enacted March 27, 2020.
Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act, including qualifying payroll costs, covered rent payments, and covered utilities. Cumberland used the PPP loan funds for such qualifying expenses. Due to assistance from our PPP loan, the Company did not lay off or furlough any employees as a result of the COVID-19 pandemic.
In October 2020, Cumberland submitted a request for the loan’s forgiveness. On June 11, 2021, the Company received a formal notice from the SBA that the full amount of the loan was forgiven.
OFF-BALANCE SHEET ARRANGEMENTS
During the six months ended June 30, 2022 and 2021, we did not engage in any off-balance sheet arrangements.
