mnkd-10q_20200331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

Or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 .

Commission file number: 000-50865

 

MannKind Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

13-3607736

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

30930 Russell Ranch Road, Suite 300

Westlake Village, California

91362

(Address of principal executive offices)

(Zip Code)

(818) 661-5000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

MNKD

 

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No   

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes      No  

As of April 13, 2020, there were 213,137,730 shares of the registrant’s common stock, $0.01 par value per share, outstanding.

 

 


 

MANNKIND CORPORATION

Form 10-Q

For the Quarterly Period Ended March 31, 2020

TABLE OF CONTENTS

 

 

Page

PART I: FINANCIAL INFORMATION

2

 

 

Item 1. Financial Statements (Unaudited)

2

Condensed Consolidated Balance Sheets: March 31, 2020 and December 31, 2019

2

Condensed Consolidated Statements of Operations: Three months ended March 31, 2020 and 2019

3

Condensed Consolidated Statements of Comprehensive Loss: Three months ended March 31, 2020 and 2019

4

Condensed Consolidated Statements of Stockholders’ Deficit: Three months ended March 31, 2020 and 2019

5

Condensed Consolidated Statements of Cash Flows: Three months ended March 31, 2020 and 2019

6

Notes to Condensed Consolidated Financial Statements

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

Item 3. Quantitative and Qualitative Disclosures About Market Risk

34

Item 4. Controls and Procedures

34

 

 

PART II: OTHER INFORMATION

35

 

 

Item 1. Legal Proceedings

35

Item 1A. Risk Factors

35

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

61

Item 3. Defaults Upon Senior Securities

61

Item 4. Mine Safety Disclosures

61

Item 5. Other Information

61

Item 6. Exhibits

62

 

 

SIGNATURES

64

 

1


 

PART 1: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share data)

 

 

 

March 31, 2020

 

 

December 31, 2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

38,868

 

 

$

29,906

 

Restricted cash

 

 

316

 

 

 

316

 

Short-term investments

 

 

 

 

 

19,978

 

Accounts receivable, net

 

 

5,032

 

 

 

3,513

 

Inventory

 

 

3,231

 

 

 

4,155

 

Prepaid expenses and other current assets

 

 

1,901

 

 

 

2,889

 

Total current assets

 

 

49,348

 

 

 

60,757

 

Property and equipment, net

 

 

26,517

 

 

 

26,778

 

Other assets

 

 

4,347

 

 

 

6,190

 

Total assets

 

$

80,212

 

 

$

93,725

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,731

 

 

$

4,789

 

Accrued expenses and other current liabilities

 

 

18,326

 

 

 

15,904

 

Short-term note payable

 

 

5,101

 

 

 

5,028

 

Deferred revenue — current

 

 

30,840

 

 

 

32,503

 

Recognized loss on purchase commitments — current

 

 

7,250

 

 

 

7,394

 

Total current liabilities

 

 

68,248

 

 

 

65,618

 

Promissory notes

 

 

70,022

 

 

 

70,020

 

Accrued interest — promissory notes

 

 

3,259

 

 

 

2,002

 

Long-term Midcap credit facility

 

 

38,893

 

 

 

38,851

 

Senior convertible notes

 

 

5,000

 

 

 

5,000

 

Recognized loss on purchase commitments — long term

 

 

82,987

 

 

 

84,639

 

Operating lease liability

 

 

2,155

 

 

 

2,514

 

Deferred revenue  — long term

 

 

1,772

 

 

 

8,344

 

Milestone rights liability

 

 

5,926

 

 

 

7,263

 

Total liabilities

 

 

278,262

 

 

 

284,251

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

 

Undesignated preferred stock, $0.01 par value — 10,000,000 shares authorized;

   no shares issued or outstanding as of March 31, 2020 and December 31, 2019

 

 

 

 

 

 

Common stock, $0.01 par value - 280,000,000 shares authorized,

   213,137,684 and 211,787,573 shares issued and outstanding at

   March 31, 2020 and December 31, 2019, respectively

 

 

2,131

 

 

 

2,118

 

Additional paid-in capital

 

 

2,801,044

 

 

 

2,799,278

 

Accumulated other comprehensive loss

 

 

 

 

 

(19

)

Accumulated deficit

 

 

(3,001,225

)

 

 

(2,991,903

)

Total stockholders' deficit

 

 

(198,050

)

 

 

(190,526

)

Total liabilities and stockholders' deficit

 

$

80,212

 

 

$

93,725

 

 

See notes to condensed consolidated financial statements.

2


 

MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

 

 

Three Months Ended March 31,

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

Net revenue — commercial product sales

$

8,000

 

 

$

5,076

 

Revenue — collaborations and services

 

8,235

 

 

 

12,372

 

Total revenues

 

16,235

 

 

 

17,448

 

Expenses:

 

 

 

 

 

 

 

Cost of goods sold

 

4,164

 

 

 

4,020

 

Cost of revenue — collaborations and services

 

3,362

 

 

 

1,537

 

Research and development

 

1,755

 

 

 

1,667

 

Selling, general and administrative

 

14,350

 

 

 

25,673

 

Impairment of commitment asset

 

1,521

 

 

 

 

Gain on foreign currency translation

 

(1,796

)

 

 

(1,935

)

Total expenses

 

23,356

 

 

 

30,962

 

Loss from operations

 

(7,121

)

 

 

(13,514

)

Other (expense) income:

 

 

 

 

 

 

 

Interest income

 

133

 

 

 

318

 

Interest expense on notes

 

(1,071

)

 

 

(593

)

Interest expense on promissory notes

 

(1,259

)

 

 

(1,080

)

Other expense

 

(4

)

 

 

(14

)

Total other expense

 

(2,201

)

 

 

(1,369

)

Loss before provision for income taxes

 

(9,322

)

 

 

(14,883

)

Provision for income taxes

 

 

 

 

 

Net loss

$

(9,322

)

 

$

(14,883

)

Net loss per share - basic and diluted

$

(0.04

)

 

$

(0.08

)

Shares used to compute basic and diluted net loss per share

 

212,467

 

 

 

187,434

 

 

See notes to condensed consolidated financial statements.

3


 

MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands)

 

 

Three Months Ended March 31,

 

 

2020

 

 

2019

 

Net loss

$

(9,322

)

 

$

(14,883

)

Other comprehensive loss:

 

 

 

 

 

 

 

Cumulative translation loss

 

(19

)

 

 

 

Comprehensive loss

$

(9,341

)

 

$

(14,883

)

 

See notes to condensed consolidated financial statements.

 

4


 

MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited)

(In thousands)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Total

 

BALANCE, JANUARY 1, 2019

 

 

187,030

 

 

$

1,870

 

 

$

2,763,067

 

 

$

(19

)

 

$

(2,940,000

)

 

$

(175,082

)

Net issuance of common stock associated

   with stock options and restricted stock

   units

 

66

 

 

1

 

 

 

1

 

 

 

 

 

 

 

2

 

Issuance of common stock under Employee

   Stock Purchase Plan

 

296

 

 

3

 

 

 

314

 

 

 

 

 

 

 

317

 

Stock-based compensation expense

 

 

 

 

 

 

999

 

 

 

 

 

 

 

999

 

Issuance of common stock pursuant to

   conversion of Senior Convertible Notes

 

386

 

 

4

 

 

 

534

 

 

 

 

 

 

 

538

 

Restricted stock unit award

 

 

 

 

 

 

105

 

 

 

 

 

 

 

105

 

Net loss

 

 

 

 

 

 

 

 

 

 

(14,883

)

 

 

(14,883

)

BALANCE, MARCH 31, 2019

 

 

187,778

 

 

$

1,878

 

 

$

2,765,020

 

 

$

(19

)

 

$

(2,954,883

)

 

$

(188,004

)

 

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Total

 

BALANCE, JANUARY 1, 2020

 

 

211,788

 

 

$

2,118

 

 

$

2,799,278

 

 

$

(19

)

 

$

(2,991,903

)

 

$

(190,526

)

Issuance of common stock under Employee

   Stock Purchase Plan

 

 

334

 

 

 

3

 

 

 

315

 

 

 

 

 

 

 

 

 

318

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,128

 

 

 

 

 

 

 

 

 

1,128

 

Issuance of common stock associated

   with debt interest payment

 

 

99

 

 

 

1

 

 

 

143

 

 

 

 

 

 

 

 

 

144

 

Net issuance of common stock associated

   with stock options and restricted stock

   units

 

 

504

 

 

 

5

 

 

 

(322

)

 

 

 

 

 

 

 

 

(317

)

Issuance of common stock in at-the-market

   offering

 

 

413

 

 

 

4

 

 

 

518

 

 

 

 

 

 

 

 

 

522

 

Issuance cost associated with at-the-market

   offering

 

 

 

 

 

 

 

 

(16

)

 

 

 

 

 

 

 

 

(16

)

Cumulative translation loss

 

 

 

 

 

 

 

 

 

 

 

19

 

 

 

 

 

 

19

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,322

)

 

 

(9,322

)

BALANCE, MARCH 31, 2020

 

 

213,138

 

 

$

2,131

 

 

$

2,801,044

 

 

$

 

 

$

(3,001,225

)

 

$

(198,050

)

 

See notes to condensed consolidated financial statements.  

5


 

MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(9,322

)

 

$

(14,883

)

Adjustments to reconcile net loss to net cash used in operating

   activities:

 

 

 

 

 

 

 

 

Impairment of commitment asset

 

 

1,521

 

 

 

 

Stock-based compensation expense

 

 

1,128

 

 

 

999

 

Depreciation, amortization and accretion

 

 

538

 

 

 

367

 

Amortization of right-of-use assets

 

 

282

 

 

 

395

 

Gain on foreign currency translation

 

 

(1,796

)

 

 

(1,935

)

Interest expense on promissory notes

 

 

1,257

 

 

 

1,134

 

Write-off of inventory

 

 

496

 

 

 

 

Other, net

 

 

19

 

 

 

104

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(1,661

)

 

 

258

 

Inventory

 

 

428

 

 

 

(123

)

Prepaid expenses and other current assets

 

 

988

 

 

 

164

 

Other assets

 

 

40

 

 

 

(340

)

Accounts payable

 

 

1,942

 

 

 

1,599

 

Accrued expenses and other current liabilities

 

 

1,880

 

 

 

2,336

 

Deferred revenue

 

 

(8,235

)

 

 

686

 

Operating lease liabilities

 

 

(724

)

 

 

(395

)

Recognized loss on purchase commitments

 

 

 

 

 

(1,963

)

Net cash used in operating activities

 

 

(11,219

)

 

 

(11,597

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(150

)

 

 

(269

)

Purchase of treasury bills

 

 

 

 

 

(24,764

)

Proceeds from sale of treasury bills

 

 

20,000

 

 

 

 

Net cash provided by (used in) investing activities

 

 

19,850

 

 

 

(25,033

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from at-the-market offering

 

 

668

 

 

 

 

Issuance costs associated with at-the-market offering

 

 

(20

)

 

 

 

Exercise of stock options

 

 

8

 

 

 

 

Payment of employment taxes related to vested restricted stock units

 

 

(325

)

 

 

 

Other

 

 

 

 

 

3

 

Net cash provided by financing activities

 

 

331

 

 

 

3

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND

   RESTRICTED CASH

 

 

8,962

 

 

 

(36,627

)

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH,

   BEGINNING OF PERIOD

 

 

30,222

 

 

 

71,684

 

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH,

   END OF PERIOD

 

$

39,184

 

 

$

35,057

 

SUPPLEMENTAL CASH FLOWS DISCLOSURES:

 

 

 

 

 

 

 

 

Interest paid in cash, net of amounts capitalized

 

$

885

 

 

$

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Common stock issuance to settle employee stock purchase plan liability

 

 

318

 

 

 

317

 

Payment of interest on senior convertible notes through common stock issuance

 

 

144

 

 

 

 

Non-cash construction in progress and property and equipment

 

 

32

 

 

 

246

 

Addition of right-of-use assets upon adoption of new lease guidance

 

 

 

 

 

5,192

 

Payment of interest on senior convertible notes through common stock

   issuance

 

 

 

 

 

534

 

 

See notes to condensed consolidated financial statements.

6


 

MANNKIND CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of Business and Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements of MannKind Corporation and its subsidiaries (“MannKind,” the “Company,” “we” or “us”), have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information included in this quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on February 25, 2020 (the “Annual Report”).

In the opinion of management, all adjustments, consisting only of normal, recurring adjustments, considered necessary for a fair presentation of the results of these interim periods have been included. The results of operations for the three months ended March 31, 2020 may not be indicative of the results that may be expected for the full year.

Financial Statement Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates or assumptions. Management considers many factors in selecting appropriate financial accounting policies, and in developing the estimates and assumptions that are used in the preparation of the financial statements. Management must apply significant judgment in this process and the threat of the COVID-19 pandemic has increased the level of judgment used by management in developing these estimates and assumptions. The COVID-19 pandemic continues to rapidly evolve and the ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. These effects could have a material impact on the estimates and assumptions used in the preparation of the accompanying condensed consolidated financial statements. The more significant estimates include revenue recognition and gross-to-net adjustments, assessing long-lived assets for impairment, clinical trial expenses, inventory costing and recoverability, recognized loss on purchase commitment, milestone rights liability, stock-based compensation and the determination of the provision for income taxes and corresponding deferred tax assets and liabilities, and the valuation allowance recorded against net deferred tax assets.

Business — The Company is a biopharmaceutical company focused on the development and commercialization of inhaled therapeutic products for diabetes and orphan lung diseases, such as pulmonary arterial hypertension. The Company’s only approved product, Afrezza (insulin human) Inhalation Powder, is an ultra rapid-acting inhaled insulin that was approved by the U.S. Food and Drug Administration (the “FDA”) in June 2014 to improve glycemic control in adults with diabetes. Afrezza became available by prescription in United States retail pharmacies in February 2015. Currently, the Company promotes Afrezza to endocrinologists and certain high-prescribing primary care physicians in the United States through its specialty sales force.

The Company’s partner in Brazil, Biomm S.A., commenced commercialization of Afrezza in January 2020. The Company’s partners in India and Australia are preparing for regulatory submissions and have not yet commenced commercialization in their respective territories.

Basis of Presentation — The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.     

The Company is not currently profitable and has rarely generated positive net cash flow from operations. In addition, the Company expects to continue to incur significant expenditures for the foreseeable future in support of its manufacturing operations, sales and marketing costs for Afrezza, and development costs for product candidates in the Company’s pipeline. As of March 31, 2020, the Company had an accumulated deficit of $3.0 billion and $120.3 million of total principal amount of outstanding borrowings, with limited capital resources of $38.9 million in cash and cash equivalents. These financial conditions raise substantial doubt about the Company’s ability to continue as a going concern.  

In August 2019, the Company and its wholly owned subsidiary, MannKind LLC, entered into a credit and security agreement with MidCap Financial Trust (as amended, the “MidCap Credit Facility”) to restructure its existing debts and to provide additional operating capital (the “recapitalization”) (Refer to Note 6 – Borrowings for further details).  The MidCap Credit Facility provides a secured term loan facility with an aggregate principal amount of up to $75.0 million, of which $40.0 million was outstanding as of December 31, 2019.  The availability of the remaining $35.0 million is subject to certain conditions: (1) $10.0 million was available to the Company until April 15, 2020, provided that the Company had achieved Afrezza net revenue of at least $30.0 million on a trailing twelve month basis by that date (which was not achieved), and (2) a further $25.0 million will be available to the Company until June 30, 2021, subject to the satisfaction of certain milestone conditions associated with Afrezza net revenue and certain milestone conditions related to the Company’s collaboration with United Therapeutics (see Note 7 – Collaboration and Licensing Arrangements) for more information on the collaboration agreement with United Therapeutics.

7


 

Principal payments on the MidCap Credit Facility begin in September 2021.  In addition, the MidCap Credit Facility contains certain covenants, one of which includes a requirement to maintain a minimum of $15.0 million of unrestricted cash and cash equivalents at all times.  This amount will increase to $20.0 million if the Company draws the aforementioned additional funding that may be made available.

The Company’s capital resources may not be sufficient to continue to meet its current and anticipated obligations over the next twelve months if the Company cannot increase its operating cash inflows by growing revenue or obtaining access to the remaining $25.0 million in borrowings that may become available under its MidCap Credit Facility.  In the event these capital resources are not sufficient, the Company may need to raise additional capital by selling equity or debt securities, entering into strategic business collaboration agreements with other companies, seeking other funding facilities, or licensing arrangements, selling assets or by other means. However, the Company cannot provide assurances that additional capital will be available on acceptable terms or at all.  

If the Company is unable to meet its current and anticipated obligations over the next twelve months through its existing capital resources, or obtain new sources of capital when needed, the Company may have to reduce the scope of its commercial operations, reduce or eliminate one or more of its development programs, or make significant changes to its operating plan. These factors raise substantial doubt about the Company’s ability to continue as a going concern.  The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Principles of Consolidation — The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.  Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported condensed consolidated balance sheets or statements of operations. An adjustment has been made to the condensed consolidated statements of stockholder’s deficit as of March 31, 2019 to combine the exercise of stock options and the issuance of common stock from the release of restricted stock units. An additional adjustment has been made to the condensed consolidated statements of cash flows for the three months ended March 31, 2019 to combine restricted stock unit award with other, net in the cash flows from operating activities. These changes in classification do not affect previously reported cash flows from investing or financing activities.

Segment Information — Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed its operations and manages its business as one segment operating in the United States of America.

Revenue RecognitionThe Company adopted Accounting Standards Codification (“ASC”) Topic 606 - Revenue from Contracts with Customers (“the new revenue guidance”), on January 1, 2018. Under Topic 606, the Company recognizes revenue when its customers obtain control of promised goods or services, in an amount that reflects the consideration which the Company expects to be entitled in exchange for those goods or services.

To determine revenue recognition for arrangements that are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to arrangements that meet the definition of a contract under Topic 606, including when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.

At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company has two types of contracts with customers: (i) contracts for commercial product sales with wholesale distributors and specialty pharmacies and (ii) collaboration arrangements.

Revenue Recognition – Net Revenue – Commercial Product Sales – The Company sells Afrezza to a limited number of wholesale distributors and specialty pharmacies in the U.S. (collectively, its “Customers”). Wholesale distributors subsequently resell the Company’s products to retail pharmacies and certain medical centers or hospitals. Specialty pharmacies sell directly to patients. In addition to distribution agreements with Customers, the Company enters into arrangements with payors that provide for government mandated and/or privately negotiated rebates, chargebacks, and discounts with respect to the purchase of the Company’s products.

The Company recognizes revenue on product sales when the Customer obtains control of the Company's product, which occurs at delivery for wholesale distributors and generally for specialty pharmacies. Product revenues are recorded net of applicable reserves for variable consideration, including discounts and allowances.

8


 

Free Goods Program From time to time, the Company offers programs to potential new patients that allow them to obtain free goods (prescription fills) from a pharmacy. The Company excludes such amounts from both gross and net revenue. The cost of product associated with the free goods program is included in cost of goods sold.

Reserves for Variable Consideration — Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, provider chargebacks and discounts, government rebates, payor rebates, and other incentives, such as voluntary patient assistance, and other allowances that are offered within contracts between the Company and its Customers, payors, and other indirect customers relating to the Company’s sale of its products. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and result in a reduction of accounts receivable or establishment of a current liability. Significant judgments are required in making these estimates.

Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted in accordance with the expected value method in Topic 606 for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reduce recognized revenue to the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts.

The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. The Company’s analysis also contemplates application of the constraint in accordance with the guidance, under which it determined a material reversal of revenue would not occur in a future period for the estimates detailed below as of March 31, 2020 and, therefore, the transaction price was not reduced further during the three months ended March 31, 2020. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net revenue — commercial product sales and earnings in the period such variances become known.

Trade Discounts and Allowances — The Company generally provides Customers with discounts which include incentives, such as prompt pay discounts, that are explicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, the Company compensates (through trade discounts and allowances) its Customers for sales order management, data, and distribution services. However, the Company has determined such services received to date are not distinct from the Company’s sale of products to the Customer and, therefore, these payments have been recorded as a reduction of revenue and as a reduction to accounts receivable, net.

Product Returns — Consistent with industry practice, the Company generally offers Customers a right of return for unopened product that has been purchased from the Company for a period beginning six months prior to and ending 12 months after its expiration date, which lapses upon shipment to a patient. The Company estimates the amount of its product sales that may be returned by its Customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized, as well as reductions to accounts receivable, net. The Company currently estimates product returns using available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel. The Company’s current return reserve percentage is estimated to be in the single-digits. Adjustments to the returns reserve have been made in the past and may be necessary in the future based on revised estimates to our assumptions.

Provider Chargebacks and Discounts — Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to Customers who directly purchase the product from the Company. Customers charge the Company for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is recorded in accrued expenses and other current liabilities. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by Customers, and the Company generally issues credits for such amounts within a few weeks of the Customer’s notification to the Company of the resale. Reserves for chargebacks consist of credits that the Company expects to issue for units that remain in the distribution channel inventories at each reporting period-end that the Company expects will be sold to qualified healthcare providers, and chargebacks that Customers have claimed, but for which the Company has not yet issued a credit.

Government Rebates — The Company is subject to discount obligations under Medicare and state Medicaid programs. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses and other current liabilities. Estimates around Medicaid have historically required significant judgement due to timing lags in receiving invoices for claims from states. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period.

9


 

Payor Rebates — The Company contracts with certain private payor organizations, primarily insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of its products. The Company estimates these rebates, including estimates for product that has been recognized as revenue, but which remains in the distribution channel, and records such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses and other current liabilities.

Other Incentives — Other incentives which the Company offers include voluntary patient support programs, such as the Company's co-pay assistance program, which are intended to provide financial assistance to qualified commercially-insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with the product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period. The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses and other current liabilities.

Revenue Recognition — Revenue — Collaborations and Services — The Company enters into licensing or research agreements under which the Company licenses certain rights to its product candidates to third parties or conducting research services to third parties. The terms of these arrangements may include, but are not limited to payment to the Company of one or more of the following:  up-front license fees; development, regulatory, and commercial milestone payments; payments for manufacturing commercial and clinical supply services the Company provides; and royalties on net sales of licensed products and sublicenses of the rights. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment such as determining the performance obligation in the contract and determining the stand-alone selling price for each performance obligation identified in the contract. If an arrangement has multiple performance obligations, the allocation of the transaction price is determined from observable market inputs, and the Company uses key assumptions to determine the stand-alone selling price, which may include development timelines, reimbursement rates for personnel costs, discount rates, and probabilities of technical and regulatory success. Revenue is recognized based on the measurement of progress as the performance obligation is satisfied and consideration received that does not meet the requirements to satisfy the revenue recognition criteria is recorded as deferred revenue. Current deferred revenue consists of amounts that are expected to be recognized as revenue in the next 12 months. Amounts that the Company expects will not be recognized within the next 12 months are classified as long-term deferred revenue. For further information see Note 7 – Collaboration and Licensing Arrangements.

The Company recognizes upfront license payments as revenue upon delivery of the license only if the license is determined to be a separate unit of accounting from the other undelivered performance obligations. The undelivered performance obligations typically include manufacturing or development services or research and/or steering committee services. If the license is not considered as a distinct performance obligation, then the license and other undelivered performance obligations would be evaluated to determine if such should be accounted for as a single unit of accounting. If concluded to be a single performance obligation, the transaction price for the single performance obligation is recognized as revenue over the estimated period of when the performance obligation is satisfied.

Whenever the Company determines that an arrangement should be accounted for over time, the Company determines the period over which the performance obligations will be performed, and revenue will be recognized over the period the Company is expected to complete its performance obligations. Significant management judgment is required in determining the level of effort required under an arrangement and the period over which the Company is expected to complete its performance obligations under an arrangement.

The Company’s collaboration agreements typically entitle the Company to additional payments upon the achievement of development, regulatory and sales milestones. If the achievement of a milestone is considered probable at the inception of the collaboration, the related milestone payment is included with other collaboration consideration, such as upfront fees and research funding, in the Company’s revenue calculation. If these milestones are not considered probable at the inception of the collaboration, the milestones will typically be recognized in one of two ways depending on the timing of when the milestone is achieved.  If the milestone is improbable at inception and subsequently deemed probable of achievement, such will be added to the transaction price, resulting in a cumulative adjustment to revenue.  If the milestone is achieved after the performance period has completed and all performance obligations have been delivered, the Company will recognize the milestone payment as revenue in its entirety in the period the milestone was achieved.

The Company’s collaborative agreements, for accounting purposes, represent contracts with customers and therefore are not subject to accounting literature on collaborative agreements. The Company grants licenses to its intellectual property, supplies raw materials or finished goods and provides research and development services, all of which are outputs of the Company’s ongoing activities, in exchange for consideration. The Company does not develop assets jointly with collaboration partners, and does not share in significant risks of their development or commercialization activities. Accordingly, the Company concluded that its collaborative agreements must be accounted for pursuant to Topic 606, Revenue from Contracts with Customers.

10


 

For collaboration agreements that allow collaboration partners to select additional optioned products or services, the Company evaluates whether such options contain material rights (i.e., have exercise prices that are discounted compared to what the Company would charge for a similar product or service to a new collaboration partner). The exercise price of these options includes a combination of licensing fees, event-based milestone payments and royalties. When these amounts in aggregate are not offered at a discount that exceeds discounts available to other customers, the Company concludes the option does not contain a material right, and therefore is not included in the transaction price at contract inception. Rather, the Company evaluates grants of additional licensing rights upon option exercises to determine whether such should be accounted for as separate contracts. The Company concluded there is no material right in these options.

The Company follows detailed accounting guidance in measuring revenue and certain judgments affect the application of its revenue policy. For example, in connection with its existing collaboration agreements, the Company has recorded on its condensed consolidated balance sheets short-term and long-term deferred revenue based on its best estimate of when such revenue will be recognized. Short-term deferred revenue consists of amounts that are expected to be recognized as revenue in the next 12 months. Amounts that the Company expects will not be recognized within the next 12 months are classified as long-term deferred revenue. However, this estimate is based on the Company’s current project development plan and, if the development plan should change in the future, the Company may recognize a different amount of deferred revenue over the next 12-month period.

Milestone Payments — At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the customer, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as, or when, the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company will re-evaluate the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration, other revenue, and earnings in the period of adjustment.

Cost of Goods Sold — Cost of goods sold includes material, labor costs and manufacturing overhead. Cost of goods sold also includes a significant component of current period manufacturing costs in excess of costs capitalized into inventory (excess capacity costs).  These costs, in addition to the impact of the annual revaluation of inventory to standard costs, and write-offs of inventory are recorded as expenses in the period in which they are incurred, rather than as a portion of inventory costs. The cost of goods sold excludes the cost of insulin purchased under our Insulin Supply Agreement (see Note 10 – Commitments and Contingencies). All insulin inventory on hand was written off and the full purchase commitment contract to purchase future insulin was accrued as a recognized loss on purchase commitments as of the end of 2015.

Cash and Cash Equivalents and Restricted Cash —The Company considers all highly liquid investments with original or remaining maturities of 90 days or less at the time of purchase, that are readily convertible into cash to be cash equivalents. As of March 31, 2020 and December 31, 2019, cash equivalents were comprised of money market accounts with maturities less than 90 days from the date of purchase.

The Company records restricted cash when cash and cash equivalents are restricted as to withdrawal or usage. The Company presents amounts of restricted cash that will be available for use within 12 months of the reporting date as restricted cash in current assets. Restricted cash amounts that will not be available for use in the Company’s operations within 12 months of the reporting date are presented as restricted cash in long term assets.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the consolidated balance sheets that sum to amounts reported on the consolidated statement of cash flows (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Cash and cash equivalents

 

$

38,868

 

 

$

29,906

 

Restricted cash

 

 

316

 

 

 

316

 

Total cash, cash equivalents, and restricted cash

 

$

39,184

 

 

$

30,222

 

 

11


 

Short-term Investments —The Company’s short-term investments consist of U.S. Treasury securities stated at amortized cost which the Company intends to hold until maturity. Those with maturities less than 12 months are included in short-term investments and any investments with maturities in excess of twelve months are included in long-term investments in our condensed consolidated balance sheets. As of March 31, 2020, the Company did not hold any short-term investments nor did it record any material gains or losses on short-term investment securities during the three months ended March 31, 2020.

Concentration of Credit Risk — Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and short-term investments. Cash and cash equivalents are held in high credit quality institutions. Cash equivalents consist of interest-bearing money market accounts and U.S. Treasury securities, which are regularly monitored by management.

Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable are recorded at the invoiced amount and are not interest bearing. Accounts receivable are presented net of an allowance for doubtful accounts if there are estimated losses resulting from the inability of its customers to make required payments. The Company makes ongoing assumptions relating to the collectability of its accounts receivable in its calculation of the allowance for doubtful accounts. Accounts receivable are also presented net of an allowance for product returns and trade discounts and allowances because the Company’s customers have the right of setoff for these amounts against the related accounts receivable.

Pre-Launch Inventory — An improvement to the manufacturing process for the Company’s primary excipient FDKP was demonstrated to be viable and management expects to realize an economic benefit in the future as a result of such process improvement.  Accordingly, the Company is required to assess whether to capitalize inventory costs related to such excipient prior to regulatory approval of the new supplier and the improved manufacturing process. In doing so, management must consider a number of factors in order to determine the amount of inventory to be capitalized, including the historical experience of achieving regulatory approvals for the Company’s manufacturing process, feedback from regulatory agencies on the changes being effected and the amount of inventory that is likely to be used in commercial production.  The shelf life of the excipient will be determined as part of the regulatory approval process; in the interim, the Company must assess the available stability data to determine whether there is likely to be adequate shelf life to support anticipated future sales occurring beyond the expected approval date of the new raw material.  If management is aware of any specific material risks or contingencies other than the normal regulatory review and approval process, or if the criteria for capitalizing inventory produced prior to regulatory approval are otherwise not met, the Company would not capitalize such inventory costs, choosing instead to recognize such costs as a research and development expense in the period incurred.

Inventories — Inventories are stated at the lower of cost or net realizable value. The Company determines the cost of inventory using the first-in, first-out, or FIFO, method. The Company capitalizes inventory costs associated with the Company’s products based on management’s judgment that future economic benefits are expected to be realized; otherwise, such costs are expensed as incurred as cost of goods sold. The Company periodically analyzes its inventory levels to identify inventory that may expire or has a cost basis in excess of its estimated realizable value and writes down such inventories, as appropriate. In addition, the Company’s products are subject to strict quality control and monitoring which the Company performs throughout the manufacturing process. If certain batches or units of product no longer meet quality specifications or may become obsolete or are forecasted to become obsolete due to expiration, the Company will record a charge to write down such unmarketable inventory to its estimated net realizable value.

The Company analyzes its inventory levels to identify inventory that may expire or has a cost basis in excess of its estimated realizable value. The Company performs an assessment of projected sales and evaluates the lower of cost or net realizable value and the potential excess inventory on hand at the end of each reporting period.

Impairment of Long-Lived Assets — The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Assets are considered to be impaired if the carrying value may not be recoverable.

If the Company believes an asset to be impaired, the impairment recognized is the amount by which the carrying value of the asset exceeds the fair value of the asset. Fair value is determined using the market, income or cost approaches as appropriate for the asset. Any write-downs are treated as permanent reductions in the carrying amount of the asset and recognized as an operating loss.

In August 2019, the Company recorded a $1.5 million commitment asset related to the future funding commitments of the MidCap Credit Facility. An assessment was performed as of March 31, 2020 to determine if the Company was on target to achieve certain milestone conditions that are required in order for the Company to access further borrowings under the MidCap Credit Facility. The Company determined that such milestone conditions related to Afrezza trailing net revenue are unlikely to be achieved. As a result of this assessment, a $1.5 million asset impairment was recognized for the three months ended March 31, 2020. See Note 6 – Borrowings for further information on the MidCap Credit Facility.

12


 

Recognized Loss on Purchase CommitmentsThe Company assesses whether losses on long term purchase commitments should be accrued. Losses that are expected to arise from firm, non-cancellable, commitments for the future purchases are recognized unless recoverable. When making the assessment, the Company also considers whether it is able to renegotiate with its vendors. The recognized loss on purchase commitments is reduced as inventory items are received. If, subsequent to an accrual, a purchase commitment is successfully renegotiated, the gain is recognized in the Company’s condensed consolidated statement of operations. The liability balance of the recognized loss on insulin purchase commitments was $90.2 million and $92.0 million as of March 31, 2020 and December 31, 2019, respectively. No new contracts were identified in the first quarter of 2020 that required a new loss on purchase commitment accrual.

Milestone Rights Liability — On July 1, 2013, in conjunction with the execution of a financing facility with Deerfield Private Design Fund II L.P. and Deerfield Private Design International I L.P., the Company issued to Deerfield Private Design Fund II, L.P. and Horizon Santé FLML SÁRL (the “Milestone Purchasers”) certain rights to receive payments of up to $90.0 million, of which $70.0 million remains payable as of March 31, 2020 upon the occurrence of specified strategic and sales milestones, including the achievement of specified net sales figures (the “Milestone Rights”). The Company analyzed the Milestone Rights and determined that they did not meet the definition of a freestanding derivative. Since the Company has not elected to apply the fair value option to the Milestone Rights, the Company recorded them at their estimated initial fair value and accounted for the Milestone Rights as a liability.

The initial fair value estimate of the Milestone Rights was calculated using the income approach in which the cash flows associated with the specified contractual payments were adjusted for both the expected timing and the probability of achieving the milestones and discounted to present value using a selected market discount rate. The expected timing and probability of achieving the milestones was developed with consideration given to both internal data, such as progress made to date and assessment of criteria required for achievement, and external data, such as market research studies. The discount rate was selected based on an estimation of required rate of returns for similar investment opportunities using available market data. The Milestone Rights liability will be remeasured as the specified milestone events are achieved. Specifically, as each milestone event is achieved, the portion of the initially recorded Milestone Rights liability that pertains to the milestone event being achieved, will be remeasured to the amount of the specified related milestone payment. The resulting change in the balance of the Milestone Rights liability due to remeasurement will be recorded in the Company’s consolidated statements of operations as interest expense. Furthermore, the Milestone Rights liability will be reduced upon the settlement of each milestone payment. As a result, each milestone payment would be effectively allocated between a reduction of the recorded Milestone Rights liability and an expense representing a return on a portion of the Milestone Rights liability paid to the investor for the achievement of the related milestone event (see Note 6 – Borrowings). As of March 31, 2020 and December 31, 2019, the remaining liability balance was $7.3 million.

Fair Value of Financial Instruments — The Company applies various valuation approaches in determining the fair value of its financial assets and liabilities within a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

Level 1 — Quoted prices for identical instruments in active markets.

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 — Significant inputs to the valuation model are unobservable.

Income Taxes — The provisions for federal, foreign, state and local income taxes are calculated on pre-tax income based on current tax law and include the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be recovered or settled. A valuation allowance is recorded to reduce net deferred income tax assets to amounts that are more likely than not to be realized.

Income tax positions are considered for uncertainty. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no liabilities for uncertain income tax positions have been recorded. If a tax position does not meet the minimum statutory threshold to avoid payment of penalties, the Company recognizes an expense for the amount of the penalty in the period the tax position is claimed in the tax return of the Company. The Company recognizes interest accrued related to unrecognized tax benefits in income tax expense, if any. Penalties, if probable and reasonably estimable, are recognized as a component of income tax expense.

13


 

Contingencies — The Company records a loss contingency for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These accruals represent management’s best estimate of probable loss. Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. On a quarterly basis, the Company reviews the status of each significant matter and assesses its potential financial exposure. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to pending claims and litigation and may revise its estimates.

Stock-Based Compensation — Share-based payments to employees, including grants of stock options, restricted stock units, performance-based awards and the compensatory elements of employee stock purchase plans, are recognized in the condensed consolidated statements of operations based upon the fair value of the awards at the grant date. The Company uses the Black-Scholes option valuation model to estimate the grant date fair value of employee stock options and the compensatory elements of employee stock purchase plans. Restricted stock units are valued based on the market price on the grant date. The Company evaluates stock awards with performance conditions as to the probability that the performance conditions will be met and estimates the date at which the performance conditions will be met in order to properly recognize stock-based compensation expense over the requisite service period.

Clinical Trial Expenses — Clinical trial expenses, which are primarily reflected in research and development expenses in the accompanying condensed consolidated statements of operations, result from obligations under contracts with vendors, consultants and clinical site agreements in connection with conducting clinical trials.

Net Income (Loss) Per Share of Common Stock — Basic net income or loss per share excludes dilution for potentially dilutive securities and is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted net income or loss per share reflects the potential dilution under the treasury method that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For periods where the Company has presented a net loss, potentially dilutive securities are excluded from the computation of diluted net loss per share as they would be anti-dilutive.

The computation of basic and diluted net loss per share for the three months ended March 31, 2020 and 2019 excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive while the Company is in a net loss position:

 

 

 

Three months ended March 31,

 

 

 

2020

 

 

2019

 

Vesting of restricted stock units

 

 

522,021

 

 

 

1,314,218

 

Employee stock purchase plan

 

 

144,088

 

 

 

141,568

 

Exercise of common stock options

 

 

14,014,315

 

 

 

10,846,738

 

Conversion of 2024 convertible notes into common stock

 

 

1,666,667

 

 

 

3,629,627

 

Conversion of Mann Group convertible note into common stock

 

 

14,000,000

 

 

 

21,909,541

 

Exercise of common stock warrants

 

 

31,851

 

 

 

31,851

 

Exercise of warrants associated with Midcap Credit Facility

 

 

1,171,614

 

 

 

 

Exercise of warrants associated with public offering

 

 

7,250,000

 

 

 

26,666,667

 

Exercise of warrants associated with direct placement

 

 

 

 

 

14,000,000

 

Total shares

 

 

38,800,556

 

 

 

78,540,210

 

 

Recently Adopted Accounting Standards — In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), The Company adopted this standard as of January 1, 2020. This update introduces the current expected credit loss (CECL) model, which requires an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables. Under this update, on initial recognition and at each reporting period, an entity is required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.

Recently Issued Accounting Standards — From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s condensed consolidated financial position or results of operations upon adoption.

14


 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) to simplify and reduce the cost of accounting for income taxes. The pronouncement calls for removing exceptions to the incremental approach for intraperiod tax allocations, exceptions to the requirement to recognize a deferred tax liability for equity method investment when a foreign subsidiary becomes an equity method investment, exception to the ability to not recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary and exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. We are currently assessing the effect the adoption of this standard will have on the Company’s consolidated financial statements.

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808) to clarify when transactions between participants in a collaborative arrangement under ASC 808 are within the scope of the new revenue guidance when the collaborative arrangement participant is a customer.  ASU 2018-18 is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements.

2. Accounts Receivable

Accounts receivable, net consists of the following (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Accounts receivable, gross

 

$

8,393

 

 

$

6,925

 

Wholesaler distribution fees and prompt pay discounts

 

 

(1,458

)

 

 

(1,767

)

Reserve for returns

 

 

(1,903

)

 

 

(1,645

)

Accounts receivable, net

 

$

5,032

 

 

$

3,513

 

 

As of March 31, 2020 and December 31, 2019, the allowance for doubtful accounts was de minimis. The Company had three wholesale distributors representing approximately 91% of accounts receivable as of March 31, 2020 and approximately 92% of gross sales for the three months ended March 31, 2020.

3. Inventories

Inventories consist of the following (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Raw materials

 

$

1,643

 

 

$

1,751

 

Work-in-process

 

 

495

 

 

 

1,432

 

Finished goods

 

 

1,093

 

 

 

972

 

Total inventory

 

$

3,231

 

 

$

4,155

 

 

Work-in-process and finished goods as of March 31, 2020 and December 31, 2019 include conversion costs and exclude the cost of insulin. All insulin inventory on hand was written off and the projected loss on the purchase commitment contract to purchase future insulin was accrued as of the end of 2015. Raw materials inventory included $0.8 million of pre-launch inventory as of March 31, 2020 and December 31, 2019, which consisted of FDKP received in November 2019 that will be used to manufacture Afrezza under an enhanced manufacturing process for FDKP.  The Company expects to receive FDA approval of the new source of FDKP in mid-2021, after which the pre-launch raw materials inventory will be reclassified as raw materials inventory for use in the manufacturing of Afrezza.

The Company analyzed its inventory levels to identify inventory that may expire or has a cost basis in excess of its estimated realizable value.  The Company also performed an assessment of projected sales and evaluated the lower of cost or net realizable value and the potential excess inventory on hand.  Inventory that was forecasted to become obsolete due to expiration is recorded in costs of goods sold in the accompanying condensed consolidated statements of operations. For the three months ended March 31, 2020 there was an inventory write-off of $0.5 million as a result of this assessment.  There was no inventory write-off for the three months ended March 31, 2019.

15


 

4. Property and Equipment

Property and equipment consists of the following (in thousands):

 

 

 

Estimated Useful

 

 

 

 

 

 

 

 

 

 

 

Life (Years)

 

 

March 31, 2020

 

 

December 31, 2019

 

Land

 

 

 

 

$

875

 

 

$

875

 

Buildings

 

39-40

 

 

 

17,389

 

 

 

17,389

 

Building improvements

 

5-40

 

 

 

37,543

 

 

 

37,543

 

Machinery and equipment

 

3-15

 

 

 

54,978

 

 

 

54,982

 

Furniture, fixtures and office equipment

 

5-10

 

 

 

3,005

 

 

 

3,005

 

Computer equipment and software

 

 

3

 

 

 

8,319

 

 

 

8,234

 

Construction in progress

 

 

 

 

 

176

 

 

 

114

 

 

 

 

 

 

 

 

122,285

 

 

 

122,142

 

Less accumulated depreciation

 

 

 

 

 

 

(95,768

)

 

 

(95,364

)

Total property and equipment, net

 

 

 

 

 

$

26,517

 

 

$

26,778

 

 

Depreciation expense related to property and equipment was as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Depreciation Expense

 

$

443

 

 

$

367

 

 

 

5. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities were comprised of the following (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Salary and related expenses

 

$

10,217

 

 

$

8,835

 

Discounts and allowances for commercial product sales

 

 

3,534

 

 

 

3,162

 

Deferred lease liability

 

 

1,415

 

 

 

1,433

 

Milestone Rights liability — current

 

 

1,337

 

 

 

 

Professional fees

 

 

314

 

 

 

620

 

Sales and marketing services

 

 

309

 

 

 

147

 

Accrued interest

 

 

337

 

 

 

409

 

Other

 

 

863

 

 

 

1,298

 

Total accrued expenses and other current liabilities

 

$

18,326

 

 

$

15,904

 

 

6. Borrowings

Carrying amount of borrowings consist of the following (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Mann Group promissory notes

 

$

70,022

 

 

$

70,020

 

Midcap Credit Facility

 

 

38,893

 

 

 

38,851

 

Senior notes (2020 notes and 2024 convertible notes)

 

 

10,101

 

 

 

10,028

 

Total debt — net carrying amount

 

$

119,016

 

 

$

118,899

 

 

16


 

The following table provides a summary of the Company’s debt and key terms:

 

 

 

Amount Due

 

Terms

 

 

March 31, 2020

 

December 31, 2019

 

Annual

Interest Rate

 

 

Maturity Date

 

Conversion Price

Mann Group convertible

   note

 

$35.0 million (plus $1.6 million accrued interest paid-in-kind)

 

$35.0 million (plus $1.0 million accrued interest paid-in-kind)

 

7.00%

 

 

November 2024

 

$2.50

per share

Mann Group non-

   convertible note

 

$35.1 million (plus $1.6 million accrued interest paid-in-kind)

 

$35.1 million (plus $1.0 million accrued interest paid-in-kind)

 

7.00%

 

 

November 2024

 

N/A

MidCap Credit

   Facility

 

$40.0 million

 

$40.0 million

 

one-month

LIBOR (2% floor)

plus 6.75%

 

 

August 2024

 

N/A

2024 convertible notes

 

$5.0 million

 

$5.0 million

 

5.75%

 

 

November 2024

 

$3.00

per share

June 2020 note

 

$2.6 million

 

$2.6 million

 

 

 

 

June 2020

 

N/A

December 2020 note

 

$2.6 million

 

$2.6 million

 

 

 

 

December 2020

 

N/A

 

The maturities of our borrowings as of March 31, 2020 are as follows (in thousands):

 

 

 

Amounts

 

2020

 

$

5,262

 

2021

 

 

4,444

 

2022

 

 

13,333

 

2023

 

 

13,333

 

2024

 

 

83,940

 

Thereafter

 

 

 

Total principal payments

 

 

120,312

 

Unamortized discount

 

 

(450

)

Debt issuance costs

 

 

(846

)

Total debt — net carrying amount

 

$

119,016

 

 

MidCap Credit Facility In August 2019, the Company closed the MidCap Credit Facility, which provides a secured term loan facility with an aggregate principal amount of up to $75.0 million. The Company borrowed the first advance of $40.0 million (“Tranche 1”) on August 6, 2019. Under the terms of the MidCap Credit Facility, the second advance of $10.0 million (“Tranche 2”) was available to the Company until April 15, 2020, provided that the Company had achieved Afrezza net revenue of at least $30.0 million on a trailing twelve month basis by that date (which was not achieved). The third advance of $25.0 million (“Tranche 3”) will be available to the Company until June 30, 2021, subject to the satisfaction of certain milestone conditions associated with Afrezza trailing net revenue and certain milestone conditions related to the Company’s collaboration with United Therapeutics (see Note 7 – Collaboration and Licensing Arrangements). As of March 31, 2020, the Company has recognized a $1.5 million impairment of the commitment asset, as it is unlikely that the milestone conditions related to Afrezza trailing net revenue will be achieved. In addition, the COVID-19 pandemic is expected to negatively impact the milestone conditions related to the Company’s collaboration with United Therapeutics.  Unamortized debt issuance costs was $0.8 million and unamortized debt discount was $0.3 million as of March 31, 2020.

In December 2019, the Company entered into an amendment to the MidCap Credit Facility, pursuant to which the parties agreed to (i) amend the financial covenant relating to trailing twelve month minimum Afrezza Net Revenue (as defined in the MidCap Credit Facility) requirements, (ii) add a condition to the third advance of $25.0 million that requires the Company achieve certain amounts of Afrezza Net Revenue, and (iii) increase the exit fee from 6.00% to 7.00% of the principal amount of all term loans advanced to the Company under the MidCap Credit Facility.

17


 

Tranche 1 and, if borrowed, Tranche 3, each accrue interest at an annual rate equal to one-month LIBOR plus 6.75%, subject to a one-month LIBOR floor of 2.00%.  Interest on each term loan advance is due and payable monthly in arrears. Principal on the term loan advance under Tranche 1 is payable in 36 equal monthly installments beginning September 1, 2021, until paid in full on August 1, 2024, and principal on any term loan advance under Tranche 3 is payable beginning on the later of (i) September 1, 2021, and (ii) the first day of the first full calendar month immediately following such term loan advance, in an amount equal to the outstanding term loan advance in respect of Tranche 3 divided by the number of full calendar months remaining before August 1, 2024. The Company has the option to prepay the term loans, in whole or in part, subject to early termination fees in an amount equal to 3.00% of principal prepaid if prepayment occurs on or prior to the first anniversary of the closing date, 2.00% of principal prepaid if prepayment occurs after the first anniversary of the closing date but on or prior to the second anniversary of the closing date, and 1.00% of principal prepaid if prepayment occurs after the second anniversary of the closing date and prior to or on the third anniversary of the closing date. In connection with execution of the MidCap Credit Facility, the Company paid MidCap a $0.4 million origination fee.

The Company’s obligations under the MidCap Credit Facility are secured by a security interest on substantially all of its assets, including intellectual property.

The MidCap Credit Facility contains customary affirmative covenants and customary negative covenants limiting the Company’s ability and the ability of the Company’s subsidiaries to, among other things, dispose of assets, undergo a change in control, merge or consolidate, make acquisitions, incur debt, incur liens, pay dividends, repurchase stock and make investments, in each case subject to certain exceptions.  The Company must also comply with a financial covenant relating to trailing twelve month minimum Afrezza net revenue, tested on a monthly basis, and a minimum cash covenant of $15.0 million at all times, which will increase to $20.0 million following the funding of Tranche 3. As of March 31, 2020, the Company was in compliance with the financial and minimum cash covenants.

The MidCap Credit Facility also contains customary events of default relating to, among other things, payment defaults, breaches of covenants, a material adverse change, listing of the Company’s common stock, bankruptcy and insolvency, cross defaults with certain material indebtedness and certain material contracts, judgments, and inaccuracies of representations and warranties. Upon an event of default, the agent and the lenders may declare all or a portion of the Company’s outstanding obligations to be immediately due and payable and exercise other rights and remedies provided for under the MidCap Credit Facility. During the existence of an event of default, interest on the term loans could be increased by 2.00%.  

The Company also agreed to issue warrants to purchase shares of the Company’s common stock (the “MidCap warrants”) upon the drawdown of each term loan advance under the MidCap Credit Facility in an aggregate amount equal to 3.25% of the amount drawn, divided by the exercise price per share for that tranche. The exercise price per share is equal to the volume-weighted average closing price of the Company’s common stock for the ten business days immediately preceding the second business day before the issue date. As a result of Tranche 1, the Company issued warrants to purchase an aggregate of 1,171,614 shares of the Company’s common stock, at an exercise price equal to $1.11 per share. The MidCap warrants are immediately exercisable and expire on the earlier to occur of the seventh anniversary of the respective issue date or, in certain circumstances, the closing of a merger, sale or other consolidation transactions in which the consideration is cash, stock of a publicly traded acquirer, or a combination thereof.

The Company determined that these warrants met the criteria for equity classification and accounted for such warrants in additional paid-in capital.

Senior Notes — As of March 31, 2020 and December 31, 2019, there was $10.2 million principal amount of senior notes outstanding, respectively.

 

In August 2019, the Company entered into a privately-negotiated exchange agreement with the holder of the 5.75% Convertible Senior Subordinated Exchange Notes due 2021 (the “2021 notes”), pursuant to which, among other things, the Company (i) repaid $1.5 million in cash to such holder, (ii) issued 4,017,857 shares of the Company’s common stock to such holder (at a conversion price of $1.12 per share), (iii) issued 5.75% Convertible Senior Subordinated Exchange Notes due November 2024 (the “2024 convertible notes”) to such holder in the principal amount of $5.0 million and (iv) issued a $2.6 million note due June 2020 (the “June 2020 note”), a $2.6 million note due December 2020 (the “December 2020 note”, and together with the June 2020 note, the “2020 notes”), all in exchange for the cancellation of the $18.7 million in principal amount of the 2021 notes. The 2020 notes may be prepaid at any time on or prior to their respective maturity dates of June 30, 2020 and December 31, 2020 at the option of the Company. In addition, the Company may elect to pay the 2020 notes at any time on or prior to their respective maturity dates, if certain conditions are met, in shares of the Company’s common stock at a price per share equal to the last reported sale price on the trading day immediately prior to the payment date.  

18


 

The 2024 convertible notes were issued pursuant to an indenture, dated as of August 6, 2019, between the Company and U.S. Bank National Association, as trustee (the “Indenture”).  The 2024 convertible notes are the Company’s general, unsecured obligations, and are subordinated in right of payment to the indebtedness incurred pursuant to the MidCap Credit Facility. The 2024 convertible notes rank equally in right of payment with the Company’s other unsecured senior debt. The 2024 convertible notes accrue interest at the rate of 5.75% per year on the principal amount, payable semiannually in arrears on February 15 and August 15 of each year, beginning February 15, 2020, with interest accruing from August 6, 2019.  Interest on the 2024 convertible notes will be payable in cash or, at the option of the Company if certain conditions are met, in shares of the Company’s common stock at a price per share equal to the last reported sale price on the trading day immediately prior to the interest payment date.  The 2024 convertible notes will mature on the earlier of (i) November 4, 2024 or (ii) the 91st day after the payment in full of, and termination and discharge of all obligations (other than contingent indemnity obligations) under the MidCap Credit Facility.

The 2024 convertible notes are convertible, at the option of the holder, at any time on or prior to the close of business on the business day immediately preceding the stated maturity date, into shares of the Company’s common stock at a conversion rate of 333.3333 shares per $1,000 principal amount of 2024 convertible notes, which is equal to a conversion price of approximately $3.00 per share.

If certain bankruptcy and insolvency-related events of default occur, the principal of, and accrued and unpaid interest on, all of the then outstanding 2024 convertible notes shall automatically become due and payable. If an event of default other than certain bankruptcy and insolvency-related events of defaults occurs and is continuing, the Trustee or the holders of at least 25% in aggregate principal amount of the then-outstanding 2024 convertible notes, by written notice to the Trustee, may declare the 2024 convertible notes due and payable at their principal amount plus any accrued and unpaid interest, and thereupon the Trustee may, at its discretion, proceed to protect and enforce the rights of the holders by the appropriate judicial proceedings. Notwithstanding the foregoing, the Indenture provides that, to the extent the Company elects, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture will, for the first 180 days after such event of default, consist exclusively of the right to receive additional interest on the 2024 convertible notes.

If the Company undergoes certain fundamental changes, except in certain circumstances, each holder of 2024 convertible notes will have the option to require the Company to repurchase all or any portion of that holder’s 2024 convertible notes. The fundamental change repurchase price will be 100% of the principal amount of the 2024 convertible notes to be repurchased plus accrued and unpaid interest, if any.

The Company may elect at its option to cause all or any portion of the 2024 convertible notes to be mandatorily converted in whole or in part at any time prior to the close of business on the business day immediately preceding the maturity date, if the last reported sale price of its common stock equals or exceeds 120% of the conversion price then in effect for at least 10 trading days in any 20 trading day period, ending within five business days prior to the date of the mandatory conversion notice.

Mann Group promissory notes — In August 2019, the Company entered into a privately-negotiated exchange agreement with The Mann Group LLC (the “Mann Group”), pursuant to which, among other things, the Company (i) repaid $3.0 million in cash to the Mann Group, (ii) issued 7,142,857 shares of the Company’s common stock to the Mann Group (at a conversion price of $1.12 per share), (iii) issued a $35.0 million note that is convertible into shares of the Company’s common stock at $2.50 per share (the “Mann Group convertible note”) and (iv) issued a non-convertible note to the Mann Group in an aggregate principal amount of $35.1 million (the “Mann Group non-convertible note” and, together with the Mann Group convertible note, the “Mann Group promissory notes”), all in exchange for the cancellation of the $71.5 million in principal and approximately $9.5 million in accrued interest paid-in-kind under the existing Mann Group loan arrangement.

The Mann Group promissory notes each accrue interest at the rate of 7.00% per year on the principal amount, payable quarterly in arrears on the first day of each calendar quarter beginning October 1, 2019.  

The Mann Group convertible note will mature on November 3, 2024.  The principal and any accrued and unpaid interest under the Mann Group convertible note may be converted, at the option of the Mann Group, at any time on or prior to the close of business on the business day immediately preceding the stated maturity date, into shares of the Company’s common stock at a conversion rate of 400 shares per $1,000 of principal and/or accrued and unpaid interest, which is equal to a conversion price of $2.50 per share. The conversion rate will be subject to adjustment under certain circumstances described in the Mann Group convertible note.  Interest on the Mann Group convertible note will be payable in kind by adding the amount thereof to the principal amount; provided that with respect to interest accruing from and after January 1, 2021, the Company may, at its option, elect to pay any such interest on any interest payment date, if certain conditions are met, in shares of the Company̵