CUMBERLAND PHARMACEUTICALS INC quarterly report, Q2 FY2020

Cumberland Pharmaceuticals Inc. — Form 10-Q Summary

Business context and reporting period

Cumberland Pharmaceuticals is a specialty pharmaceutical company focused on acquiring, developing and commercializing branded prescription products, primarily for hospital acute care and gastroenterology. The filing reports unaudited results for the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.

The portfolio included Acetadote, Caldolor, Kristalose, Omeclamox-Pak, Vaprisol, Vibativ and RediTrex. The company also continued Phase II development of ifetroban and early-stage product development through its majority-owned subsidiary, Cumberland Emerging Technologies.

Financial performance and liquidity

Metric	Three months ended June 30, 2020	Three months ended June 30, 2019	Six months ended June 30, 2020	Six months ended June 30, 2019
Net revenues	$9.6 million	$9.4 million	$17.9 million	$18.1 million
Gross profit	$7.0 million	$7.6 million	$13.7 million	$14.7 million
Gross margin	72.8%	81.0%	76.3%	81.0%
Operating loss	$(1.6) million	$(1.4) million	$(3.4) million	$(2.7) million
Net loss from continuing operations	$(1.7) million	$(1.3) million	$(3.6) million	$(2.5) million
Net loss attributable to common shareholders	$(0.9) million	$(0.5) million	$(2.0) million	$(0.6) million
Loss per diluted share	$(0.06)	$(0.04)	$(0.13)	$(0.04)

Second-quarter operating margin was approximately (16.5%), compared with (14.6%) in the prior-year quarter. Six-month operating margin was approximately (19.1%), compared with (14.9%) in 2019.

Vibativ revenue increased 26.9% in the quarter to $3.3 million and 22.8% for the first six months to $5.7 million.
Kristalose revenue was essentially flat year over year at $3.5 million in the quarter and $6.8 million year to date.
Six-month revenue declines included Acetadote of $0.5 million, Omeclamox-Pak of $0.6 million, Vaprisol of $0.1 million and Caldolor of $0.1 million.
Cost of products sold increased to 27.2% of revenue in the quarter and 23.7% year to date, versus 19.0% in both comparable 2019 periods, primarily due to product mix and higher Vibativ sales.
Six-month cash flow from operating activities was $3.7 million, compared with $1.5 million in 2019. Continuing operations generated $2.3 million of operating cash flow, compared with cash usage of $0.1 million in the prior-year period.
Cash and cash equivalents were $27.4 million at June 30, 2020, compared with $28.2 million at December 31, 2019. Working capital was $23.1 million, and the current ratio was 2.0.
Capital expenditures and additions to intangible assets totaled approximately $0.8 million during the first six months. Financing activities used $3.8 million, including $1.5 million of revolving-credit repayments, $1.2 million of common-share repurchases and $0.8 million for repurchase of subsidiary shares.

Debt, liquidity and balance-sheet position

Revolving-credit borrowings were $17.0 million at June 30, 2020, down from $18.5 million at December 31, 2019. The facility has a maximum borrowing capacity of $20.0 million, leaving reported availability of $3.0 million. Borrowings bear interest at LIBOR plus a spread of 1.75% to 2.75%; the stated rate was 2.92% at June 30, 2020. The facility matures July 31, 2021 and is secured by substantially all company assets. Cumberland reported compliance with its Tangible Capital Ratio covenant.

On April 20, 2020, the company received a $2.2 million Paycheck Protection Program loan bearing 1.0% interest and maturing April 14, 2022. The company recorded the proceeds as deferred income under its stated IAS 20 government-grant accounting policy and expects to seek forgiveness for qualifying expenditures. The filing does not provide a final determination of the amount that will be forgiven.

Total assets were $97.5 million and total liabilities were $49.1 million at June 30, 2020. Non-current inventories totaled $15.6 million, including Vibativ-related inventory and approximately $0.4 million of ifetroban-related active pharmaceutical ingredient.

Material changes versus the prior comparable period

Second-quarter revenue increased 1.9%, but six-month revenue decreased 1.2%.
Higher Vibativ sales were offset by lower sales of Acetadote, Omeclamox-Pak, Vaprisol and, year to date, Caldolor.
Gross margin contracted materially because of product mix, while total costs and expenses increased $0.4 million in the quarter and $0.5 million year to date.
Operating loss widened by $0.2 million in the quarter and $0.7 million year to date.
Continuing-operations net loss increased by $0.3 million in the quarter and $1.0 million year to date.
Discontinued operations generated income of $0.7 million in the quarter and $1.6 million year to date in 2020, primarily from installment payments under the dissolution agreement with Clinigen relating to Ethyol and Totect. The company returned the U.S. commercialization rights effective January 1, 2020.
Cash flow improved year over year, primarily due to working-capital changes and the absence of the prior-year $5.0 million Vibativ acquisition payment and marketable-securities investment activity.

Guidance, outlook, management commentary, risks and unusual items

Management stated that existing cash, internally generated cash flow and the revolving credit facility are expected to be adequate to finance internal growth, business-development initiatives and capital expenditures for the foreseeable future. No quantitative revenue or earnings guidance was provided.

COVID-19 materially reduced domestic Caldolor shipments because of lower elective-surgery activity. The company also reported reduced clinical-trial enrollment and shifted sales activity from in-person meetings to telephone and electronic communications.
Cumberland relies on third parties for components, manufacturing and distribution and warned of potential revenue loss, supply interruptions, delays and unplanned expenses from COVID-19. The company stated that the future impact could not be quantified.
The company launched special supply and financial arrangements for Vibativ, Caldolor and Vaprisol during the health-care crisis.
RediTrex was expected to be marketed before the end of 2020, subject to commercial launch activities.
Ifetroban Phase II programs continued, but enrollment was affected by the pandemic. Management stated that it was awaiting additional results before determining the product’s approval path.
The contingent consideration liability related to Vibativ was $8.3 million at June 30, 2020, including a $0.6 million decrease in fair value recognized during the period and $0.6 million of accrued royalty consideration.
The company had approximately $56.3 million of federal net operating-loss carryforwards, including approximately $44.1 million related to exercises of nonqualified stock options, and expects to pay minimal income taxes during 2020 and beyond on taxable operating income.
No legal proceedings or off-balance-sheet arrangements were reported. Management concluded that disclosure controls and procedures were effective.

Important facts for investors to verify

Whether the company maintains compliance with the revolving-credit facility covenant and refinances or repays the facility before its July 31, 2021 maturity.
The final forgiveness determination and accounting treatment of the $2.2 million PPP loan.
Whether Vibativ growth can offset declining or pressured sales of other products and the resulting gross-margin compression.
The duration and financial effects of COVID-19 on hospital demand, elective procedures, supply chains and clinical-trial enrollment.
The timing and commercial performance of the RediTrex launch.
The development results, enrollment recovery and potential regulatory path for the ifetroban programs and the hospital cholesterol-reducing product candidate.
The collectability and timing of remaining Clinigen installment payments and the $1.0 million Nordic milestone payment recorded as a liability and paid in July 2020.