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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
  þ
    
    Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Fiscal Year Ended December 31, 2009
 o
    
    Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission File No. 001-33637
 Cumberland Pharmaceuticals Inc.
 (Exact name of registrant as specified in its charter)
 Tennessee
    
    
    62-1765329State 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)
 Securities Registered Pursuant to Section 12(b) of the Act
 Title of each class
    
    Name of each exchange on which registeredCommon stock, no par value
    
    Nasdaq Global Select Market
 Yes o No þ
 Yes o No þ
 þ o
 o o
 o
  Large accelerated filer o
    

Accelerated filer o
    

Non-accelerated filer þ
    

Smaller reporting company o(Do not check if smaller reporting company)
 o þ
  DOCUMENTS INCORPORATED BY REFERENCE




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##### 



CUMBERLAND PHARMACEUTICALS INC.
INDEX
 PART I
    
    
    1Item 1: Business
    
    
    1Item 1A: Risk Factors
    
    
    17Item 1B: Unresolved Staff Comments
    
    
    28Item 2: Properties
    
    
    28Item 3: Legal Proceedings
    
    
    28PART II
    
    
    29Item 5: Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    29Item 6: Selected Financial Data
    
    
    30Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    31Item 7A: Quantitative and Qualitative Disclosures About Market Risk
    
    
    41Item 8:
Financial Statements and Supplementary Data
    
    
    42Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    42Item 9A: Controls and Procedures
    
    
    42Item 9B: Other Information
    
    
    42PART III
    
    
    42PART IV
    
    
    43Item 15: Exhibits, Financial Statement Schedules
    
    
    43SIGNATURES
    
    
    47EX-4.8EX-23.1EX-31.1EX-31.2EX-32.1




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PART I
 
 Item 1:
    
    Business
 BUSINESS
 OUR COMPANY
  Ò Ò Ò
    OUR STRATEGY
 Maximize sales of Acetadote and Kristalose
 TM
 1




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Successfully commercialize Caldolor
  Continue to build a high-performance sales organization to address our target markets
  Hospital market
 Gastroenterology market
 Expand our product portfolio by acquiring rights to additional products and late-stage product
candidates
  Develop a pipeline of early-stage products through CET
  2




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OUR PRODUCTS
  Product
    
    Indication
    
    Delivery
    
    StatusAcetadoteÒ
    
    Acetaminophen Poisoning
    
    Injectable
    
    MarketedCaldolorÒ
    
    Pain and Fever
    
    Injectable
    
    MarketedKristaloseÒ
    
    Chronic and Acute Constipation
    
    Oral Solution
    
    Marketed
 Acetadote Ò
  Journal of Medical Economics
 Market for Acetadote
  The Medical
Letter on Drugs and Therapeutics
 3




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Clinical Development
   Caldolor Ò
    The Market for Caldolor
     4




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Clinical Development Overview
 New England Journal of Medicine
  Study Name
    
    
    Number of Subjects
    
    
    Setting
    
    Study ResultsPharmacokinetic Study
    
    
    36
    
    
    Healthy volunteers
    
    Similar PK parameters between oral and CaldolorAdult Safety Study
    
    
    12
    
    
    Healthy volunteers
    
    Safe and well-tolerated IV infusion of CaldolorSepsis Study IND 32803(1)
    
    
    455
    
    
    Hospitalized patients with severe sepsis
    
    Significant and sustained reduction of temperature in patients with high fever (p<0.01)(3)Adult Malaria Fever Study
    
    
    6
    
    
    Hospitalized adult malaria patients
    
    Significant reduction in temperature over 24 hours of  treatment (p=0.002)Phase III Adult Fever Study(2)
    
    
    120
    
    
    Hospitalized adult febrile patients
    
    Significant, dose-dependent, reduction in temperature supporting 400mg dose  (p=0.0003)Phase III Adult Dose Ranging Pain Study(2)
    
    
    406
    
    
    Hospitalized adult abdominal and orthopedic post-operative patients
    
    Dose-dependent, morphine sparing
effect (22%) supporting 800mg dose 
Significant reduction in pain intensity scores (VAS)(4)over 24 hours of treatment (p=0.001)Phase III Adult Abdominal Hysterectomy Pain Study(2)
    
    
    319
    
    
    Hospitalized adult abdominal hysterectomy patients
    
    Significant, morphine-sparing effect (19%, p <0.001)
Significant reduction in pain intensity scores
                                                                                                                                                                            (VAS) over 24 hours of treatment (p=0.011)
 
 (1) Study data licensed from Vanderbilt University; Cumberland report filed 2003(2) Pivotal Study(3) P-value <0.05 represents statistical significance(4) Visual Analog Scale 5




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Additional Studies
     Phase IV Required Pediatric Assessment
   Safety Summary
  6




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Commercialization
Strategy
     Kristalose Ò
  Market for Kristalose
 Ò Ò
 7




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Competitive Advantages
   Early-stage product candidates
   
    
    In collaboration with Vanderbilt University, we are currently developing a new
palliative treatment for fluid buildup in the lungs of cancer patients. The product
candidate is a protein therapeutic being designed to treat pleural effusion, a condition
which occurs when cancer spreads to the surface of the lung and chest cavity, causing fluid
to accumulate and patients to suffer shortness of breath and chest pain. An estimated
100,000 patients are affected by this condition each year. Vanderbilt University
researchers believe they have found a method of treating this condition which may involve
less pain, a higher success rate and faster healing time, resulting in significantly
shorter hospital stays.
    
    In collaboration with the University of Mississippi, we are developing a highly
purified, injectable anti-infective used to treat fungal infections in immuno-compromised
patients. This product candidates active ingredient is currently FDA-approved in a
different formulation, and while it is the therapeutic of choice for infectious disease
specialists in treating such fungal infections, it can produce serious side effects related
to renal toxicity, often resulting in dosage limitations or discontinued use. University of
Mississippi researchers have developed what they believe is a purer and safer form of the
anti-infective.
    
    In collaboration with the University of Tennessee, we are currently developing a novel
asthma therapeutic designed to prevent remodeling of airway smooth muscle to reduce
asthmatic reaction in pediatric patients. Airway remodeling occurs when the cells or
muscles that line the airway become inflamed and can result in decreased lung function.
University of Tennessee researchers believe they have found a treatment that can reduce, or
even prevent, asthma attacks in children.
    
    In collaboration with Vanderbilt University, we recently signed an agreement to develop
a novel treatment to improve renal function in patients with hepatorenal syndrome, a
condition where kidneys fail suddenly due to cirrhosis of the liver. The product candidate
may markedly reduce renal blood flow in association with acute kidney failure.
 BUSINESS DEVELOPMENT
  8




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##### Table of Contents



CLINICAL AND REGULATORY AFFAIRS
  Clinical development
  
    
    creating clinical development strategies;
    
    designing and monitoring our clinical trials;
    
    creating case report forms and other study-related documents;
    
    overseeing clinical work contracted to third parties; and
    
    overseeing CET grant funding proposals.
 Regulatory and quality affairs
  
    
    preparing and submitting NDAs and fulfilling post-approval marketing commitments;
    
    maintaining investigational and marketing applications through the submission of appropriate reports;
    
    submitting supplemental applications for additional label indications, product line
extensions and manufacturing improvements;
    
    evaluating regulatory risk profiles for product acquisition candidates, including
compliance with manufacturing, labeling, distribution and marketing regulations;
    
    monitoring applicable third-party service providers for quality and compliance with
current Good Manufacturing Practices, Good Laboratory Practices, and Good Clinical
Practices, and performing periodic audits of such vendors; and
    
    maintaining systems for document control, product and process change control, customer
complaint handling, product stability studies and annual drug product reviews.
 Professional and medical affairs
  9




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SALES AND MARKETING
    International Sales and Marketing
    10




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MANUFACTURING AND DISTRIBUTION
  Manufacturing
  
    
    In July 2000, we established an international manufacturing alliance with a predecessor
to Hospira Australia Pty. Ltd., or Hospira. Hospira sources active pharmaceutical
ingredients, or APIs, and manufactures Caldolor for us under an agreement that expires in
June 2014, subject to early termination upon 45 days prior notice in the event of uncured
material breach by us or Hospira. The agreement will automatically renew for successive
three-year terms unless Hospira or we provide at least 12 months prior written notice of
non-renewal. Under the agreement, we pay Hospira a transfer price per unit of Caldolor
supplied. In addition, we reimburse Hospira for agreed-upon development, regulatory and
inspection and audit costs. We have granted Hospira a right of first negotiation for
manufacture and distribution of all future pharmaceutical products we intend to sell in
Australia, New Zealand, Canada and mutually agreed Southeast Asian and Latin American
countries.
    
    Bioniche Teoranta, or Bioniche, sources APIs and manufactures Acetadote for us for sale
in the U.S. at its FDA-approved manufacturing facility in Ireland. Our relationship with
Bioniche began in January 2002. Bioniche manufactures and packages Acetadote for us, and we
purchase Acetadote from Bioniche pursuant to an agreement expiring in January 2011. This
agreement is subject to early termination upon prior written notice in the event of an
uncured material default by us or Bioniche. We have an option to renew the agreement for a
five-year term upon expiration. Under the agreement, we pay Bioniche a transfer price per
unit of Acetadote supplied, which transfer price is subject to annual adjustment, and a
percentage royalty in the mid-single digits throughout the term of the agreement based on
our net sales of the product. In addition, we are required to purchase minimum quantities
of Acetadote.
    
    Inalco S.p.A. and Inalco Biochemicals, Inc., or collectively Inalco, from which we
licensed exclusive U.S. commercialization rights to Kristalose in April 2006, source APIs
and supply us with the product under an agreement that expires in 2021. The agreement
renews automatically for successive three-year terms unless we or Inalco provide written
notice of intent not to renew at least 12 months prior to expiration of a term. Either we
or Inalco may terminate this agreement upon at least 45 days prior written notice in the
event of uncured material breach. Under the agreement, we are required to pay Inalco a
transfer price per unit of Kristalose supplied and a percentage royalty in the low to mid
single-digits throughout the term of the agreement based on our net sales of Kristalose. We
are required to purchase minimum quantities of Kristalose.
    
    We entered into an agreement with Bayer Healthcare, LLC, or Bayer, in February 2008 for
the manufacture of Caldolor and Acetadote. The agreement expires in February 2013, subject
to early termination upon 30 days prior written notice in the event of uncured material
breach by us or Bayer. The agreement will automatically renew for successive one-year terms
unless Bayer or we provide at least six months prior written notice of non-renewal. Under
the agreement, we pay Bayer a transfer price per each unit of Caldolor or Acetadote
supplied. In addition, we pay Bayer for agreed upon development costs.
 11




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Distribution
  INTELLECTUAL PROPERTY
  Acetadote
  Caldolor
     Kristalose
  12




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COMPETITION
  
    
    product attributes such as efficacy, safety, ease-of-use and cost-effectiveness;
    
    brand awareness and recognition driven by sales and marketing and distribution capabilities;
    
    intellectual property and other exclusivity rights;
    
    availability of resources to build and maintain developmental and commercial capabilities;
    
    successful business development activities;
    
    extent of third-party reimbursements; and
    
    establishment of advantageous collaborations to conduct development, manufacturing or
commercialization efforts.
  Acetadote
  Caldolor
  
    
    Morphine, the most commonly used product for the treatment of acute, post-operative
pain, is manufactured and distributed by several generic pharmaceutical companies.
    
    DepoDurÒ is an extended release injectable formulation of morphine that is marketed by EKR Therapeutics, Inc.
    
    Other generic injectable opioids, including fentanyl, meperidine and hydromorphone, address this market.
    
    Ketorolac (brand name ToradolÒ), an injectable NSAID, is also
manufactured and distributed by several generic pharmaceutical companies.
   13




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Kristalose
 Ò
 Ò
 GOVERNMENT REGULATION
  FDA Approval Process
  
    
    completion of pre-clinical laboratory and animal testing;
 
    
    the submission to the FDA of an investigational new drug application, or IND, which must
be evaluated and found acceptable by the FDA before human clinical trials may commence;
 
    
    performance of adequate and well-controlled human clinical trials to establish the
safety and efficacy of the proposed drug for its intended use; and
 
    
    submission and approval of an NDA.
   14




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Section 505(b)(2) New Drug Applications
   Special Protocol Assessment Process
   15




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Orphan Drug Designation
  The Hatch-Waxman Act
  Other
Regulatory Requirements
    16




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EMPLOYEES
  
 Item 1A: Risk Factors
 You should carefully consider the risk factors described below and throughout this report, which
could materially affect our business. There are also risks that are not presently known or not
presently material, as well as the other information set forth in this report that could materially
affect our business. In addition, in our periodic filings with the SEC, press releases and other
statements, we discuss estimates and projections regarding our future performance and
business outlook. By their nature, such forward-looking statements involve known and unknown
risks, uncertainties and other factors that in some cases are out of our control. For a further
discussion of forward-looking statements, please refer to the section entitled Special Note
Regarding Forward-Looking Statements. These factors could cause our actual results to differ
materially from our historical results or our present expectations and projections. These risk
factors and uncertainties include, but are not limited to the following:
 RISKS RELATED TO OUR BUSINESS
 An adverse development regarding our products could have a material and adverse impact on our
future revenues and profitability.
  
    
    The prices of our products relative to other drugs or competing treatments;
 
    
    Any unfavorable publicity concerning us, our products, or the markets for these products
such as information concerning product contamination or other safety issues in either of
our product markets, whether or not directly involving our products;
 
    
    Perception by physicians and other members of the healthcare community of the safety or
efficacy of our products or competing products;
 
    
    Regulatory developments related to our marketing and promotional practices or the
manufacture or continued use of our products;
 
    
    The inability of the orphan drug designation of Acetadote (under which the FDA granted
seven years marketing exclusivity for intravenous treatment of moderate to severe
acetaminophen overdose) to prevent development and marketing of a different product that
competes with Acetadote;
    
    Changes in intellectual property protection available for our products or competing treatments;
    
    The availability and level of third-party reimbursement for sales of our products; and
    
    The continued availability of adequate supplies of our products to meet demand.
  17




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If any manufacturer we rely upon fails to produce our products in the amounts we require on a
timely basis, or fails to comply with stringent regulations applicable to pharmaceutical drug
manufacturers, we may be unable to meet demand for our products and may lose potential revenues.
    
    
    fines and civil penalties;
    
    suspension of production or distribution;
    
    suspension or delay in product approval;
    
    product seizure or recall; and
    
    withdrawal of product approval.
 We are dependent on a variety of other third parties. If these third parties fail to perform as we
expect, our operations could be disrupted and our financial results could suffer.
  
    
    Cardinal Health Specialty Pharmaceutical Services, a logistics and fulfillment company
and business unit of Cardinal, which warehouses and ships our marketed products;
 
    
    Ventiv Commercial Services, LLC, which provides a field sales force that is the primary
selling team for Kristalose; and
 
    
    Vanderbilt University and the Tennessee Technology Development Corporation, co-owners
with us of CET, and the universities that collaborate with us in connection with CETs
research and development programs.
  18




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Competitive pressures could reduce our revenues and profits.
     The commercial launch of Caldolor is subject to many internal and external challenges and if we
cannot overcome these challenges in a timely manner, our future revenues and profits could be
materially and adversely impacted.
  .
 19




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Any attempt by us to expand the potential market for Caldolor is subject to limitations.
   Our future growth depends on our ability to identify and acquire rights to products. If we do not
successfully identify and acquire rights to products and successfully integrate them into our
operations, our growth opportunities may be limited.
  If we are unable to maintain and build an effective sales and marketing infrastructure, we will not
be able to commercialize and grow our products and product candidates successfully.
  If governmental or third-party payors do not provide adequate reimbursement for our products, our
revenue and prospects for continued profitability may be limited.
   20




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Formulary practices of third-party payors could adversely affect our competitive position.
  Continued consolidation of distributor networks in the pharmaceutical industry as well as increases
in retailer concentration may limit our ability to profitably sell our products.
  Our CET joint initiative may not result in our gaining access to commercially viable products.
  
    
    CET investigates early-stage products, which have the greatest risk of failure prior to
FDA approval and commercialization;
 
    
    In some programs, we do not have pre-set rights to product candidates developed by CET.
We would need to agree with CET and its collaborators on the terms of any product licensed
to, or acquired by, us;
 
    
    We rely principally on government grants to fund CETs research and development
programs. If these grants were no longer available, we or our co-owners might be unable or
unwilling to fund CET operations at current levels or at all;
 
    
    We may become involved in disputes with our co-owners regarding CET policy or
operations, such as how best to deploy CET assets or which product opportunities to pursue.
Disagreement could disrupt or halt product development; and
 
    
    CET may disagree with one of the various universities with which CET is collaborating on
research. A disagreement could disrupt or halt product development.
 We depend on our key personnel, the loss of whom would adversely affect our operations. If we fail
to attract and retain the talent required for our business, our business will be materially harmed.
  21




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We face potential product liability exposure, and if successful claims are brought against us, we
may incur substantial liability for a product or product candidate and may have to limit its
commercialization.
  
    
    decreased demand for our products;
    
    injury to our reputation;
    
    withdrawal of clinical trial participants;
    
    significant litigation costs;
    
    substantial monetary awards to or costly settlement with patients;
    
    product recalls;
    
    loss of revenue; and
    
    the inability to commercialize our product candidates.
    We have never paid cash dividends on our capital stock, and we do not anticipate paying any cash
dividends in the foreseeable future.
  RISKS RELATING TO GOVERNMENT REGULATION
 We are subject to stringent government regulation. All of our products face regulatory challenges.
  22




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Proposed legislation may permit re-importation of drugs from other countries into the U.S.,
including foreign countries where the drugs are sold at lower prices than in the U.S., which could
materially adversely affect our operating results and our overall financial condition.
  RISKS RELATING TO INTELLECTUAL PROPERTY
 Our strategy to secure and extend marketing exclusivity or patent rights may provide only limited
protection from competition.
  23




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If we are unable to protect the confidentiality of our proprietary information and know-how, the
value of our technology and products could be adversely affected.
  We depend on our licensors for the maintenance and enforcement of our intellectual property and
have limited, if any, control over the amount or timing of resources that our licensors devote on
our behalf.
  If the use of our technology conflicts with the intellectual property rights of third parties, we
may incur substantial liabilities, and we may be unable to commercialize products based on this
technology in a profitable manner or at all.
  24




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We may be involved in lawsuits to protect or enforce our patents or the patents of our
collaborators or licensors, which could be expensive and time consuming.
    If we breach any of the agreements under which we license rights to our products and product
candidates from others, we could lose the ability to continue commercialization of our products and
development and commercialization of our product candidates.
  RISKS RELATED TO OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Our operating results are likely to fluctuate from period to period.
  
    
    new product launches, which could increase revenues but also increase sales and marketing expenses;
    
    acquisition activity and other charges (such as for inventory expiration);
 
    
    increases in research and development expenses resulting from the acquisition of a
product candidate that requires significant additional development;
 
    
    changes in the competitive, regulatory or reimbursement environment, which could drive
down revenues or drive up sales and marketing or compliance costs; and
 
    
    unexpected product liability or intellectual property claims and lawsuits.
 25




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Our focus on acquisitions as a growth strategy has created a large amount of intangible assets
whose amortization could negatively affect our results of operations.
  We may need additional funding and may be unable to raise capital when needed, which could force us
to delay, reduce or eliminate our product development or commercialization and marketing efforts.
  RISKS RELATED TO OWNING OUR STOCK
 The market price of our common stock may fluctuate substantially.
   Unstable market conditions may have serious adverse consequences on our business.
  26




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We are experiencing increased costs as a result of operating as a public company, and our
management will be required to devote additional time to new compliance initiatives.
    Some provisions of our third amended and restated charter, bylaws, credit facility and Tennessee
law may inhibit potential acquisition bids that you may consider favorable.
  
    
    the authorization of undesignated preferred stock, the terms of which may be established
and shares of which may be issued without shareholder approval;
 
    
    advance notice procedures required for shareholders to nominate candidates for election
as directors or to bring matters before an annual meeting of shareholders;
 
    
    limitations on persons authorized to call a special meeting of shareholders;
    
    a staggered board of directors;
    
    a restriction prohibiting shareholders from removing directors without cause;
 
    
    a requirement that vacancies in directorships are to be filled by a majority of the
directors then in office and the number of directors is to be fixed by the board of
directors; and
 
    
    no cumulative voting.
  27




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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
    
    legislative, regulatory or other changes in the healthcare industry at the local, state
or federal level which increase the costs of, or otherwise affect our operations;
 
    
    changes in reimbursement available to us by government or private payers, including
changes in Medicare and Medicaid payment levels and availability of third-party insurance
coverage;
 
    
    competition; and
 
    
    changes in national or regional economic conditions, including changes in interest rates
and availability and cost of capital to us.
 
 Item 1B: Unresolved Staff Comments
  
 Item 2: Properties
   
 Item 3: Legal Proceedings
  28




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##### Table of Contents



PART II
 
 Item 5: Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
 Market Information
  High
    
    
    LowFiscal year ended December 31, 2009:Fourth quarter
    
    $
    16.77
    
    
    $
    11.78
 Dividend Policy
  Securities Authorized for Issuance under Equity Compensation Plans
  Performance Graph
  
 29




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Use of Proceeds from Initial Public Offering of Common Stock
    Purchases of Equity Securities
  Total Number of Shares(or Units) Purchased as
    
    
    Maximum Number (or ApproximateTotal Number of
    
    
    
    
    
    
    Part of Publicly
    
    
    Dollar Value) of Shares (or Units)Shares (or Units)
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    that May Yet Be Purchased Under thePeriod
    
    Purchased
    
    
    per Share (or Unit)
    
    
    Programs
    
    
    Plans or Programs| | | |October 1  October 31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    November 1  November 30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 1  December 31
    
    
    25,739
    
    
    $
    13.59
    
    
    
    
    
    
    
    Total
    
    
    25,739
 
 Item 6: Selected Financial Data
  30




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Years Ended December 31,Statement of income data:
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(in thousands, except per share data)Net revenues
    
    $
    43,537
    
    
    $
    35,075
    
    
    $
    28,064
    
    
    $
    17,815
    
    
    $
    10,690Cost of products sold
    
    
    4,137
    
    
    
    3,046
    
    
    
    2,670
    
    
    
    2,399
    
    
    
    533Selling and marketing
    
    
    20,194
    
    
    
    14,387
    
    
    
    10,053
    
    
    
    7,349
    
    
    
    5,647Research and development
    
    
    4,993
    
    
    
    4,429
    
    
    
    3,694
    
    
    
    2,233
    
    
    
    1,158General and administrative
    
    
    7,643
    
    
    
    5,140
    
    
    
    4,138
    
    
    
    2,999
    
    
    
    2,588Other operating expenses
    
    
    794
    
    
    
    791
    
    
    
    783
    
    
    
    612
    
    
    
    13Operating income
    
    
    5,777
    
    
    
    7,282
    
    
    
    6,725
    
    
    
    2,224
    
    
    
    750Earnings per share  basic
    
    $
    0.22
    
    
    $
    0.47
    
    
    $
    0.40
    
    
    $
    0.45
    
    
    $
    0.21Earnings per share  diluted
    
    $
    0.17
    
    
    $
    0.29
    
    
    $
    0.24
    
    
    $
    0.27
    
    
    $
    0.12
 As of December 31,Balance sheet data:
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(in thousands)Cash and cash equivalents
    
    $
    78,702
    
    
    $
    11,830
    
    
    $
    10,815
    
    
    $
    6,255
    
    
    $
    5,536Working capital
    
    
    74,549
    
    
    
    10,104
    
    
    
    6,669
    
    
    
    3,945
    
    
    
    5,640Total assets
    
    
    103,724
    
    
    
    31,119
    
    
    
    28,919
    
    
    
    26,481
    
    
    
    10,173Total long-term debt and other long-term
obligations (including current portion)
    
    
    20,155
    
    
    
    7,666
    
    
    
    7,623
    
    
    
    10,543
    
    
    
    2,398Convertible preferred stock
    
    
    
    
    
    
    2,604
    
    
    
    2,743
    
    
    
    2,743
    
    
    
    2,743Retained earnings (accumulated deficit)
    
    
    4,542
    
    
    
    1,451
    
    
    
    (3,316
    )
    
    
    (7,360
    )
    
    
    (11,764
    )Total equity
    
    
    72,221
    
    
    
    17,555
    
    
    
    16,746
    
    
    
    11,126
    
    
    
    6,234
 
 Item 7: Managements Discussion and Analysis of Financial Condition and Results of
Operations
 The following discussion and analysis of our financial position and results of operations should be
read together with our audited consolidated financial statements and related notes appearing
elsewhere in this Form 10-K. This discussion and analysis may contain forward-looking statements
that involve risks and uncertainties  please refer to the section entitled Special Note Regarding
Forward-Looking Statements. You should review the Risk Factors section of this Form 10-K for a
discussion of important factors that could cause actual results to differ materially from the
results described in or implied by the forward-looking statements described in the following
discussion and analysis.
 OVERVIEW
  ® (ibuprofen) ® (acetylcysteine) ® (lactulose)
  31




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##### Table of Contents



Recent Developments
 Caldolor®
       32




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##### Table of Contents



Initial Public Offering
  CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
 Accounting Estimates and Judgments
  Revenue Recognition
 Revenue
Recognition in Financial Statements
    2009
    
    
    2008
    
    
    2007Balance at January 1
    
    $
    1,040,203
    
    
    $
    738,362
    
    
    $
    742,678Current Provision
    
    
    3,436,208
    
    
    
    1,690,134
    
    
    
    1,194,869Current Provision for Prior Period Sales
    
    
    75,589
    
    
    
    (73,960
    )
    
    
    (44,252
    )Actual Returns/Credits
    
    
    (2,688,988
    )
    
    
    (1,314,333
    )
    
    
    (1,154,933
    )Balance at December 31
    
    $
    1,863,012
    
    
    $
    1,040,203
    
    
    $
    738,362
  33




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##### Table of Contents




    
    the contractual terms with customers;
    
    analysis of historical levels of discounts, returns, chargebacks and rebates;
    
    communications with customers;
 
    
    purchased information about the rate of prescriptions being written and the level of
inventory remaining in the distribution channel, if known; and
 
    
    expectations about the market for each product, including any anticipated introduction
of competitive products.
    Income Taxes
   34




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##### Table of Contents



Stock-Based Compensation
   2009
    
    2008
    
    2007| | |Dividend yield
    
    
    
    %
    
    
    
    %
    
    
    
    %Expected term (in years)
    
    
    3.7  6.2
    
    
    
    3.5  6.0
    
    
    
    5.5  6.4Expected volatility
    
    
    50%  52
    %
    
    
    49%  51
    %
    
    
    58%  64
    %Risk-free interest rate
    
    
    1.4%  2.7
    %
    
    
    3.1
    %
    
    
    4.6%  4.8
    %The following assumptions were used in calculating the fair value of nonemployee options granted
during 2009, 2008 and 2007:2009
    
    2008
    
    2007Dividend yield
    
    
    
    %
    
    
    
    %
    
    
    
    %Expected term (in years)
    
    
    2.3  10
    
    
    
    10
    
    
    
    10Expected volatility
    
    
    51%  67
    %
    
    
    68
    %
    
    
    74
    %Risk-free interest rate
    
    
    1.1%  2.7
    %
    
    
    3.7
    %
    
    
    4.8
    %
 Research and Development
  Intangible Assets
  35




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##### Table of Contents



RESULTS OF OPERATIONS
 Description of operating accounts
 Net revenues
 Cost of products sold
 Selling and marketing expense
 Research and development expense
 General and administrative expense
 Amortization of product license right
 Interest income
 Interest expense
 Income tax expense
 Year ended December 31, 2009 compared to year ended December 31, 2008
 Net revenues.
  Cost of products sold.
 Selling and marketing.
 36




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##### Table of Contents



Research and development.
 General and administrative.
 Interest income.
 Interest expense.
 Income tax expense.
 Year ended December 31, 2008 compared to year ended December 31, 2007
 Net revenues.
  Cost of products sold.
 Selling and marketing.
 37




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##### Table of Contents



Research and development.
 General and administrative.
 Interest income.
 Interest expense.
 Income tax expense.
 LIQUIDITY AND CAPITAL RESOURCES
   Years Ended December 31,2009
    
    
    2008
    
    
    2007(in thousands)Cash provided by (used in):Operating activities
    
    $
    405
    
    
    $
    6,397
    
    
    $
    8,627Investing activities
    
    
    (712
    )
    
    
    (134
    )
    
    
    (163
    )Financing activities
    
    
    67,180
    
    
    
    (5,248
    )
    
    
    (3,904
    )Net increase in cash and cash equivalents (1)
    
    $
    66,872
    
    
    $
    1,015
    
    
    $
    4,559
 
 (1)
    
    The sum of the individual amounts may not agree due to rounding.  38




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##### Table of Contents



39




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##### Table of Contents



Payments Due by YearContractual obligations
    
    Total(1)
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014+(in thousands)Amounts reflected in the balance sheet:Term loan (2)
    
    $
    18,000
    
    
    $
    9,062
    
    
    $
    6,000
    
    
    $
    2,938
    
    
    
    
    
    
    
    Line of credit
    
    
    1,826
    
    
    
    
    
    
    
    
    
    
    
    1,826
    
    
    
    
    
    
    
    Estimated interest on debt (3)
    
    
    1,575
    
    
    
    919
    
    
    
    488
    
    
    
    167
    
    
    
    
    
    
    
    Other cash obligations not reflected on the
balance sheet:Operating leases
    
    
    1,088
    
    
    
    559
    
    
    
    138
    
    
    
    93
    
    
    
    96
    
    
    
    201Purchase obligations (4)
    
    
    544
    
    
    
    452
    
    
    
    69
    
    
    
    17
    
    
    
    4
    
    
    
    1Total (1)
    
    $
    23,032
    
    
    $
    10,992
    
    
    $
    6,695
    
    
    $
    5,042
    
    
    $
    101
    
    
    $
    203
 
 (1)
    
    The sum of the individual amounts may not agree due to rounding.(2)
    
    The term debt is payable in quarterly installments of $1.5 million beginning in March 2010. In addition to the scheduled quarterly payments, we must make an
additional principal payment within 120 days of the end of the year equal to the Excess Cash Flows, as defined in the agreement. At December 31, 2009, the Excess Cash
Flow payment was $3.1 million and is included in the 2010 amount above.(3)
    
    Represents the estimated interest payments on our line of credit and term loan based on the December 31, 2009 interest rate of LIBOR plus an applicable margin, or
5.73%. Interest payments are due and payable quarterly in arrears. The line of credit becomes due and payable in December 2012. Estimated interest for the line of
credit is based on the assumption of a consistent outstanding balance.(4)
    
    Represents minimum purchase obligations under Kristalose and Acetadote manufacturing agreements. Beginning in January 2013 and continuing through the life of the
agreement, which expires in 2021, our minimum purchases for Kristalose will be based on not less than 25% of each prior years purchases. OFF-BALANCE SHEET ARRANGEMENTS
  40




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##### Table of Contents



RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
  RECENTLY ADOPTED ACCOUNTING STANDARDS
  
 Item 7A: Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
    Exchange Rate Risk
   41




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##### Table of Contents



Item 8: Financial Statements and Supplementary Data
  
 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
  
 Item 9A: Controls and Procedures
    
 Item 9B: Other Information
  
 PART III
  42




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##### 



PART IV
 
 Item 15: Exhibits, Financial Statement Schedules
 (a) Documents filed as part of this report:
  
  Page NumberReport of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets as of December 31, 2009 and 2008
    
    
    F-2Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007
    
    
    F-3Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
    
    
    F-4Consolidated Statements of Equity and Comprehensive Income for the years ended
December 31, 2009, 2008 and 2007
    
    
    F-5Notes to the Consolidated Financial Statements
    
    
    F-6(2) Financial Statement ScheduleValuation and Qualifying Accounts
    
    
    F-25
  (b) Exhibits
 ExhibitNumber
    
    Description3.1
    
    Third Amended and Restated Charter of Cumberland Pharmaceuticals
Inc., incorporated herein by reference to the corresponding
exhibit to Amendment No. 19 of the Registrants Registration
Statement on Form S-1 (File No. 333-142535) as filed with the SEC
on July 17, 20093.2
    
    Second Amended and Restated Bylaws of Cumberland Pharmaceuticals
Inc., incorporated herein by reference to the corresponding
exhibit to Amendment No. 19 of the Registrants Registration
Statement on Form S-1 (File No. 333-142535) as filed with the SEC
on July 17, 20094.1
    
    Specimen Common Stock Certificate of Cumberland Pharmaceuticals
Inc., incorporated herein by reference to the corresponding
exhibit to Amendment No. 5 of the Registrants Registration
Statement on Form S-1 (File No. 333-142535) as filed with the SEC
on August 6, 20074.2
    
    Warrant to Purchase Common Stock of Cumberland Pharmaceuticals
Inc., issued to Bank of America, N.A. on October 21, 2003,
incorporated herein by reference to the corresponding exhibit to
the Registrants Registration Statement on Form S-1 (File No.
333-142535) as filed with the SEC on May 1, 20074.3
    
    Stock Purchase Warrant, issued to S.C.O.U.T. Healthcare Fund L.P.
on April 15, 2004, incorporated herein by reference to the
corresponding exhibit to Amendment No. 1 of the Registrants
Registration Statement on Form S-1 (File No. 333-142535) as filed
with the SEC on June 22, 20074.4
    
    Warrant to Purchase Common Stock of Cumberland Pharmaceuticals
Inc., issued to Bank of America, N.A. on April 6, 2006,
incorporated herein by reference to the corresponding exhibit to
the Registrants Registration Statement on Form S-1 (File No.
333-142535) as filed with the SEC on May 1, 20074.5#
    
    Form of Option Agreement under 1999 Stock Option Plan of
Cumberland Pharmaceuticals Inc., incorporated herein by reference
to the corresponding exhibit to the Registrants Registration
Statement on Form S-1 (File No. 333-142535) as filed with the SEC
on May 1, 20074.6.1#
    
    Form of Incentive Stock Option Agreement under 2007 Long-Term
Incentive Compensation Plan of Cumberland Pharmaceuticals Inc.,
incorporated herein by reference to the corresponding exhibit to
Amendment No. 3 of the Registrants Registration Statement on
Form S-1 (File No. 333-142535) as filed with the SEC on July 11,
20074.6.2#
    
    Form of Nonstatutory Stock Option Agreement under 2007 Long-Term
Incentive Compensation Plan of Cumberland Pharmaceuticals Inc.,
incorporated herein by reference to the corresponding exhibit to
Amendment No. 3 of the Registrants Registration Statement on
Form S-1 (File No. 333-142535) as filed with the SEC on July 11,
2007
 43




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##### Table of Contents



ExhibitNumber
    
    Description4.7#
    
    Form of Nonstatutory Stock Option Agreement under 2007 Directors
Compensation Plan of Cumberland Pharmaceuticals Inc.,
incorporated herein by reference to the corresponding exhibit to
Amendment No. 3 of the Registrants Registration Statement on
Form S-1 (File No. 333-142535) as filed with the SEC on July
11, 20074.8
    
    Warrant to Purchase Common Stock of Cumberland Pharmaceuticals
Inc., issued to Bank of America, N.A. on July 22, 2009, filed
herewith10.1
    
    Manufacturing and Supply Agreement for N-Acetylcysteine, dated
January 15, 2002, by and between Bioniche Life Sciences, Inc. and
Cumberland Pharmaceuticals Inc., incorporated herein by reference
to the corresponding exhibit to Amendment No. 5 of the
Registrants Registration Statement on Form S-1 (File No.
333-142535) as filed with the SEC on August 6, 200710.2
    
    Novation Agreement, dated January 27, 2006, by and among Bioniche
Life Sciences, Inc., Bioniche Pharma Group Ltd., and Cumberland
Pharmaceuticals Inc., incorporated herein by reference to the
corresponding exhibit to the Registrants Registration Statement
on Form S-1 (File No. 333-142535) as filed with the SEC on May 1,
200710.3
    
    First Amendment to Manufacturing and Supply Agreement for
N-Acetylcysteine, dated November 16, 2006, by and between
Bioniche Teoranta and Cumberland Pharmaceuticals Inc.,
incorporated herein by reference to the corresponding exhibit to
Amendment No. 3 of the Registrants Registration Statement on
Form S-1 (File No. 333-142535) as filed with the SEC on July 11,
200710.3.1
    
    Second Amendment to Manufacturing and Supply Agreement for
N-Acetylcysteine, dated March 25, 2008, by and between Bioniche
Teoranta and Cumberland Pharmaceuticals Inc., incorporated herein
by reference to the corresponding exhibit to Amendment No. 10 of
the Registrants Registration Statement on Form S-1 (File No.
333-142535) as filed with the SEC on May 21, 200810.4
    
    Cardinal Health Contract Sales and Services for Cumberland
Pharmaceuticals Inc. Dedicated Sales Force Agreement, dated May
16, 2006, by and between Cardinal Health PTS, LLC and Cumberland
Pharmaceuticals Inc., incorporated herein by reference to the
corresponding exhibit to Amendment No. 3 of the Registrants
Registration Statement on Form S-1 (File No. 333-142535) as filed
with the SEC on July 11, 200710.5
    
    First Amendment to Contract Sales and Service Agreement, dated
July 19, 2006, by and between Cardinal Health PTS, LLC and
Cumberland Pharmaceuticals Inc., incorporated herein by reference
to the corresponding exhibit to Amendment No. 3 of the
Registrants Registration Statement on Form S-1 (File No.
333-142535) as filed with the SEC on July 11, 200710.6
    
    Second Amendment to Contract Sales and Service Agreement, dated
June 1, 2007, by and between Cumberland Pharmaceuticals Inc. and
Inventiv Commercial Services, LLC, as successor in interest to
Cardinal Health PTS, LLC, incorporated herein by reference to the
corresponding exhibit to Amendment No. 3 of the Registrants
Registration Statement on Form S-1 (File No. 333-142535) as filed
with the SEC on July 11, 200710.6.1
    
    Third Amendment to Contract Sales and Service Agreement, dated
March 26, 2008, by and between Cumberland Pharmaceuticals Inc.
and Ventiv Commercial Services, LLC, incorporated herein by
reference to the corresponding exhibit to Amendment No. 10 of the
Registrants Registration Statement on Form S-1 (File No.
333-142535) as filed with the SEC on May 21, 200810.6.2
    
    Fourth Amendment to Service Agreement, dated April 1, 2009, by
and between Ventiv Commercial Services, LLC and Cumberland
Pharmaceuticals Inc., incorporated herein by reference to the
corresponding exhibit to Amendment No. 18 of the Registrants
Registration Statement on Form S-1 (File No. 333-142535) as filed
with the SEC on May 12, 200910.7
    
    Distribution Services Agreement, dated August 3, 2000, by and
between CORD Logistics, Inc. and Cumberland Pharmaceuticals Inc.,
incorporated herein by reference to the corresponding exhibit to
Amendment No. 13 of the Registrants Registration Statement on
Form S-1 (File No. 333-142535) as filed with the SEC on August
12, 200810.8
    
    Strategic Alliance Agreement, dated July 21, 2000, by and between
F.H. Faulding & Co. Limited and Cumberland Pharmaceuticals Inc.,
including notification of assignment from F.H. Faulding & Co.
Limited to Mayne Pharma Pty Ltd., dated April 16, 2002,
incorporated herein by reference to the corresponding exhibit to
Amendment No. 4 of the Registrants Registration Statement on
Form S-1 (File No. 333-142535) as filed with the SEC on July 23,
2007
 44




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##### Table of Contents



ExhibitNumber
    
    Description10.9
    
    Kristalose Agreement, dated April 7, 2006, by and among Inalco
Biochemicals, Inc., Inalco S.p.A., and Cumberland Pharmaceuticals
Inc., incorporated herein by reference to the corresponding
exhibit to Amendment No. 3 of the Registrants Registration
Statement on Form S-1 (File No. 333-142535) as filed with the SEC
on July 11, 200710.9.1
    
    Amendment to Kristalose Agreement, dated April 3, 2008, by and
between Inalco S.p.A., Inalco Biochemicals, Inc., and Cumberland
Pharmaceuticals Inc., incorporated herein by reference to the
corresponding exhibit to Amendment No. 10 of the Registrants
Registration Statement on Form S-1 (File No. 333-142535) as filed
with the SEC on May 21, 200810.9.2
    
    Second Amendment to Kristalose Agreement, dated July 1, 2008, by
and among Inalco Biochemicals, Inc., Inalco S.p.A., and
Cumberland Pharmaceuticals Inc., incorporated herein by reference
to the corresponding exhibit to Amendment No. 13 of the
Registrants Registration Statement on Form S-1 (File No.
333-142535) as filed with the SEC on August 12, 200810.9.3
    
    Third Amendment to Kristalose Agreement, dated April 6, 2009, by
and between Inalco S.p.A., Inalco Biochemicals, Inc., and
Cumberland Pharmaceuticals Inc., incorporated herein by reference
to the corresponding exhibit to Amendment No. 18 of the
Registrants Registration Statement on Form S-1 (File No.
333-142535) as filed with the SEC on May 12, 200910.10
    
    License Agreement, dated May 28, 1999, by and between Vanderbilt
University and Cumberland Pharmaceuticals Inc., incorporated
herein by reference to the corresponding exhibit to Amendment No.
3 of the Registrants Registration Statement on Form S-1 (File
No. 333-142535) as filed with the SEC on July 11, 200710.11#
    
    Employment Agreement effective as of January 1, 2009 by and
between A.J. Kazimi and Cumberland Pharmaceuticals Inc.,
incorporated herein by reference to the corresponding exhibit to
Amendment No. 15 of the Registrants Registration Statement on
Form S-1 (File No. 333-142535) as filed with the SEC on February
18, 200910.12#
    
    Employment Agreement effective as of January 1, 2009 by and
between Jean W. Marstiller and Cumberland Pharmaceuticals Inc.,
incorporated herein by reference to the corresponding exhibit to
Amendment No. 15 of the Registrants Registration Statement on
Form S-1 (File No. 333-142535) as filed with the SEC on February
18, 200910.13#
    
    Employment Agreement effective as of January 1, 2009 by and
between Leo Pavliv and Cumberland Pharmaceuticals Inc.,
incorporated herein by reference to the corresponding exhibit to
Amendment No. 15 of the Registrants Registration Statement on
Form S-1 (File No. 333-142535) as filed with the SEC on February
18, 200910.13.1#
    
    Amendment dated June 30, 2009 to Employment Agreement by and
between Leo Pavliv and Cumberland Pharmaceuticals Inc.,
incorporated herein by reference to the corresponding exhibit to
Amendment No. 19 of the Registrants Registration Statement on
Form S-1 (File No. 333-142535) as filed with the SEC on July 17,
200910.15#
    
    Employment Agreement effective as of January 1, 2009 by and
between David L. Lowrance and Cumberland Pharmaceuticals Inc.,
incorporated herein by reference to the corresponding exhibit to
Amendment No. 15 of the Registrants Registration Statement on
Form S-1 (File No. 333-142535) as filed with the SEC on February
18, 200910.16
    
    Fourth Amended and Restated Loan Agreement by and between
Cumberland Pharmaceuticals Inc. and Bank of America, N.A., dated
July 22, 2009, incorporated herein by reference to the
corresponding exhibit to Amendment No. 20 of the Registrants
Registration Statement on Form S-1 (File No. 333-142535) as filed
with the SEC on July 29, 200910.17#
    
    1999 Stock Option Plan of Cumberland Pharmaceuticals Inc.,
incorporated herein by reference to the corresponding exhibit to
the Registrants Registration Statement on Form S-1 (File No.
333-142535) as filed with the SEC on May 1, 200710.18#
    
    2007 Long-Term Incentive Compensation Plan of Cumberland
Pharmaceuticals Inc., incorporated herein by reference to of the
corresponding exhibit to Amendment No. 1 of the Registrants
Registration Statement on Form S-1 (File No. 333-142535) as filed
with the SEC on June 22, 200710.19#
    
    2007 Directors Compensation Plan of Cumberland Pharmaceuticals
Inc., incorporated herein by reference to the corresponding
exhibit to Amendment No. 1 of the Registrants Registration
Statement on Form S-1 (File No. 333-142535) as filed with the SEC
on June 22, 2007
 45




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##### Table of Contents



ExhibitNumber
    
    Description10.20
    
    Form of Indemnification Agreement between Cumberland
Pharmaceuticals Inc. and all members of its Board of Directors,
incorporated herein by reference to the corresponding exhibit to
the Registrants Registration Statement on Form S-1 (File No.
333-142535) as filed with the SEC on May 1, 200710.21
    
    Lease Agreement, dated September 10, 2005, by and between
Nashville Hines Development, LLC and Cumberland Pharmaceuticals
Inc., incorporated herein by reference to the corresponding
exhibit to Amendment No. 3 of the Registrants Registration
Statement on Form S-1 (File No. 333-142535) as filed with the SEC
on July 11, 200710.21.1
    
    First Amendment to Office Lease Agreement, dated April 25, 2008,
by and between 2525 West End, LLC (successor in interest to
Nashville Hines Development LLC) and Cumberland Pharmaceuticals
Inc., incorporated herein by reference to the corresponding
exhibit to Amendment No. 10 of the Registrants Registration
Statement on Form S-1 (File No. 333-142535) as filed with the SEC
on May 21, 200810.22.1
    
    Sublease Agreement, dated December 14, 2006, by and between
Robert W. Baird & Co. Incorporated and Cumberland Pharmaceuticals
Inc., incorporated herein by reference to the corresponding
exhibit to Amendment No. 3 of the Registrants Registration
Statement on Form S-1 (File No. 333-142535) as filed with the SEC
on July 11, 200710.22.2
    
    Addendum to Sublease Agreement, dated May 5, 2007, by and between
Robert W. Baird & Co. Incorporated and Cumberland Pharmaceuticals
Inc. and consented to by Nashville Hines Development, LLC,
incorporated herein by reference to the corresponding exhibit to
Amendment No. 3 of the Registrants Registration Statement on
Form S-1 (File No. 333-142535) as filed with the SEC on July 11,
200710.23
    
    Amended and Restated Lease Agreement, dated November 11, 2004, by
and between The Gateway to Nashville LLC and Cumberland Emerging
Technologies, Inc., incorporated herein by reference to the
corresponding exhibit to the Registrants Registration Statement
on Form S-1 (File No. 333-142535) as filed with the SEC on May 1,
200710.24
    
    First Amendment to Amended and Restated Lease Agreement, dated
August 23, 2005, by and between The Gateway to Nashville LLC and
Cumberland Emerging Technologies, Inc., incorporated herein by
reference to the corresponding exhibit to the Registrants
Registration Statement on Form S-1 (File No. 333-142535) as filed
with the SEC on May 1, 200710.24.1
    
    Second Amendment to Amended and Restated Lease Agreement, dated
January 9, 2006, by and between The Gateway to Nashville LLC and
Cumberland Emerging Technologies, Inc., incorporated herein by
reference to Amendment No. 10 of the corresponding exhibit to the
Registrants Registration Statement on Form S-1 (File No.
333-142535) as filed with the SEC on May 21, 200810.25
    
    Manufacturing Agreement, dated February 6, 2008, by and between
Bayer HealthCare, LLC, and Cumberland Pharmaceuticals Inc.,
incorporated herein by reference to Amendment No. 12 of the
corresponding exhibit to the Registrants Registration Statement
on Form S-1 (File No. 333-142535) as filed with the SEC on June
20, 200810.26#
    
    Employment Agreement effective as of July 1, 2009 by and between
Martin E. Cearnal and Cumberland Pharmaceuticals Inc.,
incorporated herein by reference to Amendment No. 19 of the
corresponding exhibit to the Registrants Registration Statement
on Form S-1 (File No. 333-142535) as filed with the SEC on July
17, 200921
    
    Subsidiaries of Cumberland Pharmaceuticals Inc., incorporated
herein by reference to the corresponding exhibit to the
Registrants Registration Statement on Form S-1 (File No.
333-142535) as filed with the SEC on May 1, 200723.1
    
    Consent of KPMG LLP31.1
    
    Certification of Chief Executive Officer Pursuant to Rule
13-14(a) of the Securities Exchange Act of 1934 as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Rule
13-14(a) of the Securities Exchange Act of 1934 as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 #
    
    Indicates a management contract or compensatory plan.
    
    Confidential treatment has been granted for portions of this exhibit.
These portions have been omitted from the Registration Statement and
submitted separately to the Securities and Exchange Commission.
    
    Confidential treatment has been requested for portions of this
exhibit. These portions have been omitted from the Registration
Statement and submitted separately to the Securities and Exchange
Commission. 46




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##### Table of Contents



SIGNATURES
  CUMBERLAND PHARMACEUTICALS INC.By:
    /s/ A. J. KazimiA. J. KazimiChief Executive Officer(Principal Executive Officer)  Signature
    
    Title
    
    Date/s/ A. J. KazimiA.J. Kazimi
    
    Chairman and CEO(Principal Executive Officer and Director)
    
    March 19, 2010/s/ David L. Lowrance

David L. Lowrance
    
    Vice President and CFO(Principal Financial and Accounting Officer)
    
    March 19, 2010/s/ Robert G. Edwards
    
    Director
    
    March 19, 2010Robert G. Edwards/s/ Thomas R. Lawrence
    
    Director
    
    March 19, 2010Thomas R. Lawrence/s/ Lawrence W. Greer
    
    Director
    
    March 19, 2010Lawrence W. Greer/s/ Martin E. Cearnal
    
    Director
    
    March 19, 2010Martin E. Cearnal
 47




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 F-1




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##### Table of Contents



CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
 ASSETS
    
    2009
    
    
    2008Current assets:Cash and cash equivalents
    
    $
    78,701,682
    
    
    $
    11,829,551Accounts receivable, net of allowances
    
    
    6,176,585
    
    
    
    3,129,347Inventories
    
    
    4,822,873
    
    
    
    1,762,776Prepaid and other current assets
    
    
    2,746,259
    
    
    
    481,312Deferred tax assets
    
    
    726,196
    
    
    
    507,212Total current assets
    
    
    93,173,595
    
    
    
    17,710,198Property and equipment, net
    
    
    918,412
    
    
    
    432,413Intangible assets, net
    
    
    7,956,009
    
    
    
    8,528,732Deferred tax assets
    
    
    1,306,514
    
    
    
    1,000,031Other assets
    
    
    369,790
    
    
    
    3,447,813Total assets
    
    $
    103,724,320
    
    
    $
    31,119,187LIABILITIES AND EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    9,061,973
    
    
    $
    1,250,000Current portion of other long-term obligations
    
    
    144,828
    
    
    
    457,915Accounts payable
    
    
    5,632,796
    
    
    
    3,257,164Other accrued liabilities
    
    
    3,784,777
    
    
    
    2,640,855Total current liabilities
    
    
    18,624,374
    
    
    
    7,605,934Revolving line of credit
    
    
    1,825,951
    
    
    
    1,825,951Long-term debt, excluding current portion
    
    
    8,938,027
    
    
    
    3,750,000Other long-term obligations, excluding current portion
    
    
    184,632
    
    
    
    382,487Total liabilities
    
    
    29,572,984
    
    
    
    13,564,372Commitments and contingenciesRedeemable common stock
    
    
    1,930,000
    
    
    
    Shareholders equity:Cumberland Pharmaceuticals Inc. shareholders equity:Convertible preferred stock  no par value; 3,000,000 shares authorized; 812,749 shares
issued and outstanding as of December 31, 2008
    
    
    
    
    
    
    2,604,070Common stock  no par value; 100,000,000 shares authorized; 20,180,486 (1) and 9,903,047
shares issued and outstanding as of December 31, 2009 and 2008, respectively
    
    
    67,711,746
    
    
    
    13,500,034Retained earnings
    
    
    4,542,126
    
    
    
    1,450,711Total shareholders equity
    
    
    72,253,872
    
    
    
    17,554,815Noncontrolling interests
    
    
    (32,536
    )
    
    
    Total equity
    
    
    72,221,336
    
    
    
    17,554,815Total liabilities and equity
    
    $
    103,724,320
    
    
    $
    31,119,187
 
 (1)
    
    Number of shares issued and outstanding represents total shares of common stock regardless of
classification on theconsolidated balance sheet. The number of shares of redeemable common stock as of December 31,
2009 was 142,016.  F-2




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##### Table of Contents



CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
 
 
 2009
    
    
    2008
    
    
    2007Revenues:Net product revenue
    
    $
    43,142,350
    
    
    $
    34,889,967
    
    
    $
    27,821,646Other revenue
    
    
    394,928
    
    
    
    185,193
    
    
    
    241,943Net revenues
    
    
    43,537,278
    
    
    
    35,075,160
    
    
    
    28,063,589Costs and expenses:Cost of products sold
    
    
    4,136,541
    
    
    
    3,045,672
    
    
    
    2,669,628Selling and marketing
    
    
    20,194,074
    
    
    
    14,387,153
    
    
    
    10,053,355Research and development
    
    
    4,993,278
    
    
    
    4,429,064
    
    
    
    3,693,917General and administrative
    
    
    7,643,070
    
    
    
    5,139,937
    
    
    
    4,137,942Amortization of product license right
    
    
    686,904
    
    
    
    686,904
    
    
    
    686,905Other
    
    
    106,776
    
    
    
    104,209
    
    
    
    96,524Total costs and expenses
    
    
    37,760,643
    
    
    
    27,792,939
    
    
    
    21,338,271Operating income
    
    
    5,776,635
    
    
    
    7,282,221
    
    
    
    6,725,318Interest income
    
    
    79,363
    
    
    
    241,282
    
    
    
    382,919Interest expense
    
    
    (772,927
    )
    
    
    (213,303
    )
    
    
    (639,590
    )Income before income taxes
    
    
    5,083,071
    
    
    
    7,310,200
    
    
    
    6,468,647Income tax expense
    
    
    (2,024,192
    )
    
    
    (2,543,951
    )
    
    
    (2,424,261
    )Net income
    
    
    3,058,879
    
    
    
    4,766,249
    
    
    
    4,044,386Net loss at subsidiary attributable to noncontrolling interests
    
    
    32,536
    
    
    
    
    
    
    
    Net income attributable to common shareholders
    
    $
    3,091,415
    
    
    $
    4,766,249
    
    
    $
    4,044,386Earnings per share attributable to common shareholders- Basic
    
    $
    0.22
    
    
    $
    0.47
    
    
    $
    0.40- Diluted
    
    $
    0.17
    
    
    $
    0.29
    
    
    $
    0.24Weighted-average shares outstanding- Basic
    
    
    14,199,479
    
    
    
    10,142,807
    
    
    
    10,032,083- Diluted
    
    
    18,234,171
    
    
    
    16,539,662
    
    
    
    16,581,902
  F-3




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##### Table of Contents



CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
 2009
    
    
    2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    3,058,879
    
    
    $
    4,766,249
    
    
    $
    4,044,386Adjustments to reconcile net income to net cash provided by operating activities:Gain on early extinguishment of other long-term obligations
    
    
    
    
    
    
    (38,577
    )
    
    
    Depreciation and amortization expense
    
    
    816,499
    
    
    
    786,597
    
    
    
    762,222Deferred tax (benefit) expense
    
    
    (525,467
    )
    
    
    683,914
    
    
    
    2,230,596Nonemployee stock granted for services received
    
    
    210,740
    
    
    
    106,558
    
    
    
    222,596Nonemployee stock option grant expense
    
    
    845,661
    
    
    
    58,646
    
    
    
    93,836Stock-based compensation  employee stock options
    
    
    606,395
    
    
    
    397,500
    
    
    
    299,212Excess tax benefit derived from exercise of stock options
    
    
    (3,968,894
    )
    
    
    (398,529
    )
    
    
    (449,528
    )Noncash interest expense
    
    
    128,800
    
    
    
    71,933
    
    
    
    273,714Net changes in assets and liabilities affecting operating activities:Accounts receivable
    
    
    (3,047,238
    )
    
    
    (755,810
    )
    
    
    2,746,925Inventory
    
    
    (3,060,097
    )
    
    
    (813,667
    )
    
    
    (278,011
    )Prepaid, other current assets and other assets
    
    
    (721,464
    )
    
    
    (163,274
    )
    
    
    (184,268
    )Accounts payable and other accrued liabilities
    
    
    6,572,098
    
    
    
    1,652,911
    
    
    
    (811,107
    )Other long-term obligations
    
    
    (510,942
    )
    
    
    42,501
    
    
    
    (323,691
    )Net cash provided by operating activities
    
    
    404,970
    
    
    
    6,396,952
    
    
    
    8,626,882Cash flows from investing activities:Additions to property and equipment
    
    
    (601,802
    )
    
    
    (67,572
    )
    
    
    (152,420
    )Additions to trademarks and patents
    
    
    (110,541
    )
    
    
    (66,576
    )
    
    
    (11,069
    )Net cash used in investing activities
    
    
    (712,343
    )
    
    
    (134,148
    )
    
    
    (163,489
    )Cash flows from financing activities:Proceeds from initial public offering of common stock
    
    
    85,000,000
    
    
    
    
    
    
    
    Costs of initial public offering
    
    
    (7,479,011
    )
    
    
    (687,977
    )
    
    
    (2,031,416
    )Proceeds from borrowings on long-term debt
    
    
    18,000,000
    
    
    
    4,083,340
    
    
    
    Principal payments on note payable
    
    
    (5,000,000
    )
    
    
    (1,833,336
    )
    
    
    (1,833,336
    )Net borrowings on line of credit
    
    
    
    
    
    
    500,000
    
    
    
    500,000Payment of other long-term obligations
    
    
    
    
    
    
    (2,760,000
    )
    
    
    (1,500,000
    )Costs of financing for long-term debt and credit facility
    
    
    (189,660
    )
    
    
    (29,491
    )
    
    
    Payments made in connection with repurchase of common shares
    
    
    (27,295,808
    )
    
    
    (4,999,995
    )
    
    
    Proceeds from exercise of stock options
    
    
    175,089
    
    
    
    81,159
    
    
    
    510,951Excess tax benefit derived from exercise of stock options
    
    
    3,968,894
    
    
    
    398,529
    
    
    
    449,528Net cash provided by (used in) financing activities
    
    
    67,179,504
    
    
    
    (5,247,771
    )
    
    
    (3,904,273
    )Net increase in cash and cash equivalents
    
    
    66,872,131
    
    
    
    1,015,033
    
    
    
    4,559,120Cash and cash equivalents, beginning of year
    
    
    11,829,551
    
    
    
    10,814,518
    
    
    
    6,255,398Cash and cash equivalents, end of year
    
    $
    78,701,682
    
    
    $
    11,829,551
    
    
    $
    10,814,518Supplemental disclosure of cash flow information:Cash paid during the year for:Interest
    
    $
    677,387
    
    
    $
    221,000
    
    
    $
    419,100Income taxes
    
    
    196,187
    
    
    
    1,486,991
    
    
    
    89,075Noncash investing and financing activities:Deferred financing costs
    
    
    335,075
    
    
    
    125,000
    
    
    
    Increase in accounts payable and accrued expenses
of initial public offering
    
    
    
    
    
    
    
    
    
    
    645,934See accompanying notes to consolidated financial statements.
 F-4




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##### Table of Contents



CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
 
    Cumberland Pharmaceuticals Inc. ShareholdersRetainedearnings
    
    
    Non-Preferred stock
    
    
    Common stock
    
    
    (accumulated
    
    
    controlling
    
    
    TotalShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    deficit)
    
    
    interests
    
    
    equityBalance, December 31, 2006
    
    
    855,495
    
    
    $
    2,742,994
    
    
    
    9,844,150
    
    
    $
    15,742,590
    
    
    $
    (7,359,924
    )
    
    $
    
    
    
    $
    11,125,660Stock-based compensation  employee stock option grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    299,212
    
    
    
    
    
    
    
    
    
    
    
    299,212Issuance of common stock for services received
    
    
    
    
    
    
    
    
    
    
    25,236
    
    
    
    222,596
    
    
    
    
    
    
    
    
    
    
    
    222,596Stock-based compensation  nonemployee stock option grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,836
    
    
    
    
    
    
    
    
    
    
    
    93,836Exercise of options and related tax benefit, net of mature
shares redeemed for the exercise price
    
    
    
    
    
    
    
    
    
    
    221,874
    
    
    
    960,479
    
    
    
    
    
    
    
    
    
    
    
    960,479Net and comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,044,386
    
    
    
    
    
    
    
    4,044,386Balance, December 31, 2007
    
    
    855,495
    
    
    
    2,742,994
    
    
    
    10,091,260
    
    
    
    17,318,713
    
    
    
    (3,315,538
    )
    
    
    
    
    
    
    16,746,169Stock-based compensation  employee stock option grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    397,500
    
    
    
    
    
    
    
    
    
    
    
    397,500Issuance of common stock for services received
    
    
    
    
    
    
    
    
    
    
    7,961
    
    
    
    106,558
    
    
    
    
    
    
    
    
    
    
    
    106,558Stock-based compensation  nonemployee stock option grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,646
    
    
    
    
    
    
    
    
    
    
    
    58,646Conversion of preferred stock into common stock
    
    
    (42,746
    )
    
    
    (138,924
    )
    
    
    85,492
    
    
    
    138,924
    
    
    
    
    
    
    
    
    
    
    
    Repurchase of common shares
    
    
    
    
    
    
    
    
    
    
    (384,615
    )
    
    
    (4,999,995
    )
    
    
    
    
    
    
    
    
    
    
    (4,999,995
    )Exercise of options and related tax benefit, net of mature
shares redeemed for the exercise price
    
    
    
    
    
    
    
    
    
    
    102,949
    
    
    
    479,688
    
    
    
    
    
    
    
    
    
    
    
    479,688Net and comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,766,249
    
    
    
    
    
    
    
    4,766,249Balance, December 31, 2008
    
    
    812,749
    
    
    
    2,604,070
    
    
    
    9,903,047
    
    
    
    13,500,034
    
    
    
    1,450,711
    
    
    
    
    
    
    
    17,554,815Initial public offering of common stock, net of offering costs
    
    
    
    
    
    
    
    
    
    
    5,000,000
    
    
    
    74,801,596
    
    
    
    
    
    
    
    
    
    
    
    74,801,596Stock-based compensation  employee stock option grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    606,395
    
    
    
    
    
    
    
    
    
    
    
    606,395Issuance of common stock for services received
    
    
    
    
    
    
    
    
    
    
    20,250
    
    
    
    338,240
    
    
    
    
    
    
    
    
    
    
    
    338,240Stock-based compensation  nonemployee stock option grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    845,661
    
    
    
    
    
    
    
    
    
    
    
    845,661Conversion of preferred stock into common stock
    
    
    (812,749
    )
    
    
    (2,604,070
    )
    
    
    1,625,498
    
    
    
    2,604,070
    
    
    
    
    
    
    
    
    
    
    
    Repurchase of common shares
    
    
    
    
    
    
    
    
    
    
    (4,018
    )
    
    
    (52,234
    )
    
    
    
    
    
    
    
    
    
    
    (52,234
    )Issuance of common stock warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,575
    
    
    
    
    
    
    
    
    
    
    
    97,575Exercise of options and related tax benefit, net of mature
shares redeemed for the exercise
price and statutory
tax withholdings
    
    
    
    
    
    
    
    
    
    
    3,635,709
    
    
    
    (23,099,591
    )
    
    
    
    
    
    
    
    
    
    
    (23,099,591
    )Net and comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,091,415
    
    
    
    (32,536
    )
    
    
    3,058,879Reclass of redeemable common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,930,000
    )
    
    
    
    
    
    
    
    
    
    
    (1,930,000
    )Balance, December 31, 2009
    
    
    
    
    
    $
    
    
    
    
    20,180,486
    
    
    $
    67,711,746
    
    
    $
    4,542,126
    
    
    $
    (32,536
    )
    
    $
    72,221,336
  F-5




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##### Table of Contents



CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
 
  (1)
    
    Organization
 Cumberland Pharmaceuticals Inc. and its subsidiaries (the Company or Cumberland) is a
specialty pharmaceutical company incorporated in Tennessee on January 6, 1999. Its mission is
to provide high-quality products to address underserved medical needs. Cumberland is focused
on acquiring rights to, developing, and commercializing branded prescription products for the
hospital acute care and gastroenterology markets.The Companys corporate operations and product acquisitions have been funded by a combination
of equity and debt financings. 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 partner to make its products
available in the United States.In order to create access to a pipeline of early-stage product candidates, the Company formed
a subsidiary, Cumberland Emerging Technologies, Inc. (CET), which assists universities and
other research organizations to help bring biomedical projects from the laboratory to the
marketplace. The Companys ownership in CET is 85%. The remaining interest is owned by
Vanderbilt University and the Tennessee Technology Development Corporation. During 2002, CETs
losses reduced its equity to a deficit position. Accordingly, the Company reduced the
noncontrolling interest balance to zero and recorded 100% of the losses associated with the
joint venture until January 1, 2009. These losses amounted to approximately $272,000 and
$171,000 for the years ended December 31, 2008 and 2007, respectively. Effective January 1,
2009, the Company adopted a new accounting standard that required the allocation of operating
results, including losses, to the noncontrolling interests. During 2009, approximately $33,000
of losses from CET were allocated to the noncontrolling interests.Effective January 1, 2007, the Company formed a wholly-owned subsidiary, Cumberland Pharma
Sales Corp. (CPSC), for the purpose of employing the hospital sales force that promotes the
Companys products, Acetadote® and Caldolor®, in the acute care market.
Previously, this sales force was contracted through a third-party contract sales organization.The Company operates in a single operating segment of specialty pharmaceutical products.
Management has chosen to organize the Company based on the type of products sold. All of the
Companys assets are located in the United States. Total revenues are primarily attributable
to U.S. customers. Net revenues from non-U.S. customers were approximately $0.7 million, $0.6
million and $0.9 million for the years ended December 31, 2009, 2008 and 2007, respectively.
 (2)
    
    Significant Accounting Policies
 (a)
    
    Principles of ConsolidationThese consolidated financial statements are stated in U.S. dollars and are prepared under
U.S. generally accepted accounting principles. The consolidated financial statements
include the accounts of the Company and its majority-owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
 F-6




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CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
  (b)
    
    Cash and Cash EquivalentsCash and cash equivalents include highly liquid investments with an original maturity of
three months or less when purchased.(c)
    
    Accounts ReceivableTrade accounts receivable are recorded at the invoiced amount and do not bear interest.
The Company records allowances for uncollectible amounts, cash discounts, chargebacks and
credits to be taken by customers for product damaged in shipments based on historical
experience. The Company reviews each customer balances for collectibility. The allowance
for uncollectible amounts, cash discounts, chargebacks and credits for damaged product
was approximately $0.2 million and $0.1 million as of December 31, 2009 and 2008,
respectively.Cash discounts are reductions to invoiced amounts offered to customers for payment within
a specified period of time from the date of the invoice.The majority of the Companys products are distributed through independent pharmaceutical
wholesalers. Net product revenue and accounts receivable take into account the sale of
the product at the wholesale acquisition cost, and an accrual is recorded to reflect the
difference between the wholesale acquisition cost and the estimated average end-user
contract price. This accrual is calculated on a product-specific basis and is based on
the estimated number of outstanding units sold to wholesalers that will ultimately be
sold under end-user contracts. When the wholesaler sells the product to the end-user at
the agreed upon end-user contract price, the wholesaler charges the Company for the
difference between the wholesale acquisition price and the end-user contract price and
that chargeback is offset against the initial accrual balance.The Companys estimate of the allowance for damaged product is based upon historical
experience of claims made for damaged product. At the time the transaction is recognized
as a sale, the Company records a reduction in revenue for the estimate of product damaged
in shipment.(d)
    
    InventoriesThe Company works closely with third parties to manufacture and package finished goods
for sale, takes title to the finished goods at the time of shipment from the manufacturer
and warehouses such goods until distribution and sale. The Companys inventory was
comprised completely of finished goods at December 31, 2009 and 2008. Inventories are
stated at the lower of cost or market with cost determined using the first-in, first-out
method.(e)
    
    Prepaids and Other Current AssetsPrepaid and other current assets consist of unamortized deferred financing costs, prepaid
insurance premiums, prepaid consulting services, prepaid royalties and annual fees to the
U.S. Food and Drug Administration (FDA). The Company expenses all prepaid amounts as used
or over the period of benefit on a straight-line basis, as applicable. In addition, the
Company has recognized an income tax receivable of
approximately $1.4 million at December 31, 2009 related to the utilization of net
operating losses that will be carried back to recover income taxes that were paid in
prior years.(f)
    
    Property and EquipmentProperty and equipment, including leasehold improvements, are stated at cost.
Depreciation is provided using the straight-line method over the estimated useful lives
of the assets. Leasehold improvements are amortized over the shorter of the initial lease
term plus its renewal options, if renewal is reasonably assured, or the remaining useful
life of the asset. Upon retirement or disposal of assets, the asset and accumulated depreciation or amortization accounts are adjusted
 F-7




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##### Table of Contents



CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
  accordingly and any gain or loss is
reflected as a component of operating income in the consolidated statement of income.
Repairs and maintenance costs are expensed as incurred. Improvements that extend an
assets useful life are capitalized.(g)
    
    Intangible AssetsThe Companys intangible assets consist of costs incurred related to licenses, trademarks
and patents.In 2006, the Company acquired the exclusive U.S. commercialization rights (license) to
Kristalose®. The cost of acquiring the licenses of products that are approved
for commercial use are capitalized and amortized ratably over the estimated economic life
of the products. At the time of acquisition, the product life is estimated based upon the
term of the license agreement, patent life or market exclusivity of the products and our
assessment of future sales and profitability of the product. We assess this estimate
regularly during the amortization period and adjust the asset value or useful life when
appropriate. The total purchase price for Kristalose, which includes the cost of the U.S.
commercialization rights and other related costs of obtaining the licenses, is being
amortized on a straight-line basis over 15 years, which is managements estimate of the
assets useful life.Trademarks are amortized on a straight-line basis over 10 years, which is managements
estimate of the assets useful life.Patents consist of outside legal costs associated with obtaining patents for products
that have already been approved for marketing by the FDA. Upon issuance of a patent, the
finite useful economic life of the patent (or family of patents) is determined, and the
patent is amortized on a straight-line basis over such useful life. If it becomes
probable that a patent will not be issued, related costs associated with the patent
application will be expensed at the time such determination is made. All costs associated
with obtaining patents for products that have not been approved for marketing by the FDA
are expensed as incurred.When the Company acquires license agreements, product rights and other identifiable
intangible assets, it records the aggregate purchase price as an intangible asset. The
Company allocates the purchase price to the fair value of the various intangible assets
in order to amortize their cost as an expense in its consolidated statements of income
over the estimated useful lives of the related assets.(h)
    
    Impairment of Long-Lived AssetsLong-lived assets, such as property and equipment and purchased intangible assets subject
to amortization, are reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable. If circumstances require
a long-lived asset to be tested for possible impairment, the Company first compares
undiscounted cash flows expected to be generated by an asset to the carrying value of the
asset. If the carrying amount of the long-lived asset is not recoverable on an
undiscounted cash flow basis, an impairment charge is recognized to the extent that the
carrying value exceeds its fair value. Fair value is determined through various valuation
techniques including quoted market prices, third-party independent appraisals and
discounted cash flow models, as considered necessary. Assets to be disposed of would be
separately presented in the consolidated balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and would no longer be depreciated. The
assets and liabilities of a disposed group classified as held-for-sale would be presented
separately in the appropriate asset and liability sections of the consolidated balance
sheet. The Company recorded no impairment charges during the three-year period ended
December 31, 2009.
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##### Table of Contents



CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
  (i)
    
    Costs of Initial Public OfferingIncremental costs directly attributable to the initial public offering of the Companys
common stock of approximately $4.2 million were recognized as a reduction of the proceeds
received from the offering. In addition to the incremental costs directly attributable to
the initial public offering, the Company incurred approximately $6.0 million of
underwriting costs. These costs were recognized as a reduction of the proceeds received
from the offering. At December 31, 2008, approximately $3.3 million of the offering costs
were deferred and included in other assets in the consolidated balance sheet.(j)
    
    Revenue RecognitionRevenue is realized or realizable and earned when all of the following criteria are met:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services
have been rendered; (3) the sellers price to the buyer is fixed and determinable; and
(4) collectibility is reasonably assured. Delivery is considered to have occurred upon
either shipment of the product or arrival at its destination, depending upon the shipping
terms of the transaction.The Companys net product revenue reflects reduction from gross product revenue for
estimated allowances for chargebacks, discounts, and damaged goods and for accruals for
rebates, product returns, certain administrative fees and fee for services. Allowances of
$0.2 million and $0.1 million as of December 31, 2009 and 2008, respectively, for
chargebacks, discounts and allowances for product damaged in shipment are recorded as a
reduction of accounts receivable, and liabilities of $1.9 million and $1.0 million as of
December 31, 2009 and 2008, respectively, for rebates, product returns and administrative
fees are included in other accrued liabilities.As discussed in 2(c) above, the allowances for chargebacks, discounts and damaged goods
are determined on a product-by-product basis, and are established by management as the
Companys best estimate at the time of sale based on each products historical experience
adjusted to reflect known changes in the factors that impact such allowances. These
allowances are established based on the contractual terms with direct and
indirect customers and analyses of historical levels of chargebacks, discounts and
credits claimed for damaged product.Other organizations, such as managed care providers, pharmacy benefit management
companies and government agencies, may receive rebates from the Company based on either
negotiated contracts to carry the Companys product or reimbursements for filled
prescriptions. These entities represent indirect customers of the Company. In addition,
the Company may provide rebates to the end-user. In conjunction with recognizing a sale
to a wholesaler, sales revenues are reduced and accrued liabilities are increased by the
Companys estimates of the rebates that will be owed.Consistent with industry practice, the Company maintains a return policy that allows
customers to return product within a specified period prior to and subsequent to the
expiration date. The Companys estimate of the provision for returns is based upon
historical experience. Any changes in the assumptions used to estimate the provision for
returns is recognized in the period those assumptions were changed.The Company has agreements with certain key wholesalers, including fee for service costs.
These costs have been netted against product revenues.
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CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
  The Companys net product revenue consisted of the following as of December 31:
 Net product revenue2009
    
    
    2008
    
    
    2007Acetadote
    
    $
    30,176,981
    
    
    $
    25,438,774
    
    
    $
    18,817,293Kristalose
    
    
    9,688,998
    
    
    
    9,468,562
    
    
    
    9,012,789Caldolor(1)
    
    
    3,276,371
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    (17,369
    )
    
    
    (8,436
    )$
    43,142,350
    
    
    $
    34,889,967
    
    
    $
    27,821,646
 
 (1)
    
    The Company obtained FDA approval for Caldolor in June 2009 and launched the product in
September 2009.
 Other revenue is primarily comprised of revenue generated by CET through grant funding
from federal Small Business (SBIR/STTR) grant programs, lease income generated by CETs
Life Sciences Center and contract services. The Life Sciences Center is a research center
that provides scientists with access to flexible lab space and other resources to develop
biomedical products. Revenue related to grants is recognized when all conditions related
to such grants have been met. Grant revenue totaled approximately $228,000, $7,000 and
$83,000 for the years ended December 31, 2009, 2008 and 2007, respectively.(k)
    
    Income TaxesThe Company provides for deferred taxes using the asset and liability approach. Under
this method, deferred tax assets and liabilities are recognized for future tax
consequences attributable to operating loss and tax credit carryforwards, as well as
differences between the carrying amounts of existing assets and liabilities and their
respective tax bases. The Companys principal differences are related to the timing of
deductibility of certain items, such as depreciation, amortization and expense for
non-qualified stock options. Deferred tax assets and liabilities are measured using
enacted tax rates that are expected to apply to taxable income in the years such
temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period of
enactment. The Company does not recognize income tax benefits associated with any income
tax position where it is not more likely than not that the position would be sustained
upon examination by the taxing authorities.The tax benefit associated with the exercise of nonqualified stock options is recognized
when the benefit is used to offset income taxes payable.The Companys accounting policy with respect to interest and penalties arising from
income tax settlements is to recognize them as part of the provision for income taxes.(l)
    
    Share-Based PaymentsThe Company recognizes compensation cost for all share-based payments issued, modified,
repurchased or cancelled. The cost of stock options is measured based on the grant-date
fair value using the Black-Scholes option-pricing model, and the expense is recognized
over the employees requisite service period. Restricted stock awards are measured using
the fair value of common stock on the date the vesting provisions lapse. Prior to the
lapse, the fair value is measured on the last day of the reporting period.
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CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
  (m)
    
    Research and DevelopmentResearch and development costs are expensed in the period incurred. Research and
development costs are comprised mainly of clinical trial expenses, salary and wages and
other related costs such as materials and supplies. Development expense includes
activities performed by third-party providers participating in the Companys clinical
studies. The Company accounts for these costs based on estimates of work performed,
patients enrolled or fixed fee for services.(n)
    
    Advertising CostsAdvertising costs are expensed as incurred and amounted to $1.4 million, $0.7 million and
$0.6 million in 2009, 2008 and 2007, respectively.(o)
    
    Distribution CostsThe Company expenses distribution costs as incurred. Distribution costs included in
selling and marketing expenses amounted to $1.1 million, $1.0 million and $0.8 million in
2009, 2008 and 2007, respectively.(p)
    
    Selling and Marketing ExpenseSelling and marketing expense consists primarily of expense relating to the promotion,
distribution and sale of products, including royalty expense, salaries and related costs.(q)
    
    Cost of Products SoldCost of products sold consists principally of the cost to acquire each unit of product
sold, including in-bound freight expense. Cost of products sold also includes expenses
associated with the write-off of slow moving or expired product.(r)
    
    Earnings Per ShareBasic earnings per share is calculated by dividing net income by the weighted-average
number of shares outstanding. Except where the result would be antidilutive to income
from continuing operations, diluted earnings per share is calculated by assuming the
conversion of convertible instruments, the vesting of unvested restricted stock and the
exercise of stock options and warrants, as well as their related income tax benefits. The
following table reconciles the numerator and the denominator used to calculate diluted
earnings per share:
 Year ended December 31,2009
    
    
    2008
    
    
    2007Numerator:Net income attributable to
common shareholders
    
    $
    3,091,415
    
    
    $
    4,766,249
    
    
    $
    4,044,386Denominator:Weighted-average shares
outstanding  basic
    
    
    14,199,479
    
    
    
    10,142,807
    
    
    
    10,032,083Convertible preferred stock shares
    
    
    986,840
    
    
    
    1,710,990
    
    
    
    1,710,990Dilutive effect of other securities
    
    
    3,047,852
    
    
    
    4,685,865
    
    
    
    4,838,829Weighted-average shares
outstanding  diluted
    
    
    18,234,171
    
    
    
    16,539,662
    
    
    
    16,581,902
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CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
  The calculation of diluted earnings per share excludes 246,332, 206,670 and 144,002
outstanding options and warrants as of December 31, 2009, 2008 and 2007, respectively,
because the effect would be antidilutive.(s)
    
    Comprehensive IncomeTotal comprehensive income was comprised solely of net income for all periods presented.(t)
    
    Use of EstimatesThe preparation of the 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. Significant items
subject to estimates and assumptions include those related to chargebacks, rebates,
discounts, credits for damaged product and returns, the valuation and determination of
useful lives of intangible assets and the rate such assets are amortized, the realization
of deferred tax assets and stock-based compensation. Actual results could differ from
those estimates.(u)
    
    Fair Value of Financial InstrumentsThe Companys financial instruments include cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities, revolving line of credit, long-term
debt, and other long-term obligations. The carrying values for cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities approximate fair value due
to their short-term nature. The terms of the revolving line of credit and term debt
include variable interest rates, which approximate current market rates. The current
portion of other long-term liabilities is primarily related to the milestone payments due
to a third party as a result of the FDA approval of Caldolor in June 2009, and
approximates fair value due to its short-term nature. The long-term
portion of other long-term liabilities is primarily related to the difference between the
straight-line rent expense recognized during the course of the operating leases and the
amount paid to the lessor, and is not subject to changes in fair value.(v)
    
    Recently Issued Accounting StandardsIn October 2009, the FASB issued guidance setting forth requirements that must be met for
an entity to recognize revenue from the sale of a delivered item that is part of a
multiple-element arrangement when other items have not yet been delivered. The overall
arrangement fee will be allocated to each element based on their relative selling prices.
If an entity does not have a selling price for an element, then management must estimate
the selling price. This guidance is effective for the Company for all revenue
arrangements entered into or materially modified after January 1, 2011. Early adoption is
permitted. The future impact of adopting this standard will depend on the nature and
extent of transactions covered by this standard. This standard would not have materially
impacted the consolidated financial statements as of December 31, 2009.(w)
    
    Subsequent EventsThe Company has evaluated events occurring subsequent to December 31, 2009 for accounting
and disclosure implications. See additional discussion at footnote 17.
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CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
  (3)
    
    Property and Equipment
 Property and equipment consisted of the following at December 31:
 Range ofuseful lives
    
    
    2009
    
    
    2008Computer hardware and software
    
    35 years
    
    $
    343,494
    
    
    $
    162,515Office equipment
    
    315 years
    
    
    62,447
    
    
    
    30,276Furniture and fixtures
    
    515 years
    
    
    364,158
    
    
    
    242,591Leasehold improvements
    
    315 years, or remaining lease term
    
    
    607,444
    
    
    
    331,5571,377,543
    
    
    
    766,939Less accumulated depreciation and amortization
    
    
    (459,131
    )
    
    
    (334,526
    )$
    918,412
    
    
    $
    432,413
 Depreciation expense, including amortization expense related to leasehold improvements,
during 2009, 2008 and 2007 was approximately $125,000, $95,000 and $71,000, respectively, and
is included in general and administrative expense in the consolidated statements of income.
 (4)
    
    Intangible Assets
 Intangible assets consisted of the following at December 31:
 2009
    
    
    2008Trademarks
    
    $
    9,020
    
    
    $
    46,986Less accumulated amortization
    
    
    (7,396
    )
    
    
    (40,371
    )Total trademarks
    
    
    1,624
    
    
    
    6,615License
    
    
    10,303,595
    
    
    
    10,303,595Less accumulated amortization
    
    
    (2,575,895
    )
    
    
    (1,888,990
    )Total license
    
    
    7,727,700
    
    
    
    8,414,605Patents
    
    
    226,685
    
    
    
    107,512$
    7,956,009
    
    
    $
    8,528,732
 Amortization expense related to trademarks and license rights totaled approximately $0.7
million in 2009, 2008 and 2007, and is expected to be approximately $0.7 million in each of
the years 2010 through 2014.
 In April 2006, the Company acquired the exclusive U.S. commercialization rights (product
license) for Kristalose from Inalco Biochemicals, Inc. and Inalco S.p.A.
(collectively Inalco) for $10,303,595. This amount included cash paid on the effective date of
the agreement of $6,500,000, discounted future obligations totaling $3,823,937 due in April
2007 and April 2009, and acquisition costs of $13,775, and was net of the fair value of
services received by the Company in 2006 of $34,117 under a transition service agreement. The
fair value of these services was expensed over the transition period in 2006. In April 2007,
the Company made an installment payment of $1,500,000 (inclusive of $102,440 of imputed
interest). In April 2008, the Company amended its agreement and paid the remaining obligation
related to the purchase of the Kristalose rights. The terms of the amendment provided for an
8% discount on the $3,000,000 face value of the obligation for a net payment of $2,760,000.
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##### Table of Contents



CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
  (5)
    
    Other Accrued Liabilities
 Other accrued liabilities consisted of the following at December 31:
 2009
    
    
    2008Rebates, fee for services, and product returns
    
    $
    1,863,012
    
    
    $
    1,040,204Employee wages and benefits
    
    
    919,913
    
    
    
    707,638Costs related to initial public offering
    
    
    
    
    
    
    196,746Outside sales force and related expenses
    
    
    192,711
    
    
    
    181,140Other
    
    
    809,141
    
    
    
    515,127$
    3,784,777
    
    
    $
    2,640,855
 (6)
    
    Long-Term Debt
 In April 2006, the Company completed its transaction with Inalco to acquire exclusive U.S.
commercialization rights for Kristalose. In order to complete this transaction, funding was
obtained from Bank of America in the form of a three-year term loan for $5.5 million and a
two-year revolving line of credit agreement, both with an interest rate of LIBOR plus 2.5%.
The term loan was due in 2009, and was being paid off in quarterly principal installments of
$458,334, plus interest. In April 2008, the Company amended its revolving line of credit
agreement to extend the maturity date to April 2009. In conjunction with the agreement, the
Company issued warrants to purchase up to 3,958 shares of common stock at an exercise price of
$9.00 per share, which expire in April 2016 and are outstanding and exercisable as of December
31, 2009. The estimated grant-date fair value of these warrants of $25,680, as determined
using the Black-Scholes model utilizing an expected term of 10 years, risk-free interest rate
of 4.89%, volatility of 60%, and 0% dividend yield, was recorded as equity and deferred
financing costs. Deferred
financing costs were being expensed to interest expense using the effective-interest method
over the respective terms of the line of credit and term note.
 On December 30, 2008, the Company amended its debt agreement (Third Amended and Restated Loan
Agreement) to provide for $5.0 million of term debt and up to $7.5 million under its revolving
line of credit, both with an interest rate of LIBOR plus an applicable margin based on the
Companys Leverage Ratio, as defined in the agreement. This agreement expires in December
2011. The term loan was being paid off in quarterly installments of $416,667, plus interest,
beginning April 2009. The credit agreement provided that borrowings are collateralized by a
first priority lien on all of the Companys assets. The credit agreement contains an adverse
subjective acceleration clause and also requires the Company to maintain bank accounts and a
lockbox at the lender. However, cash received in the lockbox is not required to be applied
against amounts borrowed under the line of credit. This credit agreement contains various
covenants and the Company was in compliance with all covenants at December 31, 2008.
 In July 2009, the Company amended its debt agreement (Fourth Amended and Restated Loan Agreement)
to provide for $18.0 million in term debt and a $4.0 million revolving credit facility, both with
an interest rate of LIBOR plus an applicable margin based on the Companys Leverage Ratio, as
defined in the agreement. The interest rate at December 31, 2009 was 5.73% per annum. In addition,
the Company must pay a commitment fee of 0.75% per annum on the unused portion of the commitment.
The term debt is payable in quarterly installments of $1.5 million beginning on March 31, 2010 and
continuing until December 31, 2012. The revolving credit facility is due on December 31, 2012. The
Company may be required to make additional principal payments on the term debt if the Leverage
Ratio, as defined, exceeds 1.75 to 1.0 on an annual basis. The borrowings are collateralized by a
first lien against all of the Companys assets. The proceeds from the term debt were restricted for
the payment, in part, of the minimum statutory tax withholding requirements of approximately $24.6
million due from option holders who exercised options to purchase shares of our common stock at the
pricing of the Companys initial public offering. The consideration for that payment was the
transfer to the Company of shares acquired upon exercise at the then-current fair market value of the Companys common stock. In connection with the amendment of
the debt agreement,
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CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
  the Company capitalized approximately $0.5 million of debt issue costs, of
which $0.1 million related to the fair value of common stock and $0.1 million related to the
fair value of warrants issued to the lender. Deferred financing costs are being expensed to
interest expense using the effective-interest method over the term of the debt agreement.
 The Fourth Amended and Restated Loan Agreement contains restrictive covenants, including:
maintaining a Leverage Ratio not exceeding 2.75 to 1.00 as of December 31, 2009 and decreasing
to 1.00 to 1.00 as of December 31, 2011; maintaining a Fixed Charge Coverage Ratio of at least
1.25 to 1.00; maintaining liquidity of at least $2.0 million as of the end of a quarter/annual
period; limiting capital expenditures during any fiscal year; maintaining adequate insurance;
and prohibiting the payment of dividends on common stock. The Company was in compliance with
all covenants as of December 31, 2009.
 The Fourth Amended and Restated Loan Agreement requires the Company to make an additional
principal payment within 120 days after the end of the fiscal year in an amount equal to its
Excess Cash Flow, as defined in the agreement. As of December 31, 2009, the additional
principal payment was $3.1 million, and is included as a current portion of long-term debt in
the consolidated balance sheet. The scheduled debt payments, including the additional
principal payment, are as follows:
 Year ending December 31:2010
    
    $
    9,061,9732011
    
    
    6,000,0002012
    
    
    4,763,978$
    19,825,951
 (7)
    
    Other Long-Term Obligations
 Other long-term obligations consisted of the following components at December 31:
 2009
    
    
    2008Third-party development costs
    
    $
    101,369
    
    
    $
    615,846Other
    
    
    228,091
    
    
    
    224,556329,460
    
    
    
    840,402Less current portion
    
    
    (144,828
    )
    
    
    (457,915
    )$
    184,632
    
    
    $
    382,487
 During 2000, the Company signed an agreement with a third party to cover a variety of
development efforts related to Caldolor, an injectable form of ibuprofen, including
preparation of submissions to the FDA. As of December 31, 2008, the remaining balance of
approximately $0.4 million was included in the current portion of other long-term liabilities
in the consolidated balance sheet. During 2009, the Company paid the remaining balance.
 In June 2009, the Company received marketing approval for Caldolor from the FDA. The approval
triggered a milestone obligation of approximately $1.0 million to a third party who assisted
in a variety of development efforts related to Caldolor and is payable as follows:
approximately $0.8 million was paid in the third quarter of 2009 and the remaining $0.2
million is payable in equal monthly installments through July 2010. The remaining balance of
$0.1 million at December 31, 2009 is included in the current portion of other long-term
obligations in the consolidated balance sheet. The milestone expense is included in research
and development expenses in the consolidated statement of income for the year ended December
31, 2009.
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CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
  In addition to the milestone obligation discussed above, the third party immediately vested in
performance-based options to acquire 60,000 common shares with an exercise price of $1.63 per
share. The Company calculated the fair value of this award to be $13.41 per share using the
Black-Scholes methodology and the following assumptions: expected term of 2.3 years,
risk-free interest rate of 1.1%, volatility of 51% and an expected dividend yield of 0%. For
the year ended December 31, 2009, the Company recognized approximately $0.8 million of
research and development expense associated with this award.
 (8)
    
    Income Taxes
 Income tax benefit (expense) includes the following components:
 2009
    
    
    2008
    
    
    2007Current:Federal
    
    $
    (2,240,827
    )
    
    $
    (1,593,865
    )
    
    $
    (543,115
    )State
    
    
    (308,832
    )
    
    
    (266,172
    )
    
    
    (100,078
    )(2,549,659
    )
    
    
    (1,860,037
    )
    
    
    (643,193
    )Deferred:Federal
    
    
    528,602
    
    
    
    (571,114
    )
    
    
    (1,646,209
    )State
    
    
    (3,135
    )
    
    
    (112,800
    )
    
    
    (134,859
    )525,467
    
    
    
    (683,914
    )
    
    
    (1,781,068
    )$
    (2,024,192
    )
    
    $
    (2,543,951
    )
    
    $
    (2,424,261
    )
 The Companys deferred tax expense in 2007 was primarily the result of the utilization of
the deferred tax assets from federal and state net operating loss carryforwards. The deferred
tax expense for 2008 was primarily due to the utilization of deferred tax assets from federal
tax credit carryforwards. The deferred tax benefit for 2009 was primarily due to the expense
for non-qualified stock options issued to employees.
 The deferred income tax benefit (expense) is comprised of the following components for the
years ended December 31:
 2009
    
    
    2008
    
    
    2007Deferred tax benefit (expense) exclusive
of components listed below
    
    $
    170,648
    
    
    $
    158,864
    
    
    $
    458,806Utilization of operating loss carryforwards
    
    
    (60,266
    )
    
    
    (248,651
    )
    
    
    (2,002,955
    )Utilization of tax credit carryforwards
    
    
    7,172
    
    
    
    (626,956
    )
    
    
    (191,191
    )Change in valuation allowance due to
changes in net deferred tax asset
balances
    
    
    (11,342
    )
    
    
    (11,291
    )
    
    
    (7,867
    )Benefits of non-qualified stock options
    
    
    419,255
    
    
    
    44,120
    
    
    
    (37,861
    )Deferred income tax benefit (expense)
    
    $
    525,467
    
    
    $
    (683,914
    )
    
    $
    (1,781,068
    )
 The valuation allowance at December 31, 2009 and 2008 is primarily related to state tax
benefits at CET that will likely not be realized.
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##### Table of Contents



CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
  The Companys effective income tax rate for 2009, 2008 and 2007 reconciles with the federal
statutory tax rate as follows:
 2009
    
    
    2008
    
    
    2007Federal tax expense at statutory rate
    
    
    34
    %
    
    
    34
    %
    
    
    34
    %State income tax benefit (net of federal
income tax benefit)
    
    
    4
    
    
    
    4
    
    
    
    3Permanent differences
    
    
    3
    
    
    
    2
    
    
    
    1Recognition of previously unrecognized
tax benefits
    
    
    
    
    
    
    (4
    )
    
    
    Other
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )Net income tax expense
    
    
    40
    %
    
    
    35
    %
    
    
    37
    %
 Components of the net deferred tax assets at December 31 are as follows:
 2009
    
    
    2008Net operating loss and tax credits
    
    $
    72,532
    
    
    $
    125,626Property and equipment
    
    
    169,852
    
    
    
    123,227Allowance for accounts receivable
    
    
    89,160
    
    
    
    55,425Reserve for expired product
    
    
    386,669
    
    
    
    239,790Inventory
    
    
    80,462
    
    
    
    Deferred charges
    
    
    257,413
    
    
    
    394,467Cumulative compensation costs incurred on nonqualified options
    
    
    1,046,734
    
    
    
    627,478Total deferred tax assets
    
    
    2,102,822
    
    
    
    1,566,013Less deferred tax asset valuation allowance
    
    
    (70,112
    )
    
    
    (58,770
    )Net deferred tax assets
    
    $
    2,032,710
    
    
    $
    1,507,243
 In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. In order to fully realize the deferred
tax assets, the Company will need to generate future taxable income of approximately $5.4
million. Taxable income, excluding tax deductions generated by the exercise of nonqualified
options, for the years ended December 31, 2009, 2008 and 2007 was approximately $7.0 million,
$7.9 million and $7.1 million, respectively. Based upon the level of taxable income over the
last three years and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences, net of the existing
valuation allowances, at December 31, 2009. The amount of the deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
 At December 31, 2009, the Company has $65.5 million of federal net operating loss
carryforwards that expire in 2029. All of the federal net operating loss originated from the
exercise of nonqualified options in 2009. As of December 31, 2009, the Company has
unrecognized tax benefits associated with the exercise of nonqualified stock options of
approximately $26.1 million. The benefit will be recognized when the deduction reduces income
taxes payable in future periods.
 F-17




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CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
  At December 31, 2009, the Company has $59.7 million of state net operating loss carryforwards.
This amount includes $58.2 million from the exercise of nonqualified stock options in 2009, of
which $3.2 million will expire in 2014. The remaining carryforwards begin to expire in 2018.
The remaining state net operating loss carryforward of $1.5 million is subject to a full
valuation allowance. Approximately $0.5 million of these state net operating losses are set to
expire between 2015 and 2017. The remaining state net operating losses will begin expiring in
2018.
 Federal tax years that remain open to examination are 2007 to 2009. State tax years that
remain open to examination are 2004 to 2009. The Company is currently undergoing an
examination by the Internal Revenue Service of its 2007 and 2008 federal tax returns.
 (9)
    
    Shareholders Equity
 (a)
    
    Initial Public OfferingOn August 10, 2009, the Company completed its initial public offering of 5,000,000 shares
of common stock at a price of $17.00 per share, raising gross proceeds of $85.0 million.
After deducting underwriting discounts of approximately $6.0 million and offering costs
incurred of approximately $4.2 million, the net proceeds to the Company were
approximately $74.8 million. Contemporaneously with the offering, each outstanding share
of preferred stock was automatically converted into two shares of common stock.(b)
    
    Stock SplitOn July 6, 2007, the Board of Directors declared a two-for-one stock split of the
Companys common stock effective on that date. All applicable common stock share and per
share amounts have been retroactively adjusted in the accompanying consolidated financial
statements for the stock split. In accordance with the anti-dilution provisions of the
respective agreements, the share and per share amounts associated with the Companys
stock option grants, warrants and preferred stock conversion rights reflected in the
accompanying consolidated financial statements have also been adjusted to reflect the
effects of the stock split.(c)
    
    Preferred StockThe Company is authorized to issue 20,000,000 shares of preferred stock. The Board of
Directors is authorized to divide these shares into classes or series, and to fix and
determine the relative rights, preferences, qualifications and limitations of the shares
of any class or series so established. At December 31, 2009, there is no preferred stock
outstanding.(d)
    
    Common StockDuring 2009, 2008 and 2007, the Company issued 2,750, 7,961 and 25,236 shares of common
stock, respectively, valued at $39,750, $107,000 and $223,000, respectively, to
executives, related parties, and advisors as compensation for services, and is included
in general and administrative expenses in the consolidated statements of income. Included
in these amounts are shares of common stock granted to board members of 0, 3,461 and
11,036 in 2009, 2008 and 2007, respectively, for services rendered. The expense
associated with these grants to board members was approximately $0, $45,000 and $121,000
in 2009, 2008 and 2007, respectively. In addition, the Company issued 2,924,202, 87,142
and 10,304 net shares of common stock to a key executive and an advisor upon exercise of
options in 2009, 2008 and 2007, respectively.In April 2007, the shareholders approved an amendment to the Companys charter, which
increased the number of authorized shares to 100,000,000.
 F-18




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CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
  (e)
    
    WarrantsIn 2003, the Company issued warrants to purchase 25,000 shares of common stock at an
exercise price of $6.00 per share as partial consideration for a modification to its line
of credit. The warrants expire 10 years from the date of issuance. All of these warrants
were outstanding and exercisable as of December 31, 2009.In connection with the issuance of shares of stock to a related party in 2004, the
Company issued warrants to purchase 40,000 shares of stock at $6.00 per share at any time
within ten years of issuance. All of these warrants were outstanding and exercisable as
of December 31, 2009.In 2006, the Company signed a new line of credit agreement along with a term loan
agreement with a financial institution. In conjunction with these agreements, the Company
issued warrants to purchase up to 3,958 shares of common stock at $9.00 per share, which
expire in April 2016, and which are outstanding and exercisable as of December 31, 2009.
In connection with the Fourth Amended and Restated Loan Agreement, the Company issued
warrants to purchase up to 7,500 shares of common stock at $17.00 per share, which expire
in July 2019. The fair value of these warrants of $97,575, as determined using the
Black-Scholes methodology and utilizing an expected term of 10 years, risk-free interest
rate of 4.0%, volatility of 67% and an expected dividend yield of 0%, was recorded in the
consolidated balance sheet as equity and deferred financing costs.(f)
    
    Share RepurchaseOn December 12, 2008, the Board of Directors authorized the Company to repurchase up to
384,615 shares of common stock at $13.00 per share. On December 30, 2008, the Company
completed its $5.0 million repurchase of common stock. In connection with the repurchase,
42,746 shares of preferred stock were converted into 85,492 shares of common stock. The
repurchase was financed, in part, by additional borrowings under its term debt with Bank
of America.
 (10)
    
    Stock Options
 The Cumberland Pharmaceuticals Inc. 1999 Stock Option Plan (the 1999 Plan), which allowed for
both incentive stock options and nonqualified stock options to be granted to employees,
officers, consultants, directors and affiliates of the Company, was superseded and replaced by
the 2007 Long-Term Incentive Compensation Plan (the 2007 Plan) and 2007 Directors Incentive
Plan (the Directors Plan). The new plans were approved by the Companys Board of Directors
and shareholders in April 2007. The implementation of the new plans did not result in a
modification of the terms and conditions of the outstanding awards granted under the 1999 Plan
that would result in the awards being treated as an exchange of the original award for a new
award.
 The purposes of the 2007 Plan are to encourage the Companys employees and consultants to
acquire stock and other equity-based interests and to replace the 1999 Plan. The Company has
reserved 2.4 million shares of common stock for issuance under the 2007 Plan.
 The purposes of the Directors Plan are to strengthen the Companys ability to attract,
motivate, and retain Directors with experience and ability, and to encourage the highest level
of performance by providing Directors with a proprietary interest in the Companys financial
success and growth. The Directors Plan supersedes and replaces the provisions pertaining to
grants of stock options to Directors in the 1999 Plan, but does not impair the vesting or
exercise of any options granted under the 1999 Plan. The Company has reserved 250,000 shares
of common stock under the Directors Plan.
 Incentive stock options must be granted at an exercise price not less than the fair
market value of the common stock on the grant date. Options granted to shareholders owning
more than 10% of the common stock on the grant
 F-19




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CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
 date must be granted at an exercise price not less than 110% of fair market value of the
common stock on the grant date.
 The options are exercisable on the dates established by each grant; however, options granted
to officers or directors are not exercisable until at least six months after grant date. The
maximum exercise life of an option is ten years from grant date and is five years for stock
options issued to shareholders who own 10% or more of the Companys common stock. Vesting is
determined on a grant-by-grant basis in accordance with the terms of the plans and the related
grant agreements. Upon exercise, the Company issues new shares of common stock.
 Stock option activity for the year ended December 31, 2009 was as follows:
 Weighted-
    
    
    Weighted-average
    
    
    averageexercise
    
    
    remaining
    
    
    AggregateNumber of
    
    
    price
    
    
    contractual
    
    
    intrinsicshares
    
    
    per share
    
    
    term (years)
    
    
    valueOutstanding, December 31, 2008
    
    
    7,910,986
    
    
    $
    1.65Options granted
    
    
    146,430
    
    
    
    13.48Options exercised
    
    
    (5,460,918
    )
    
    
    0.55Options forfeited/expired
    
    
    (86,913
    )
    
    
    3.42Outstanding, December 31, 2009
    
    
    2,509,585
    
    
    
    4.65
    
    
    
    3.31
    
    
    $
    22,497,039Exercisable at December 31, 2009
    
    
    2,336,148
    
    
    $
    4.02
    
    
    
    2.94
    
    
    $
    22,389,117
 Information related to the stock option plans during 2009, 2008 and 2007 was as follows:
 2009
    
    
    2008
    
    
    2007Intrinsic value of options exercised
    
    $
    86,155,328
    
    
    $
    1,162,796
    
    
    $
    1,929,259Weighted-average fair value
of options granted
    
    $
    6.42
    
    
    $
    6.27
    
    
    $
    7.21
 Of the options outstanding at December 31, 2009, 2008 and 2007, 86,930, 4,795,420 and
4,771,420, respectively, were options issued to a key executive.
 The fair value of employee options granted during 2009, 2008, and 2007 were estimated using
the Black-Scholes option-pricing model and the following assumptions:
 2009
    
    
    2008
    
    
    2007Dividend yield
    
    
    
    
    
    
    
    
    
    
    Expected term (years)
    
    
    3.7  6.2
    
    
    
    3.5  6.0
    
    
    
    5.5  6.4Expected volatility
    
    
    50%  52
    %
    
    
    49%  51
    %
    
    
    58%  64
    %Risk-free interest rate
    
    
    1.4%  2.7
    %
    
    
    3.1
    %
    
    
        4.6%  4.8
    %
 F-20




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CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
 The fair value of nonemployee options granted during 2009, 2008, and 2007 were estimated using
the Black-Scholes option-pricing model and the following assumptions:
 2009
    
    
    2008
    
    
    2007Dividend yield
    
    
    
    
    
    
    
    
    
    
    Expected term (years)
    
    
    2.3  10.0
    
    
    
    10.0
    
    
    
    10.0Expected volatility
    
    
    51%  67
    %
    
    
    68
    %
    
    
    74
    %Risk-free interest rate
    
    
    1.1%  2.7
    %
    
    
    3.7
    %
    
    
    4.8
    %
 The Company determined the expected life of employee share options based on the simplified
method allowed by SEC Staff Accounting Bulletin (SAB) No. 107, as amended by SAB No. 110.
Under this approach, the expected term is presumed to be the average between the
weighted-average vesting period and the contractual term. The expected term for options
granted to nonemployees is generally the contractual term of the option. The expected
volatility over the term of the respective option was based on the volatility of similar
publicly-traded entities. In evaluating similarity, the Company considered factors such as
industry, stage of life cycle, size, and financial leverage. The risk-free interest rate is
based on the U.S. Treasury Note, Stripped Principal, on the date of grant with a term
substantially equal to the corresponding options expected term. The Company has never
declared or paid any cash dividends and does not presently plan to pay cash dividends in the
foreseeable future.
 Stock compensation expense is presented as a component of general and administrative expenses
in the accompanying consolidated statements of income. At December 31, 2009, there was
approximately $1.1 million of unrecognized compensation cost related to share-based payments,
which is expected to be recognized over a weighted-average period of 2.39 years. This amount
relates primarily to unrecognized compensation cost for employees.
 In January 2009, options to purchase 773,556 shares of common stock were exercised with a
weighted-average exercise price of $0.11 per share. A portion of the options were exercised
using a net-share settlement feature that provided for an option holder to use 204,245 shares
acquired upon exercise to settle the minimum statutory tax withholding requirements of
approximately $2.7 million.
 During the third quarter of 2009, options to purchase 4,605,962 shares of common stock were
exercised with a weighted-average exercise price of $0.55 per share. A portion of the options
were exercised using a net-share settlement feature that provided for an option holder to use
1,445,074 shares acquired upon exercise to settle the minimum statutory tax withholding
requirements of approximately $24.6 million. The payment of the exercise price for these
options of approximately $2.6 million was settled by cash and the tendering of 140,788 shares
of common stock by the optionees.
 In connection with these exercises, the Company agreed to repurchase up to $1.9 million in
common stock during the first quarter of 2010 to provide for the settlement of the remaining
tax liabilities associated with the exercise. The estimated repurchase amount is presented as
redeemable common stock in the condensed consolidated balance sheet.
 F-21




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CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
 (11)
    
    Leases
 The Company is obligated under long-term real estate leases for office space expiring at
various times through July 2011. The Company also subleases a portion of the space under these
leases. Rent expense is recognized over the expected term of the lease, including renewal
option periods, if applicable, on a straight-line basis. Rent expense for 2009, 2008 and 2007
was approximately $575,000, $526,000 and $388,000, respectively, and sublease income was
approximately $203,000, $170,000 and $77,000, respectively. Future minimum lease payments
under noncancelable operating leases (with initial or remaining lease terms in excess of one
year) are:
 Year ending December 31:2010
    
    
    559,1132011
    
    
    137,7812012
    
    
    93,4812013
    
    
    96,2882014 and thereafter
    
    
    201,315Total minimum lease payments
    
    $
    1,087,978
 (12)
    
    Manufacturing and Supply Agreements
 The Company utilizes one primary supplier to manufacture each of its respective products and
product candidates. In February 2008, the Company entered into an agreement with a second
supplier of Acetadote. The agreement for the second supplier expires in February 2013.
Although there are a limited number of manufacturers of pharmaceutical products, the Company
believes it could utilize other suppliers to manufacture its prescription products on
comparable terms. A change in suppliers, any problems with such manufacturing operations or
capacity, or contract disputes with the suppliers, however, could cause a delay in
manufacturing and a possible loss of sales, which would adversely affect operating results.
 The Companys manufacturing and supply agreements with the manufacturers of some of its
products contain minimum purchase obligations. These obligations require the Company to
purchase approximately $0.5 million during 2010, $0.1 million during 2011 and $17,000 during
2012. Beginning in January 2013 and continuing through the life of the agreement, which
expires in 2021, one of the manufacturing and supply agreements requires minimum purchases of
not less than 25% of prior year purchases. The Company met its purchase obligations for 2009
under these agreements.
 (13)
    
    Commitments and Contingencies
 The Company outsources some of its sales force activities through an agreement with a third
party. Under the terms of the agreement, the Company makes monthly payments to the third party
of approximately $393,000 for these activities. The agreement expires on March 31, 2010.
Should the Company not continue to receive these services from this third party, the Company
would have to consider an alternative source such as another service organization or hiring an
internal sales force.
 In connection with its manufacturing and supply agreement for Acetadote and its licensing
agreements for Kristalose and Caldolor, the Company is required to pay a royalty based on net
sales over the life of the contracts. Royalty expense is recognized as a component of selling
and marketing expense in the period that revenue is recognized.
 (14)
    
    Employment Agreements
 The Company has entered into employment agreements with its full-time and part-time employees.
Each employment agreement provides for a salary for services performed, a potential annual
bonus and, if applicable, a grant of incentive options to purchase the Companys common shares
pursuant to an option agreement. Two of the employment agreements
 F-22




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CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
 address expense reimbursements for relevant and applicable licenses and
continuing education. Employment agreements are amended each successive one-year period,
unless terminated.
 (15)
    
    Market Concentrations
 The Company currently focuses on acquiring, developing, and commercializing branded
prescription products for the acute care and gastroenterology markets. The Companys principal
financial instruments subject to potential concentration of credit risk are accounts
receivable, which are unsecured, and cash equivalents. The Companys cash equivalents consist
primarily of money market funds. Certain bank deposits may at times be in excess of the
Federal Deposit Insurance Corporation (FDIC) insurance limits.
 The Companys primary customers are wholesale pharmaceutical distributors in the U.S. Total
revenues from customers representing 10% or more of total revenues for the respective years
are summarized as follows:
 2009
    
    
    2008
    
    
    2007Customer 1
    
    
    37
    %
    
    
    37
    %
    
    
    35
    %Customer 2
    
    
    29
    
    
    
    25
    
    
    
    26Customer 3
    
    
    27
    
    
    
    31
    
    
    
    31
 Additionally, 96% and 93% of the Companys accounts receivable balances were due from these
three customers at December 31, 2009 and 2008, respectively.
 (16)
    
    Employee Benefit Plan
 The Company sponsors an employee benefit plan that was established on January 1, 2006, the
Cumberland Pharmaceuticals 401(k) Plan (the Plan), under Section 401(k) of the Internal
Revenue Code of 1986, as amended, for the benefit of all employees over the age of 21, having
been employed by the Company for at least six months. The Plan provides that participants may
contribute up to the maximum amount of their compensation as set forth by the Internal Revenue
Service each year. Employee contributions are invested in various investment funds based upon
elections made by the employees. In 2008, the Companys Board of Directors adopted a plan to
match 20% of the first 5% of participants annual deferrals to the Plan. During 2009, the
Company contributed $13,800 to the Plan.
 (17)
    
    Subsequent Events
 In January 2010, an executive exercised a put right to sell $1.8 million, or 153,543 shares,
of common stock to the Company to provide for the settlement of the remaining tax liabilities
associated with the exercise of options in 2009. The purchase price was the fair-market value
of the common stock as reported by Nasdaq on the date of settlement.
 F-23




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##### Table of Contents



CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
 (18)
    
    Quarter Financial Information (Unaudited)
 The following table sets forth the unaudited operating results for each fiscal quarter of 2009
and 2008:
 First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Total2009Net revenues
    
    $
    9,404,599
    
    
    $
    9,820,613
    
    
    $
    13,597,760
    (2)
    
    $
    10,714,306
    
    
    $
    43,537,278Operating income
    
    
    2,117,025
    
    
    
    594,116
    
    
    
    2,372,059
    
    
    
    693,435
    
    
    
    5,776,635Net income attributable
to common shareholders
    
    
    1,218,090
    
    
    
    295,871
    
    
    
    1,288,137
    
    
    
    289,317
    
    
    
    3,091,415Earnings per share attributable
to common shareholders (1)- Basic
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.08
    
    
    $
    0.01
    
    
    $
    0.22- Diluted
    
    $
    0.08
    
    
    $
    0.02
    
    
    $
    0.07
    
    
    $
    0.01
    
    
    $
    0.172008Net revenues
    
    $
    8,303,827
    
    
    $
    8,357,532
    
    
    $
    8,602,709
    
    
    $
    9,811,092
    
    
    $
    35,075,160Operating income
    
    
    1,793,539
    
    
    
    1,838,488
    
    
    
    2,150,508
    
    
    
    1,499,686
    
    
    
    7,282,221Net income attributable
to common shareholders
    
    
    1,395,250
    
    
    
    1,058,423
    
    
    
    1,209,009
    
    
    
    1,103,567
    
    
    
    4,766,249Earnings per share attributable
to common shareholders (1)- Basic
    
    $
    0.14
    
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.47- Diluted
    
    $
    0.09
    
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.29
 
 (1)
    
    Due to the nature of interim earnings per share
calculations, the sum of the quarterly earnings per
share amounts may
not equal the reported earnings per share for the year.(2)
    
    Includes $3.3 million of net revenue associated with the launch of Caldolor in September 2009. F-24




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Schedule II
 CUMBERLAND PHARMACEUTICALS INC. AND SUBSIDIARIES
 
   Column A
    
    
    Column B
    
    
    Column C
    
    
    Column D
    
    
    Column ECharged toBalance at
    
    
    Charged to
    
    
    otherbeginning of
    
    
    costs and
    
    
    accounts 
    
    
    Deductions 
    
    
    Balance atDescription
    
    period
    
    
    expenses
    
    
    describe
    
    
    describe(1)
    
    
    end of periodAllowance for uncollectible amounts, cash
discounts, chargebacks, and credits
issued for damaged products:For the period ended:December 31, 2007
    
    $
    298,913
    
    
    $
    1,184,711
    
    
    $
    
    
    
    $
    (1,336,652
    )
    
    $
    146,972December 31, 2008
    
    
    146,972
    
    
    
    1,242,300
    
    
    
    
    
    
    
    (1,242,226
    )
    
    
    147,046December 31, 2009
    
    
    147,046
    
    
    
    1,734,521
    
    
    
    
    
    
    
    (1,646,287
    )
    
    
    235,280Valuation allowance for deferred tax assets:For the period ended:December 31, 2007
    
    $
    39,612
    
    
    $
    7,867
    
    
    $
    
    
    
    $
    
    
    
    $
    47,479December 31, 2008
    
    
    47,479
    
    
    
    11,291
    
    
    
    
    
    
    
    
    
    
    
    58,770December 31, 2009
    
    
    58,770
    
    
    
    11,342
    
    
    
    
    
    
    
    
    
    
    
    70,112
 
 (1)
    
    Actual discounts, chargebacks, and credits taken by
customers. F-25