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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, 2021

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, a 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 Exchange Act).     Yes      No  

 


As of April 30, 2021, there were 249,157,354 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, 2021

TABLE OF CONTENTS

 

 

Page

PART I: FINANCIAL INFORMATION

2

 

 

Item 1. Financial Statements (Unaudited)

2

Condensed Consolidated Balance Sheets: March 31, 2021 and December 31, 2020

2

Condensed Consolidated Statements of Operations: Three months ended March 31, 2021 and 2020

3

Condensed Consolidated Statements of Comprehensive Loss: Three months ended March 31, 2021 and 2020

4

Condensed Consolidated Statements of Stockholders’ Deficit: Three months ended March 31, 2021 and 2020

5

Condensed Consolidated Statements of Cash Flows: Three months ended March 31, 2021 and 2020

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

33

Item 4. Controls and Procedures

33

 

 

PART II: OTHER INFORMATION

34

 

 

Item 1. Legal Proceedings

34

Item 1A. Risk Factors

34

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

62

Item 3. Defaults Upon Senior Securities

62

Item 4. Mine Safety Disclosures

62

Item 5. Other Information

62

Item 6. Exhibits

63

 

 

SIGNATURES

65

 

1


 

PART 1: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)

 

 

March 31, 2021

 

 

December 31, 2020

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

247,833

 

 

$

67,005

 

Restricted cash

 

158

 

 

 

158

 

Short-term investments

 

28,962

 

 

 

 

Accounts receivable, net

 

3,573

 

 

 

4,218

 

Inventory

 

5,050

 

 

 

4,973

 

Prepaid expenses and other current assets

 

2,766

 

 

 

3,122

 

Total current assets

 

288,342

 

 

 

79,476

 

Property and equipment, net

 

26,507

 

 

 

25,867

 

Long-term investments

 

1,480

 

 

 

 

Other assets

 

3,053

 

 

 

3,265

 

Total assets

$

319,382

 

 

$

108,608

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

6,706

 

 

$

5,582

 

Accrued expenses and other current liabilities

 

27,586

 

 

 

19,707

 

PPP loan — current

 

4,670

 

 

 

4,061

 

Deferred revenue — current

 

25,880

 

 

 

33,275

 

Recognized loss on purchase commitments — current

 

8,274

 

 

 

11,080

 

Total current liabilities

 

73,116

 

 

 

73,705

 

Senior convertible notes

 

222,855

 

 

 

 

MidCap credit facility

 

49,406

 

 

 

49,335

 

Mann Group promissory notes

 

53,453

 

 

 

63,027

 

Accrued interest — Mann Group promissory notes

 

4,753

 

 

 

4,150

 

PPP loan — long term

 

203

 

 

 

812

 

2024 convertible notes

 

 

 

 

5,000

 

Recognized loss on purchase commitments — long term

 

80,797

 

 

 

84,208

 

Operating lease liability

 

869

 

 

 

1,202

 

Deferred revenue  — long term

 

1,626

 

 

 

1,662

 

Milestone rights liability

 

5,926

 

 

 

5,926

 

Total liabilities

 

493,004

 

 

 

289,027

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

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

   no shares issued or outstanding as of March 31, 2021 and December 31, 2020

 

 

 

 

 

Common stock, $0.01 par value - 400,000,000 shares

   authorized, 249,072,677 and 242,117,089 shares issued and outstanding

   at March 31, 2021 and December 31, 2020, respectively

 

2,491

 

 

 

2,421

 

Additional paid-in capital

 

2,885,946

 

 

 

2,866,303

 

Accumulated deficit

 

(3,062,059

)

 

 

(3,049,143

)

Total stockholders' deficit

 

(173,622

)

 

 

(180,419

)

Total liabilities and stockholders' deficit

$

319,382

 

 

$

108,608

 

 

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,

 

 

2021

 

 

2020

 

Revenues:

 

 

 

 

 

 

 

Net revenue — commercial product sales

$

8,099

 

 

$

8,000

 

Revenue — collaborations and services

 

9,337

 

 

 

8,235

 

Total revenues

 

17,436

 

 

 

16,235

 

Expenses:

 

 

 

 

 

 

 

Cost of goods sold

 

4,315

 

 

 

4,164

 

Cost of revenue — collaborations and services

 

3,295

 

 

 

3,362

 

Research and development

 

2,442

 

 

 

1,755

 

Selling, general and administrative

 

17,413

 

 

 

14,350

 

Asset impairment

 

 

 

 

1,521

 

Gain on foreign currency translation

 

(3,838

)

 

 

(1,796

)

Total expenses

 

23,627

 

 

 

23,356

 

Loss from operations

 

(6,191

)

 

 

(7,121

)

Other (expense) income:

 

 

 

 

 

 

 

Interest income

 

3

 

 

 

133

 

Interest expense on notes

 

(5,422

)

 

 

(1,071

)

Interest expense on Mann Group promissory notes

 

(1,030

)

 

 

(1,259

)

Other expense

 

(276

)

 

 

(4

)

Total other expense

 

(6,725

)

 

 

(2,201

)

Loss before provision for income taxes

 

(12,916

)

 

 

(9,322

)

Provision for income taxes

 

 

 

 

 

Net loss

$

(12,916

)

 

$

(9,322

)

Net loss per share - basic and diluted

$

(0.05

)

 

$

(0.04

)

Shares used to compute basic and diluted net loss per share

 

246,631

 

 

 

212,467

 

 

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,

 

 

2021

 

 

2020

 

Net loss

$

(12,916

)

 

$

(9,322

)

Other comprehensive loss:

 

 

 

 

 

 

 

Cumulative translation loss

 

 

 

 

(19

)

Comprehensive loss

$

(12,916

)

 

$

(9,341

)

 

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, 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

)

Write-off of 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

)

 

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Total

 

BALANCE, JANUARY 1, 2021

 

 

242,118

 

 

$

2,421

 

 

$

2,866,303

 

 

$

 

 

$

(3,049,143

)

 

$

(180,419

)

Net issuance of common stock associated

   with stock options and restricted stock

   units

 

390

 

 

4

 

 

 

393

 

 

 

 

 

 

 

 

 

397

 

Issuance of common stock under Employee

   Stock Purchase Plan

 

293

 

 

3

 

 

 

387

 

 

 

 

 

 

 

 

 

390

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,935

 

 

 

 

 

 

 

 

 

1,935

 

Issuance of common stock pursuant to

   conversion of the Mann Group

   convertible note

 

 

3,830

 

 

38

 

 

 

9,535

 

 

 

 

 

 

 

 

 

9,573

 

Issuance of common stock pursuant to

   conversion of the Mann Group

   convertible note interest

 

 

170

 

 

 

2

 

 

 

425

 

 

 

 

 

 

 

 

 

427

 

Issuance of common stock pursuant to

   conversion of the 2024 convertible notes

 

 

1,667

 

 

17

 

 

 

4,983

 

 

 

 

 

 

 

 

 

5,000

 

Issuance of common stock pursuant to

   payoff of the 2024 convertible note

   interest

 

 

27

 

 

 

 

 

 

143

 

 

 

 

 

 

 

 

 

143

 

Issuance of at-the-market placement

 

 

578

 

 

6

 

 

 

1,880

 

 

 

 

 

 

 

 

 

1,886

 

Issuance costs associated with at-the-

   market placement

 

 

 

 

 

 

 

 

(38

)

 

 

 

 

 

 

 

 

(38

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,916

)

 

 

(12,916

)

BALANCE, MARCH 31, 2021

 

 

249,073

 

 

$

2,491

 

 

$

2,885,946

 

 

$

 

 

$

(3,062,059

)

 

$

(173,622

)

 

 

 

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,

 

 

 

2021

 

 

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(12,916

)

 

$

(9,322

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Interest expense on Mann Group promissory notes

 

 

1,028

 

 

 

1,257

 

Stock-based compensation expense

 

 

1,935

 

 

 

1,128

 

Asset impairment

 

 

 

 

 

1,521

 

Depreciation, amortization and accretion

 

 

655

 

 

 

538

 

Amortization of right-of-use assets

 

 

309

 

 

 

282

 

Write-off of inventory

 

 

 

 

 

496

 

Gain on foreign currency translation

 

 

(3,838

)

 

 

(1,796

)

Other, net

 

 

 

 

 

19

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

645

 

 

 

(1,661

)

Inventory

 

 

(77

)

 

 

428

 

Prepaid expenses and other current assets

 

 

356

 

 

 

988

 

Other assets

 

 

(97

)

 

 

40

 

Accounts payable

 

 

1,124

 

 

 

1,942

 

Accrued expenses and other current liabilities

 

 

8,288

 

 

 

1,880

 

Deferred revenue

 

 

(7,431

)

 

 

(8,235

)

Operating lease liabilities

 

 

(333

)

 

 

(724

)

Recognized loss on purchase commitments

 

 

(2,379

)

 

 

 

Net cash used in operating activities

 

 

(12,731

)

 

 

(11,219

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of debt securities

 

 

(30,442

)

 

 

 

Purchase of property and equipment

 

 

(976

)

 

 

(150

)

Proceeds from sale of treasury bills

 

 

 

 

 

20,000

 

Net cash (used in) provided by investing activities

 

 

(31,418

)

 

 

19,850

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from the Senior convertible notes

 

 

230,000

 

 

 

 

Issuance costs associated with Senior convertible notes

 

 

(7,268

)

 

 

 

Proceeds from at-the-market offering

 

 

1,886

 

 

 

668

 

Issuance costs associated with at-the-market offering

 

 

(38

)

 

 

(20

)

Payment of employment taxes related to vested restricted stock units

   and exercise of stock options

 

 

397

 

 

 

(317

)

Net cash provided by financing activities

 

 

224,977

 

 

 

331

 

NET INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

 

 

180,828

 

 

 

8,962

 

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD

 

 

67,163

 

 

 

30,222

 

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD

 

$

247,991

 

 

$

39,184

 

SUPPLEMENTAL CASH FLOWS DISCLOSURES:

 

 

 

 

 

 

 

 

Interest paid in cash, net of amounts capitalized

 

$

1,094

 

 

$

885

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Payment on Mann Group convertible note through issuance of common stock

 

 

9,573

 

 

 

 

Payment of 2024 convertible notes through common stock issuance

 

 

5,000

 

 

 

 

Reclassification of the PPP Loan from current to long-term

 

 

609

 

 

 

 

Payment of Mann Group convertible note interest through issuance of common stock

 

 

427

 

 

 

 

Common stock issuance to settle employee stock purchase plan liability

 

 

390

 

 

 

318

 

Payment of interest on 2024 convertible notes through common stock issuance

 

 

143

 

 

 

144

 

Non-cash construction in progress and property and equipment

 

 

124

 

 

 

32

 

 

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, 2020 filed with the SEC on February 25, 2021 (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, 2021 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 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 — MannKind is a biopharmaceutical company focused on the development and commercialization of inhaled therapeutic products for patients with endocrine and orphan lung diseases. The Company’s lead product is Afrezza (insulin human) Inhalation Powder, an ultra rapid-acting inhaled insulin indicated to improve glycemic control in adults with diabetes, which was approved by the U.S. Food and Drug Administration (“FDA”) in June 2014. Since September 2018, the Company has been collaborating with United Therapeutics to develop an inhaled formulation of treprostinil, known as Tyvaso DPI. In April 2021, United Therapeutics submitted a new drug application (“NDA”) to the FDA seeking approval of Tyvaso DPI.  

Basis of Presentation — The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP.

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 the commercialization of Tyvaso DPI and other product candidates in the Company’s pipeline. As of March 31, 2021, the Company had capital resources of $247.8 million in cash and cash equivalents, $29.0 million in short-term investments, $1.5 million in long-term investments, an accumulated deficit of $3.1 billion and total principal amount of outstanding borrowings of $338.4 million.  

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”). The MidCap Credit Facility currently provides a secured term loan facility with a potential aggregate principal amount of up to $110.0 million, of which $50.0 million was outstanding as of March 31, 2021 and December 31, 2020. Subsequent to March 31, 2021, $10.0 million of the outstanding principal amount was repaid. See Note 6 – Borrowings. In March 2021, the Company issued $230.0 million of 2.50% convertible senior notes due 2026 (the “Senior convertible notes”) to provide additional operating capital and pay down higher cost debt. The cash received from this debt issuance has resolved the Company’s significant risks and uncertainties regarding sources of liquidity, which previously raised substantial doubt about the Company’s ability to continue as a going concern.

The Company believes its resources will be sufficient to fund its operations for the next twelve months from the date of issuance of these condensed consolidated financial statements. 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 cash flows for the three months ended March 31, 2020 to combine payment of employment taxes related to vested restricted stock units and exercise of stock options in the cash flows from financing activities. These changes in classification do not affect previously reported cash flows from operating or investing activities.

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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.

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 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 Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, 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 payers 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 at delivery for specialty pharmacies. Product revenues are recorded net of applicable reserves, including discounts, allowances, rebates, returns and other incentives. See Reserves for Variable Consideration below.

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 related to these programs from both gross and net revenue. The cost of product associated with the free goods program is recognized as cost of goods sold in the condensed consolidated statements of operations.

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, payer rebates, and other incentives, such as voluntary patient assistance, and other allowances that are offered within contracts between the Company and its Customers, payers, and other indirect customers relating to the Company’s sale of its products. These reserves, as further 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 that 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, 2021 and, therefore, the transaction price was not reduced further during the three months ended March 31, 2021. 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.

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Significant judgment is required in estimating gross-to-net adjustments considering legal interpretations of applicable laws and regulations, historical experience, payer channel mix, current contract prices under applicable programs, unbilled claims, processing time lags and inventory levels in the distribution channel.

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 that 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 that is included in accrued expenses and other current liabilities. Estimates around Medicaid have historically required significant judgment 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. The Company’s estimates include consideration of historical claims experience, payer channel mix, current contract prices, unbilled claims, claim submission time lags and inventory in the distribution channel.

Payer Rebates — The Company contracts with certain private payer 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. The Company’s estimates include consideration of historical claims experience, payer channel mix, current contract prices, unbilled claims, claim submission time lags and inventory in the distribution channel.

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 payers. 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 that is included in accrued expenses and other current liabilities.

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Revenue Recognition — Revenue — Collaborations and Services — The Company enters into licensing, research or other agreements under which the Company licenses certain rights to its product candidates to third parties, conducts research or provides other 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, Licensing and Other 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, provides research and development services and offers sales support for the co-promotion of products, 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.

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.

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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.

PPP loan — On April 10, 2020, the Company received the proceeds from a loan in the amount of approximately $4.9 million (the “PPP loan”) from JPMorgan Chase Bank, N.A., as lender, pursuant to the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Company accounted for the PPP loan as a financial liability in accordance with ASC Topic 470, Debt. Accordingly, the PPP loan was recognized as current and long-term debt in the Company’s consolidated balance sheets and is included as PPP loan — current and PPP loan — long term. In addition, a di minimis amount of accrued interest is included in accrued expenses and other current liabilities. See Note 6 – Borrowings for additional information.

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 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 (the “Insulin Supply Agreement”) with Amphastar Pharmaceuticals, Inc. (“Amphastar”). 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, 2021 and December 31, 2020, 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 condensed consolidated balance sheets that sum to amounts reported on the condensed consolidated statement of cash flows (in thousands):

 

 

March 31, 2021

 

 

December 31, 2020

 

Cash and cash equivalents

 

$

247,833

 

 

$

67,005

 

Restricted cash

 

 

158