Cumberland Pharmaceuticals Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Cumberland is a specialty pharmaceutical company focused on acquiring, developing and commercializing branded prescription products, primarily for hospital acute care and gastroenterology. The company markets seven FDA-approved products in the United States and is developing ifetroban and other pipeline candidates. This unaudited Form 10-Q covers the three months ended March 31, 2020, with comparison to the three months ended March 31, 2019. Cumberland is classified as a smaller reporting company and non-accelerated filer.
Ethyol and Totect were returned to Clinigen effective January 1, 2020 and are presented as discontinued operations for all periods.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net revenues | $8.33 million | $8.73 million | Down $0.40 million |
| Operating income (loss) | $(1.85) million | $(1.32) million | Loss increased $0.52 million |
| Net income (loss) from continuing operations | $(1.88) million | $(1.19) million | Loss increased $0.70 million |
| Discontinued operations income | $0.82 million | $1.15 million | Down $0.33 million |
| Net loss attributable to common shareholders | $(1.06) million | $(0.07) million | Loss increased $0.98 million |
| Basic loss per share | $(0.07) | Approximately $0.00 | Lower |
Gross margin was approximately 80.4%, compared with 81.0% in the prior-year quarter. Operating margin was approximately negative 22.2%, compared with negative 15.2%. Continuing-operations net margin was approximately negative 22.6%, compared with negative 13.6%.
- Product revenue increases were led by Vibativ, up $0.37 million to $2.43 million, and Kristalose, up slightly to $3.31 million.
- Revenue declined for Caldolor by $0.22 million, Acetadote by $0.14 million, Omeclamox-Pak by $0.08 million, Vaprisol by $0.08 million and other revenue by $0.25 million.
- Selling and marketing expense increased $0.27 million, and research and development expense increased $0.32 million, primarily reflecting higher salaries, insurance-related noncash expense and FDA user fees.
- General and administrative expense decreased $0.50 million, principally because of lower advisory, legal and professional fees and lower stock compensation expense.
- Cash provided by operating activities was $0.89 million, compared with cash used of $0.39 million in Q1 2019. Continuing operations used $0.44 million, partially offset by $1.33 million from discontinued operations.
- Investing activities used $0.57 million, including $0.55 million of additions to intangible assets. Financing activities used $1.50 million, including $0.44 million for common-stock repurchases and $0.80 million to repurchase subsidiary shares.
- Cash and cash equivalents declined from $28.21 million at December 31, 2019 to $27.03 million at March 31, 2020.
- Working capital was $25.36 million and the current ratio was 2.3 at March 31, 2020.
Debt, liquidity and balance sheet
- Total assets were $97.42 million and total liabilities were $47.58 million at March 31, 2020.
- The revolving credit facility had $18.50 million outstanding against a maximum borrowing capacity of $20.0 million, leaving reported availability of $1.50 million. The facility matures July 31, 2021, is secured by substantially all company assets and carried an interest rate of 3.73% at March 31, 2020.
- The company was in compliance with its Tangible Capital Ratio covenant as of March 31, 2020 and stated that it expects to remain compliant.
- Inventory totaled $23.72 million, including $15.57 million classified as non-current. Management reported no required obsolescence or discontinuance reserve.
- The company had approximately $44.1 million of net operating loss carryforwards and expects to pay minimal income taxes during 2020 and beyond on taxable operating income.
Material changes, outlook and unusual items
- Discontinued operations income of $0.82 million represented the first quarterly installment under the agreement with Clinigen. Cumberland expects to receive total financial consideration of $5.0 million over two years, with no associated expenses reported.
- Cumberland launched a ready-to-use, premixed Caldolor presentation in January 2020. It also reported favorable topline results from a pediatric Caldolor study, with final reporting and potential FDA submission still pending.
- The company introduced special supply, pricing and payment arrangements for Vibativ and Caldolor during the COVID-19 health-care crisis and later announced a similar initiative for Vaprisol.
- COVID-19 caused lower health-care utilization, including reduced hospital admissions, physician visits and elective procedures. Sales activity shifted largely to telephone and electronic communications, while travel and medical meetings were curtailed.
- Management warned of potential revenue losses, supply interruptions, clinical-trial delays and unplanned expenses related to COVID-19, but stated that the future impact could not be quantified as of the filing date.
- Enrollment in ifetroban clinical studies declined during Q1 2020, although the company continued supplying study drug to existing participants.
- On April 20, 2020, the company received a $2.19 million Paycheck Protection Program loan bearing 1.0% interest and maturing April 14, 2022. A portion may be forgiven if used for qualifying expenses. The company stated that it had not laid off or furloughed employees due to COVID-19.
- The company continues to depend on third-party manufacturers, distributors and research partners. Specific supply risks include single-source or replacement-manufacturer requirements for certain products, including Kristalose, Vaprisol and Vibativ.
- No legal proceedings were reported. Management concluded that disclosure controls and procedures were effective as of March 31, 2020, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-19 materially affects product demand, hospital utilization, manufacturing, distribution, collections and clinical-trial enrollment beyond Q1.
- The company’s ability to maintain compliance with its credit-facility covenant and refinance or repay the $18.5 million revolving balance before maturity.
- The amount and timing of forgiveness, if any, for the $2.19 million PPP loan and the resulting accounting treatment.
- Whether Vibativ growth and the Caldolor ready-to-use launch can offset declines in other products and discontinued operations.
- Availability and manufacturing continuity for products dependent on third-party suppliers, particularly Kristalose, Vaprisol, Vibativ and RediTrex.
- Progress, enrollment recovery and regulatory strategy for the ifetroban and other clinical programs.
- The sustainability of cash generation from continuing operations, which remained negative despite consolidated operating cash flow being positive due to discontinued operations.