Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             .
Commission file number: 001-33637 
Cumberland Pharmaceuticals Inc.
(Exact Name of Registrant as Specified In Its Charter)
Tennessee
62-1765329
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
2525 West End Avenue, Suite 950,
Nashville, Tennessee
37203
(Address of Principal Executive Offices)
(Zip Code)
(615) 255-0068
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Securities registered pursuant to Section 12(b) of the Act:
ClassTrading SymbolName of exchanged on which registeredOutstanding at November 6, 2019
Common stock, no par valueCPIXNASDAQ Global Select Market15,183,943  




CUMBERLAND PHARMACEUTICALS INC.
INDEX




PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, 2019December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents$26,978,424  $27,938,960  
Marketable securities2,265,839  8,290,679  
Accounts receivable, net8,296,672  7,844,249  
Inventories, net9,864,240  12,078,343  
Prepaid and other current assets1,992,409  2,963,806  
Total current assets49,397,584  59,116,037  
Non-current inventories15,329,920  15,749,000  
Property and equipment, net743,801  771,213  
Intangible assets, net31,040,213  33,655,099  
Goodwill882,000  784,000  
Deferred tax assets, net43,605  87,210  
Other assets6,328,777  2,531,309  
Total assets$103,765,900  $112,693,868  
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable$8,226,609  $11,093,297  
Other current liabilities12,826,341  16,710,927  
Total current liabilities21,052,950  27,804,224  
Revolving line of credit20,000,000  20,000,000  
Other long-term liabilities11,006,022  9,319,143  
Total liabilities52,058,972  57,123,367  
Commitments and contingencies
Equity:
Shareholders’ equity:
Common stock—no par value; 100,000,000 shares authorized; 15,231,278 and 15,481,497 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
49,563,807  51,098,613  
Retained earnings2,169,101  4,746,154  
Total shareholders’ equity51,732,908  55,844,767  
Noncontrolling interests(25,980) (274,266) 
Total equity51,706,928  55,570,501  
Total liabilities and equity$103,765,900  $112,693,868  
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
1


CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (loss)
(Unaudited)

Three months ended September 30,Nine months ended September 30,
2019201820192018
Net revenues$10,371,918  $8,492,530  $33,855,265  $27,243,859  
Costs and expenses:
Cost of products sold1,921,875  1,460,463  5,933,807  4,511,743  
Selling and marketing5,562,443  4,803,112  15,836,077  14,549,873  
Research and development1,278,013  1,306,055  4,003,980  4,631,384  
General and administrative2,422,886  2,067,981  7,621,858  6,732,485  
Amortization1,033,786  661,802  3,085,139  1,946,457  
Total costs and expenses12,219,003  10,299,413  36,480,861  32,371,942  
Operating income (loss)(1,847,085) (1,806,883) (2,625,596) (5,128,083) 
Interest income(50,511) 166,220  195,915  398,420  
Interest expense(64,877) (19,199) (216,988) (59,520) 
Income (loss) before income taxes(1,962,473) (1,659,862) (2,646,669) (4,789,183) 
Income tax (expense) benefit(4,462) (4,159) 72,504  (12,477) 
Net income (loss)(1,966,935) (1,664,021) (2,574,165) (4,801,660) 
Net (income) loss at subsidiary attributable to noncontrolling interests13,267  20,977  (2,888) 58,689  
Net income (loss) attributable to common shareholders$(1,953,668) $(1,643,044) $(2,577,053) $(4,742,971) 
Earnings (loss) per share attributable to common shareholders
- basic$(0.13) $(0.11) $(0.17) $(0.30) 
- diluted$(0.13) $(0.11) $(0.17) $(0.30) 
Weighted-average shares outstanding
- basic15,368,027  15,573,108  15,454,159  15,645,230  
- diluted15,368,027  15,573,108  15,454,159  15,645,230  
Comprehensive income (loss) attributable to common shareholders(1,953,668) (1,643,044) (2,577,053) (4,742,971) 
Net (income) loss at subsidiary attributable to noncontrolling interests13,267  20,977  (2,888) 58,689  
Total comprehensive income (loss)$(1,966,935) $(1,664,021) $(2,574,165) $(4,801,660) 
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

2


CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
20192018
Cash flows from operating activities:
Net income (loss)$(2,574,165) $(4,801,660) 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization expense3,278,958  2,108,051  
Deferred tax expense43,605    
Share-based compensation1,107,817  1,005,239  
Decrease in non-cash contingent consideration(681,577)   
Noncash interest expense36,292  44,117  
Noncash investment gains(34,303) (131,652) 
Net changes in assets and liabilities affecting operating activities:
Accounts receivable547,577  1,339,974  
Inventories2,214,103  311,419  
Other current assets and other assets195,529  966,817  
Accounts payable and other current liabilities(1,726,832) (1,595,243) 
Other long-term liabilities(207,648) 142,486  
Net cash provided by (used in) operating activities2,199,356  (610,452) 
Cash flows from investing activities:
Additions to property and equipment(166,407) (171,731) 
Purchases of marketable securities(9,627,191) (20,851,951) 
Proceeds from sale of marketable securities15,686,334  16,122,376  
Cash paid for acquisitions(5,000,000)   
Additions to intangible assets(498,003) (1,411,710) 
Net cash provided by (used in) investing activities394,733  (6,313,016) 
Cash flows from financing activities:
Borrowings on line of credit56,000,000  36,000,000  
Repayments on line of credit(56,000,000) (33,800,000) 
Proceeds from sales of common stock, net of offering costs  200,909  
Payments of deferred offering costs  (248,108) 
Payments of financing costs(52,500)   
Cash payment of contingent consideration(908,347)   
Repurchase of common shares(2,593,778) (2,382,968) 
Net cash used in financing activities(3,554,625) (230,167) 
Net decrease in cash and cash equivalents(960,536) (7,153,635) 
Cash and cash equivalents at beginning of period$27,938,960  45,412,868  
Cash and cash equivalents at end of period$26,978,424  $38,259,233  
Supplemental non-cash operating, investing and financing activities:
Recognition of operating lease assets and liabilities through adoption of ASC 842$3,629,320  $  
Sale of subsidiary shares to noncontrolling interests1,000,000  $  
Repurchase of subsidiary shares from noncontrolling interests(800,000) $  
Additions to intangible assets from final purchase price allocation$148,000  $  
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3


CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Equity
(Unaudited)
Common stockRetained earningsNoncontrolling interestsTotal equity
SharesAmount
Balance, December 31, 201715,723,075  $52,410,941  $11,709,222  $(198,562) $63,921,601  
Proceeds from sales of common stock, net of offering costs30,704  200,909  —  —  200,909  
Share-based compensation145,550  339,209  —  —  339,209  
Repurchase of common shares(172,079) (1,195,225) —  —  (1,195,225) 
Net loss—  —  (2,379,239) (12,950) (2,392,189) 
Balance, March 31, 201815,727,250  $51,755,834  $9,329,983  $(211,512) $60,874,305  

Balance, March 31, 201815,727,250  $51,755,834  $9,329,983  $(211,512) $60,874,305  
Share-based compensation4,750  326,100  —  —  326,100  
Repurchase of common shares(127,291) (784,505) —  —  (784,505) 
Net loss—  —  (720,688) (24,762) (745,450) 
Balance, June 30, 201815,604,709  $51,297,429  $8,609,295  $(236,274) $59,670,450  
Balance, June 30, 201815,604,709  $51,297,429  $8,609,295  $(236,274) $59,670,450  
Share-based compensation17,434  339,930  —  —  339,930  
Repurchase of common shares(66,278) (401,747) —  —  (401,747) 
Net loss—  —  (1,643,044) (20,977) (1,664,021) 
Balance, September 30, 201815,555,865  15,555,865  $51,235,612  $6,966,251  $(257,251) $57,944,612  
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4


CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Equity
(Unaudited)
Common stockRetained earningsNoncontrolling interestsTotal equity
SharesAmount
Balance, December 31, 201815,481,497  $51,098,613  $4,746,154  $(274,266) $55,570,501  
Share-based compensation187,486  364,434  —  —  364,434  
Repurchase of common shares(121,466) (703,790) —  —  (703,790) 
Net loss—  —  (73,878) 33,460  (40,418) 
Balance, March 31, 201915,547,517  $50,759,257  $4,672,276  $(240,806) $55,190,727  

Balance, March 31, 201915,547,517  $50,759,257  $4,672,276  $(240,806) $55,190,727  
Share-based compensation8,000  396,548  —  —  396,548  
Repurchase of subsidiary shares from noncontrolling interest—  (685,805) —  (114,195) (800,000) 
Repurchase of common shares(84,447) (531,746) —  —  (531,746) 
Net loss—  —  (549,507) (17,305) (566,812) 
Balance, June 30, 201915,471,070  $49,938,254  $4,122,769  $(372,306) $53,688,717  

Balance, June 30, 201915,471,070  $49,938,254  $4,122,769  $(372,306) $53,688,717  
Share-based compensation6,450  346,835  —  —  346,835  
Sales of subsidiary shares to noncontrolling interest—  640,407  —  359,593  1,000,000  
Repurchase of common shares(246,242) (1,361,689) —  —  (1,361,689) 
Net loss—  —  (1,953,668) (13,267) (1,966,935) 
Balance, September 30, 201915,231,278  $49,563,807  $2,169,101  $(25,980) $51,706,928  
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5


CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) ORGANIZATION AND BASIS OF PRESENTATION
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. The Company's primary target markets are hospital acute care, gastroenterology, and oncology supportive care. These medical specialties are characterized by relatively concentrated prescriber bases that the Company believes can be penetrated effectively by small, targeted sales forces. Cumberland is dedicated to providing innovative products that improve quality of care for patients and address unmet or poorly met medical needs.
Cumberland focuses its resources on maximizing the commercial potential of its products, as well as developing new product candidates, and has both internal development and commercial capabilities. The Company’s products are manufactured by third parties, which are overseen by Cumberland’s quality control and manufacturing professionals. The Company works closely with its third-party distribution partners to make its products available in the United States.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company have been prepared on a basis consistent with the December 31, 2018 audited consolidated financial statements, with the exception of the impacts of adopting accounting pronouncements during 2019, and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly present the information set forth herein. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (the “SEC”), and certain information and disclosures have been condensed or omitted as permitted by the SEC for interim period presentation. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Annual Report on Form 10-K”). The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.
Total comprehensive income (loss) consisted solely of net income (loss) for the three and nine months ended September 30, 2019 and 2018.
Recent Accounting Guidance
Recent Adopted Accounting Pronouncement
In February 2016, the Financial Accounting Standards Board ("FASB") issued guidance in the form of a FASB Accounting Standards Update ("ASU") No. 2016-02, “Leases.” The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance (formerly "capital leases") or operating, with classification affecting the pattern of expense recognition in the income statement. The standard provides for a modified retrospective transition approach for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain optional practical expedients. In July 2018, the FASB issued ASU 2018-11, "Leases: Targeted Improvements", allowing for an alternative transition method (the effective date approach). It allows an entity to initially apply the new lease guidance at the adoption date (rather than at the beginning of the earliest period presented). Cumberland adopted the lease guidance effective January 1, 2019 using the package of transition practical expedients. This allowed the Company to retain the lease classification for any leases existing prior to adoption, in addition to other benefits. See additional discussion of the impact of adopting the lease accounting guidance in Note 6.
Recent Accounting Pronouncements - Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses,” which changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, companies will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, companies will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities. Companies will have to disclose significantly more information, including information they use to track credit quality by year of origination for most financing receivables. Companies will apply the ASU’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This standard is effective for the Company on January 1, 2020 with early adoption permitted. The Company is in the initial stage of evaluating the impact of this new standard on its trade and other receivables.
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In November 2018, the FASB issued ASU No. 2018-18, “Collaboration Arrangements: Clarifying the Interaction between Topic 808 and Topic 606” (ASU 2018-18). The issuance of ASU 2014-09 raised questions about the interaction between the guidance on collaborative arrangements and revenue recognition. ASU 2018-18 addresses this uncertainty by (1) clarifying that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASU 2014-09 when the collaboration arrangement participant is a customer, (2) adding unit of account guidance to assess whether the collaboration arrangement or a part of the arrangement is with a customer and (3) precluding a company from presenting transactions with collaboration arrangement participants that are not directly related to sales to third parties together with revenue from contracts with customers. The new standard will be effective for the Company on January 1, 2020 with early adoption permitted. The Company is in the initial stage of evaluating the impact of this new standard on its condensed consolidated financial statements and related disclosures.
In May 2019, the FASB issued ASU 2019-05, "Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief" which provides transition relief for ASU 2016-13 by providing entities with an alternative to irrevocably elect the fair value option for eligible financial assets measured at amortized cost upon adoption of the new credit losses standard. Certain eligibility requirements must be met, the election must be applied on an instrument-by-instrument basis, and the election is not available for either available-for-sale or held-to-maturity debt securities. As Cumberland has not yet adopted ASU 2016-13, the effective dates are the same as those in ASU 2016-13, which is January 1, 2020. The Company is in the initial stage of evaluating the impact of this new standard on its condensed consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” (ASU 2017-04). The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. As a result of the revised guidance, a goodwill impairment will be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The new standard will be effective for the Company on January 1, 2020 and will be applied prospectively. The Company is in the initial stage of evaluating the impact of this new standard on its condensed consolidated financial statements and related disclosures.
Accounting Policies:
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates under different assumptions and conditions. 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 (3) assumptions used in estimating acquisition date fair value of assets acquired in business combinations and (4) valuation of contingent consideration liability associated with business combinations.
Operating Segments
The Company has one operating segment which is specialty pharmaceutical products. Management has chosen to organize the Company based on the type of products sold. Operating segments are identified as components of an enterprise about which separate discrete financial information is evaluated by the chief operating decision maker, or decision-making group, in making decisions regarding resource allocation and assessing performance. The Company, which uses consolidated financial information in determining how to allocate resources and assess performance, has concluded that our specialty pharmaceutical products compete in similar economic markets and similar circumstances. Substantially all of the Company’s assets are located in the United States and total revenues are primarily attributable to U.S. customers.
(2) MARKETABLE SECURITIES
The Company invests in marketable debt securities in order to maximize its return on cash. Marketable securities consist of short-term cash investments, U.S. Treasury notes and bonds, corporate bonds and commercial paper. At the time of purchase, the Company classifies marketable securities as either trading securities or available-for-sale securities, depending on the intent at that time. As of September 30, 2019 and December 31, 2018, marketable securities were comprised solely of trading securities. Trading securities are carried at fair value with unrealized gains and losses recognized as a component of interest income in the consolidated statements of operations.
The Company's fair value measurements follow the appropriate rules as well as the fair value hierarchy that prioritizes the information used to develop the measurements. It applies whenever other guidance requires (or permits) assets or liabilities to be measured at fair value and gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
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A summary of the fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels is described below:
Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 - Significant inputs to the valuation model are unobservable.
The Company's fair values of marketable securities are determined based on valuations provided by a third-party pricing service, as derived from such service's pricing models, and are considered either Level 1 or Level 2 measurements, depending on the nature of the investment. The Company has no marketable securities in which the fair value is determined based on Level 3 measurements. The level of management judgment required in evaluating fair value for Level 1 investments is minimal. Similarly, there is little subjectivity or judgment required for Level 2 investments valued using valuation models that are standard across the industry and whose parameter inputs are quoted in active markets. Inputs to the models may include, but are not limited to, reported trades, executable bid and ask prices, broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. Based on the information available, the Company believes that the valuations provided by the third-party pricing service, as derived from such service's pricing models, are representative of prices that would be received to sell the assets at the measurement date (exit prices). There were no transfers of assets between levels within the fair value hierarchy.
The following table summarizes the fair value of our marketable securities, by level within the fair value hierarchy, as of each period end:
September 30, 2019December 31, 2018
Level 1Level 2TotalLevel 1Level 2Total
U.S. Treasury notes and bonds$  $  $  $5,034,955  $  $5,034,955  
Corporate bonds        2,504,551  2,504,551  
Commercial paper  2,265,8392,265,839        
Short-term cash investments        751,173  751,173  
Total fair value of marketable securities$  $2,265,839  $2,265,839  $5,034,955  $3,255,724  $8,290,679  

(3) EARNINGS (LOSS) PER SHARE
The following table reconciles the numerator and denominator used to calculate diluted earnings (loss) per share for the three and nine months ended September 30, 2019 and 2018:
Three months ended September 30,
20192018
Numerator:
Net income (loss) attributable to common shareholders$(1,953,668) $(1,643,044) 
Denominator:
Weighted-average shares outstanding – basic15,368,027  15,573,108  
Dilutive effect of other securities    
Weighted-average shares outstanding – diluted15,368,027  15,573,108  

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Nine months ended September 30,
20192018
Numerator:
Net income (loss) attributable to common shareholders$(2,577,053) $(4,742,971) 
Denominator:
Weighted-average shares outstanding – basic15,454,159  15,645,230  
Dilutive effect of other securities—  —  
Weighted-average shares outstanding – diluted15,454,159  15,645,230  
As of September 30, 2019 and 2018, restricted stock awards and options to purchase 3,600 and 18,325 shares of common stock, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect would be antidilutive.
(4) REVENUES
Product Revenues
The Company accounts for revenues from contracts with customers under ASC 606, which became effective January 1, 2018. As part of the adoption of ASC 606, the Company applied the new standard on a modified retrospective basis analyzing open contracts as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606. As discussed in Note 10, during November 2018, Cumberland entered into an agreement to acquire the global responsibility for Vibativ. The product began contributing to Cumberland's net revenue during the fourth quarter of 2018.
The Company’s net revenues consisted of the following for the three and nine months ended September 30, 2019 and 2018:
Three months ended September 30,Nine months ended September 30,
2019201820192018
Products:
Acetadote$777,185  $1,122,544  $2,608,160  $3,238,284  
Omeclamox-Pak116,063  278,017  794,205  509,358  
Kristalose2,924,237  3,017,803  9,720,434  9,490,901  
Vaprisol224,940  (67,436) 724,143  1,712,353  
Caldolor1,170,567  1,318,109  3,543,166  3,458,881  
Ethyol3,299,136  2,593,830  8,398,564  7,659,594  
Totect137,344  45,249  373,150  727,211  
Vibativ1,451,595    6,156,653    
Other270,851  184,414  1,536,790  447,277  
Total net revenues$10,371,918  $8,492,530  $33,855,265  $27,243,859  

Other Revenues
During 2019, Cumberland executed a License and Distribution agreement with HongKong WinHealth Pharma Group Co. Limited (“WinHealth”) for our Caldolor and Acetadote brands in China and Hong Kong. In conjunction with these new arrangements, the Company terminated a previous License and Distribution agreement with Gloria Pharmaceuticals Co ("Gloria Pharmaceuticals") for the two brands. In addition, we also signed a new License and Distribution agreement with DB Pharm Korea Co., Ltd. (“DB Pharm”) for Vibativ in South Korea. As a result of these agreements, Cumberland recognized approximately $0.3 million of non-refundable up-front payments as other revenue in the consolidated statement of operations during the nine months ended September 30, 2019. Cumberland's performance obligation was satisfied upon entering into the agreements to license each of the products intellectual property. CET grant revenue for the three and nine months ended September 30, 2019 included in other revenue was $0.2 million and $0.9 million, respectively.

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The Company has agreements with international partners for commercialization of the Company's products. The international agreements provide that each of the partners are responsible for seeking regulatory approvals for the products, and following approvals, each partner will handle ongoing distribution and sales in the respective international territories. The Company maintains responsibility for the intellectual property and product formulations. Under the international agreements, the Company is typically entitled to receive a non-refundable, up-front payment at the time each agreement is entered into as a result of providing the distinct intellectual property rights for the respective international territory. These agreements also provide for additional payments upon the partners' achievement of defined regulatory approvals, sales milestones or both. The Company may also be entitled to receive royalties on future sales of the products under the agreements and a transfer price on supplies. The contractual payments associated with the partners achievement of regulatory approvals, sales milestones and royalties on future sales are recognized as revenue upon occurrence, or at such time that the Company has a high degree of confidence that the revenue would not be reversed in a subsequent period.
(5) INVENTORIES
The Company works closely with third parties to manufacture and package finished goods for sale. Based on the relationship with the manufacturer or packager, the Company will either take title to the finished goods at the time of shipment or at the time of arrival from the manufacturer. The Company then warehouses such goods until distribution and sale. Inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out method.
The Company continually evaluates inventory for potential losses due to excess, obsolete or slow-moving inventory by comparing sales history and sales projections to the inventory on hand. When evidence indicates that the carrying value may not be recoverable, a charge is taken to reduce the inventory to its current net realizable value. At September 30, 2019 and December 31, 2018, the Company has recognized and maintained cumulative charges for potential obsolescence and discontinuance losses of approximately $0.5 million and $0.1 million, respectively.
In connection with the acquisition of certain product rights related to the Kristalose brand, the Company is responsible for the purchase of the active pharmaceutical ingredient (“API”) for Kristalose and maintains the inventory at the third-party manufacturer. As the API is consumed in production, the value of the API is transferred from raw materials to finished goods. API for the Company's Vaprisol brand is also included in the raw materials inventory total. Consigned inventory represents Authorized Generic inventory stored until shipment.
As part of the Vibativ acquisition, Cumberland acquired API and work in process inventories of $14.9 million that are classified as non-current inventories at September 30, 2019 and December 31, 2018. Non-current inventories also include $0.1 million and $0.8 million in Vibativ finished goods at September 30, 2019 and December 31, 2018, respectively. During 2019, Cumberland also obtained $0.3 million in non-current inventory for API related to its ifetroban clinical initiatives.
The Company's net inventories consisted of the following:
September 30, 2019December 31, 2018
Raw materials and work in process$19,176,660  $18,378,450  
Consigned inventory723,324  937,006  
Finished goods, net of reserves5,294,176  8,511,887  
Total inventories25,194,160  27,827,343  
less non-current inventories(15,329,920) (15,749,000) 
Total inventories classified as current$9,864,240  $12,078,343  

(6) LEASES
In March 2016, the FASB issued ASU 2016-02. ASU 2016-02’s core principle is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information. The Company adopted ASU 2016-02 under the alternative transition method (the effective date approach). It allowed the Company to initially apply the new lease guidance at the adoption date (rather than at the beginning of the earliest period presented). Prior periods have not been adjusted.


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The primary effect of adopting ASU 2016-02 to the Company was to record right-of-use assets and obligations for the leases currently classified as operating leases. The Company’s significant operating leases include the lease of approximately 25,500 square feet of office space in Nashville, Tennessee for its corporate headquarters. This lease currently expires in October 2022. The operating leases also include the lease of approximately 14,200 square feet of wet laboratory and office space in Nashville, Tennessee by Cumberland Emerging Technologies (“CET”), our majority-owned subsidiary, where it operates the CET Life Sciences Center. This lease currently expires in April 2023. The Company did not have any leases classified as finance leases at January 1, 2019 or September 30, 2019. The new lease accounting standard did not have a significant impact on the Company's Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for any period presented.
The Company elected the package of practical expedients offered in the transition guidance which allows management not to reassess lease identification, lease classification and initial direct costs at the adoption date.
These operating leases resulted in initial ROU assets of $3.6 million and lease liabilities of $3.8 million as of January 1, 2019 for non-cancelable operating leases with original lease terms in excess of one year.
Operating lease liabilities were recorded as the present value of remaining lease payments not yet paid for the lease term discounted using the incremental borrowing rate associated with each lease. Operating lease right-of-use assets represent operating lease liabilities adjusted for lease incentives and initial direct costs. As the Company’s leases do not contain implicit borrowing rates, the incremental borrowing rates were calculated based on information available at January 1, 2019. Incremental borrowing rates reflect the Company’s estimated interest rates for collateralized borrowings over similar lease terms. The weighted-average remaining lease term is 3.5 years and the weighted-average incremental borrowing rate used to discount the present value of the remaining lease payments is 7.42%.
Lease Position
At September 30, 2019, the Company recorded the following on the Condensed Consolidated Balance Sheet:

Right-of-Use AssetsBalance Sheet ClassificationSeptember 30, 2019
Operating lease right-of-use assetsOther non-current assets  $3,047,283  
Total$3,047,283  

Lease LiabilitiesBalance Sheet ClassificationSeptember 30, 2019
Current:
Operating lease liabilitiesOther current liabilities  $897,506  
Noncurrent:
Operating lease liabilitiesOther long-term liabilities  2,315,761  
Total$3,213,267  


Maturity of Leases Liabilities at September 30, 2019Operating Leases
2019$282,646  
20201,120,067  
20211,144,889  
20221,019,313  
202392,477  
After 2023  
Total lease payments3,659,392  
Less: Interest(446,125) 
Present value of lease liabilities$3,213,267  




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(7) SHAREHOLDERS’ EQUITY AND DEBT
Share repurchases
The Company currently has a share repurchase program to repurchase up to $10 million of its common stock pursuant to Rule 10b-18 of the Securities Exchange Act of 1934. In January 2019, the Company's Board of Directors established the current $10 million repurchase program to replace the prior authorizations. During the nine months ended September 30, 2019 and September 30, 2018, the Company repurchased 452,155 shares and 365,648 shares, respectively, of common stock for approximately $2.6 million and $2.4 million, respectively.
Share purchases and sales
During the Company's March 2019 trading window, several members of Cumberland's Board of Directors entered into share purchase agreements of the Company's stock pursuant to Rule 10b-18 of the Securities Exchange Act of 1934. These purchases are designed to increase ownership in the Company by the members of the Board. During the March 2019 trading window, one member of the Board of Directors entered into a share sale agreement, as required by a policy change by his employer, which prohibits his ownership in a pharmaceutical company. The policy change did not impact his ability to serve on the Company's Board of Directors. This Board member sold 117,729 Cumberland shares during the second and third quarters of 2019, representing the majority of his holdings.
Share Sale
In November 2017, the Company filed a Shelf Registration on Form S-3 with the SEC associated with the sale of up to $100 million in corporate securities. The Shelf Registration was declared effective in January 2018. During the nine months ended September 30, 2018, the Company issued 30,704 shares of common stock for gross proceeds of $0.2 million as part of its At-The-Market (“ATM”) sales agreement with B. Riley FBR. The Company did not issue any shares under the ATM during the nine months ended September 30, 2019.
Restricted Share Grants
During the nine months ended September 30, 2019, and September 30, 2018, the Company issued 225,869 shares and 233,330 shares of restricted stock to employees and directors, respectively. Restricted stock issued to employees generally cliff-vests on the fourth anniversary of the date of grant and for directors on the one-year anniversary of the date of grant. Stock compensation expense is presented as a component of general and administrative expense in the condensed consolidated statements of operations and comprehensive income (loss).
Cumberland Emerging Technologies
In April 2019, Cumberland Emerging Technologies ("CET"), our majority-owned subsidiary, entered into an agreement with WinHealth whereby WinHealth will make a $1 million investment through the purchase of shares of CET stock. As part of the agreement, WinHealth obtained a Board position at CET and the first opportunity to license CET products for the Chinese market. In connection with WinHealth's investment in CET, Cumberland also made an additional $1 million investment in CET. Cumberland purchased additional CET shares through contribution of $0.3 million in cash and a conversion of $0.7 million in intercompany loans payable. Upon completion of the additional investment by WinHealth and Cumberland, Gloria Pharmaceuticals agreed to return it's shares in CET in exchange for consideration of $0.8 million.
Debt Agreement
On May 10, 2019, the Company 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, including 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. Under the Pinnacle Agreement, Cumberland was initially subject to one financial covenant, the maintenance of a Funded Debt Ratio, as such term is defined in the agreement and determined on a quarterly basis. On August 14, 2018, the Company 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 Company achieved compliance with the Tangible Capital Ratio financial covenant as of September 30, 2019 through the utilization of the covenant cure section of the Pinnacle Agreement.
The initial revolving line of credit under the Pinnacle Agreement was for up to an aggregate principal amount of $12.0 million with the ability to increase the principal amount available for borrowing up to $20.0 million, upon the satisfaction of certain conditions. On October 17, 2018, the Company entered into a second amendment (“Second Amendment”) which increased the maximum aggregate principal available for borrowing under the Pinnacle Agreement to $20.0 million.
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The interest rate on the Pinnacle Agreement is based on LIBOR plus an interest rate spread. There is no LIBOR minimum and the LIBOR pricing provides for an interest rate spread of 1.75% to 2.75% (representing an interest rate of 4.78% at September 30, 2019). In addition, a fee of 0.25% per year is charged on the unused line of credit. Interest and the unused line fee are payable quarterly. Borrowings under the line of credit are collateralized by substantially all of our assets.

(8) INCOME TAXES
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“the Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate to 21%; (2) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (3) capital expensing; and (4) creating new limitations on deductible interest expense and executive compensation.
The SEC staff issued Staff Accounting Bulletin (“SAB”) 118, providing guidance on applying the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company reflects the income tax effects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but a reasonable estimate is available, it must record the estimate in the financial statements. If a company cannot determine an estimate, it should continue to apply ASC 740 on the basis of the tax laws that were in effect immediately prior to enactment of the Tax Act.
As of September 30, 2019, the Company has approximately $44.1 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. The Company expects it will 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.

(9) COLLABORATIVE AGREEMENTS
Cumberland is a party to several collaborative arrangements with research institutions to identify and pursue promising pharmaceutical product candidates. The Company has determined that these collaborative agreements do not meet the criteria for accounting under ASC Topic 808, Collaborative Agreements. The agreements do not specifically designate each party’s rights and obligations to each other under the collaborative arrangements. Except for patent defense costs, expenses incurred by one party are not required to be reimbursed by the other party. The funding for these programs is primarily provided through Federal Small Business Administration (SBIR/STTR) and other grant awards. Expenses incurred under these collaborative agreements are included in research and development expenses and funding received from grants are recorded as net revenues in the condensed consolidated statements of operations and comprehensive income (loss).


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(10) RECENT ADDITIONS AND EXPECTED RETURN OF PRODUCT RIGHTS
Omeclamox-Pak
In December 2018, Cumberland completed an agreement with Gasto-enterlogics Inc. ("GEL") to acquire the remaining product rights associated with Omeclamox-Pak, including the product’s FDA-approved New Drug Application and the domestic and international trademarks. As part of the transaction, which was accounted for as an asset acquisition, Cumberland paid $2.3 million during 2018 and ended Cumberland’s payments of royalties and manufacturing fees to GEL. The Company has now assumed responsibility for the maintenance of the product’s FDA approval and for the oversight of the product’s manufacturing and packaging.
Vibativ
During November 2018, the Company closed on an agreement with Theravance Biopharma ("Theravance") to acquire the global responsibility for Vibativ including the marketing, distribution, manufacturing and regulatory activities associated with the brand. 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. Cumberland acquired Vibativ to further add to its product offerings, increase its net revenue and positively contribute to the Company's operating results. Cumberland expects to deduct the goodwill acquired in the acquisition for tax purposes.
Cumberland has accounted for the transaction as a business combination in accordance with ASC 805 and the product sales are included in the results of operations subsequent to the acquisition date. The Company made an upfront payment of $20.0 million at the closing of the transaction and a $5.0 million milestone payment in early April 2019. In addition, Cumberland has agreed to pay a royalty of up to 20% on future net sales of the product. The future royalty payments are required to be recognized at their acquisition-date fair value as part of the contingent consideration transferred in the business combination.
The following table summarizes the initial payments and consideration for the business combination:
Consideration:
Cash paid at closing$20,000,000  
Cash payment during early 20195,000,000  
Fair value of contingent consideration - net sales royalty9,182,000  
Total consideration $34,182,000  

The contingent consideration liability represents the future net sales royalty payments discussed above. Cumberland prepared the valuations of the contingent consideration liability and the intangible assets utilizing significant unobservable inputs. As a result, the valuations are classified as Level 3 fair value measurements. The Company will continue to evaluate the assets acquired and liabilities assumed during the measurement period.
The following table presents the changes in the Company's Level 3 contingent consideration liability that is measured at fair value on a recurring basis. The contingent consideration earned and accrued in operating expenses is paid to the seller quarterly.
Contingent consideration liability
Balance at November 12, 2018$9,034,000  
Change in fair value of contingent consideration included in operating expenses(40,000) 
Contingent consideration earned and accrued in operating expenses508,000  
Balance at December 31, 20189,502,000  
Adjustment to initial fair value of the contingent consideration liability148,000  
Cash payment of royalty during the period(908,347) 
Change in fair value of contingent consideration included in operating expenses(681,577) 
Contingent consideration earned and accrued in operating expenses560,128  
Balance at September 30, 2019$8,620,204  
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The following table summarizes the final allocation of the fair values of the assets acquired as part of the acquisition of Vibativ:
Finished goods inventory$6,624,000  
Work in process - unlabeled vials3,970,000  
Work in process - validation vials1,827,000  
Raw materials9,129,000  
Total inventory$21,550,000