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 markets. The filing covers the unaudited three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. The company operates as one specialty pharmaceutical products segment and relies on third-party manufacturers and distributors.
The financial statements reclassify the former Ethyol and Totect business as discontinued operations following the return of U.S. commercialization rights to Clinigen effective January 1, 2020.
Financial Performance and Key Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net revenues | $9.3 million | $6.9 million | $27.2 million | $25.1 million |
| Operating income (loss) | $(1.2) million | $(3.2) million | $(4.6) million | $(5.9) million |
| Net income (loss) from continuing operations | $(1.3) million | $(3.3) million | $(4.8) million | $(5.8) million |
| Net income (loss) attributable to common shareholders | $(0.5) million | $(2.0) million | $(2.5) million | $(2.6) million |
| Basic loss per share | $(0.03) | $(0.13) | $(0.16) | $(0.17) |
Gross profit was approximately $7.1 million in Q3 and $20.8 million for the first nine months. Gross margin was approximately 76.8% in Q3 2020 versus 77.2% in Q3 2019, and 76.5% for the first nine months versus 79.9% in the prior-year period. Operating margins were approximately negative 13.1% in Q3 and negative 17.1% for the first nine months, improving from negative 46.1% and negative 23.5%, respectively, in the comparable periods.
- Q3 revenue increased $2.3 million, or approximately 33%, primarily from Vibativ, Kristalose, Omeclamox-Pak, Caldolor and Vaprisol.
- Nine-month revenue increased $2.1 million, or 8.4%, led by Vibativ and Kristalose, partly offset by lower Acetadote and Omeclamox-Pak revenue.
- Q3 cost of products sold increased $0.6 million; nine-month cost increased $1.4 million. Product cost as a percentage of revenue rose to 23.2% in Q3 and 23.5% year to date, partly because of product mix and Vibativ purchase-accounting inventory step-up costs.
- Q3 selling and marketing expense decreased $0.2 million and research and development expense decreased $0.4 million. General and administrative expense increased $0.3 million.
- Vibativ revenue was $2.8 million in Q3 and $8.6 million for the first nine months, up 93.8% and 38.9%, respectively, from the comparable periods.
Cash Flow, Liquidity and Debt
| Metric | September 30, 2020 | December 31, 2019 |
|---|---|---|
| Cash and cash equivalents | $26.6 million | $28.2 million |
| Working capital | $25.0 million | $26.0 million |
| Current ratio | 2.0x | 2.1x |
| Revolving credit availability | $3.0 million | $1.5 million |
| Revolving credit borrowings | $17.0 million | $18.5 million |
- Cash provided by operating activities was $4.6 million for the first nine months of 2020, compared with $2.2 million in 2019. Continuing operations generated $2.4 million, compared with $0.3 million used in 2019; discontinued operations contributed $2.2 million.
- Investing activities used $1.4 million, including $1.8 million for intangible assets and $0.1 million for property and equipment.
- Financing activities used $4.7 million, including $1.5 million of net revolving-credit repayments, $1.6 million of common-share repurchases and $0.8 million to repurchase a portion of CET noncontrolling interests.
- Cash decreased $1.6 million during the nine-month period.
- The company received a $2.2 million Paycheck Protection Program loan bearing 1.0% interest and maturing April 14, 2022. The company applied for forgiveness in October 2020; the lender approved the request and submitted it to the SBA for review.
- On October 7, 2020, the revolving credit agreement was amended to provide up to $15 million of borrowing capacity, with a possible increase of up to $5 million subject to conditions and bank approval, and to extend maturity to October 1, 2022. The company was in compliance with its Tangible Capital Ratio covenant at September 30, 2020.
Material Changes Versus the Prior Comparable Period
- Continuing-operations revenue grew despite COVID-19-related reductions in hospital admissions, elective procedures, medical-facility access and in-person sales activity.
- Vibativ became a more significant contributor to revenue and operating results, while Acetadote revenue declined materially.
- Operating and continuing-operations losses narrowed, but the company remained unprofitable.
- Gross margin declined because of product mix, especially higher Vibativ sales, and purchase-accounting step-up costs.
- Discontinued operations contributed $2.3 million of income in the first nine months of 2020, representing three quarterly installments from Clinigen under the Ethyol and Totect dissolution agreement. The comparable 2019 period included $3.3 million of income from the products’ sales and operations.
- Common-share repurchases totaled 407,683 shares, or approximately $1.5 million, in the first nine months of 2020, compared with 452,155 shares and approximately $2.6 million in 2019.
Guidance, Outlook, Risks and Unusual Items
- Management stated that existing working capital, internally generated cash flows and the revolving credit facility are expected to fund internal growth, business development and capital expenditures for the foreseeable future. No specific revenue or earnings guidance was provided.
- COVID-19 caused reduced patient visits and elective surgeries, restricted access to medical facilities, interrupted clinical-trial enrollment and shifted sales activity toward telephone and electronic communications. Management could not quantify the future financial impact.
- The Omeclamox-Pak packager experienced COVID-19-related financial difficulties and suspended operations. Cumberland reported a product shortage to the FDA effective October 14, 2020, had no stated date for new inventory availability and was evaluating alternative packaging arrangements.
- The company depends on third-party manufacturers and distributors. Risks include supply interruptions, regulatory noncompliance, product recalls, delayed approvals and potential impairment of brand-related assets. Vaprisol also faces a longer-term manufacturing transition risk.
- Ifetroban Phase II enrollment was interrupted by COVID-19. Studies were continuing or resuming at some sites, but management was awaiting results before determining the registration strategy.
- The company expects to pay minimal income taxes during 2020 and beyond because of approximately $56.3 million of federal net operating loss carryforwards, including approximately $44.1 million arising from nonqualified stock-option exercises.
- The filing reports no legal proceedings and no off-balance-sheet arrangements.
Investor Verification Checklist
- Verify the timing and final SBA approval of forgiveness for the $2.2 million PPP loan and any resulting accounting treatment.
- Monitor Omeclamox-Pak packaging alternatives, inventory availability and the duration of the reported shortage.
- Assess Vibativ sales growth, royalty obligations, inventory utilization and the remaining $8.1 million contingent-consideration liability.
- Evaluate whether operating cash generation can be sustained while the company remains loss-making and continues product-development spending.
- Review compliance with the revolving-credit facility’s financial covenant and the company’s available borrowing capacity after the October 2020 amendment.
- Track COVID-19 effects on hospital utilization, Caldolor demand, manufacturing supply, clinical-trial enrollment and international shipments.
- Confirm the launch and commercial performance of RediTrex, which management expected to introduce before the end of 2020.