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 June 30, 2019

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 July 16, 2019, there were 189,616,126 shares of the registrant’s common stock, $0.01 par value per share, outstanding.

 

 


 

MANNKIND CORPORATION

Form 10-Q

For the Quarterly Period Ended June 30, 2019

TABLE OF CONTENTS

 

 

Page

PART I: FINANCIAL INFORMATION

2

 

 

Item 1. Financial Statements (Unaudited)

2

Condensed Consolidated Balance Sheets: June 30 , 2019 and December 31, 2018

2

Condensed Consolidated Statements of Operations: Three and six months ended June 30 , 2019 and 2018

3

Condensed Consolidated Statements of Comprehensive Loss: Three and six months ended June 30 , 2019 and 2018

4

Condensed Consolidated Statements of Stockholders’ Deficit: Three and six months ended June 30, 2019 and 2018

5

Condensed Consolidated Statements of Cash Flows: Six months ended June 30, 2019 and 2018

6

Notes to Condensed Consolidated Financial Statements

7

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

30

Item 3. Quantitative and Qualitative Disclosures About Market Risk

37

Item 4. Controls and Procedures

37

 

 

PART II: OTHER INFORMATION

38

 

 

Item 1. Legal Proceedings

38

Item 1A. Risk Factors

38

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: FINANCI AL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share data)

 

 

 

June 30, 2019

 

 

December 31, 2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,968

 

 

$

71,157

 

Restricted cash

 

 

5,316

 

 

 

527

 

Short-term investments

 

 

24,909

 

 

 

 

Accounts receivable, net

 

 

4,974

 

 

 

4,017

 

Inventory

 

 

3,963

 

 

 

3,597

 

Prepaid expenses and other current assets

 

 

2,704

 

 

 

2,556

 

Total current assets

 

 

49,834

 

 

 

81,854

 

Property and equipment, net

 

 

27,146

 

 

 

25,602

 

Right-of-use and other assets

 

 

4,815

 

 

 

249

 

Total assets

 

$

81,795

 

 

$

107,705

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,533

 

 

$

5,379

 

Accrued expenses and other current liabilities

 

 

16,452

 

 

 

15,022

 

Facility financing obligation

 

 

8,974

 

 

 

11,298

 

Deferred revenue - current

 

 

32,370

 

 

 

36,885

 

Recognized loss on purchase commitments - current

 

 

11,649

 

 

 

6,657

 

Total current liabilities

 

 

76,978

 

 

 

75,241

 

Senior convertible notes

 

 

19,031

 

 

 

19,099

 

Note payable to related party

 

 

71,981

 

 

 

72,089

 

Accrued interest - note payable to related party

 

 

9,132

 

 

 

6,835

 

Recognized loss on purchase commitments - long term

 

 

81,978

 

 

 

91,642

 

Deferred revenue - long term

 

 

8,399

 

 

 

10,680

 

Milestone rights liability

 

 

7,201

 

 

 

7,201

 

Operating lease liabilities

 

 

3,094

 

 

 

 

Total liabilities

 

 

277,794

 

 

 

282,787

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

 

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

   189,447,055 and 187,029,967 shares issued and outstanding at

   June 30, 2019 and December 31, 2018, respectively

 

 

1,894

 

 

 

1,870

 

Additional paid-in capital

 

 

2,769,396

 

 

 

2,763,067

 

Accumulated other comprehensive loss

 

 

(19

)

 

 

(19

)

Accumulated deficit

 

 

(2,967,270

)

 

 

(2,940,000

)

Total stockholders' deficit

 

 

(195,999

)

 

 

(175,082

)

Total liabilities and stockholders' deficit

 

$

81,795

 

 

$

107,705

 

 

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 June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue - commercial product sales

 

$

6,065

 

 

$

3,753

 

 

$

11,141

 

 

$

7,155

 

Revenue - collaborations and services

 

 

8,937

 

 

 

87

 

 

 

21,309

 

 

 

150

 

Revenue - other

 

 

 

 

 

53

 

 

 

 

 

 

53

 

Total revenues

 

 

15,002

 

 

 

3,893

 

 

 

32,450

 

 

 

7,358

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

4,327

 

 

 

5,095

 

 

 

8,347

 

 

 

9,103

 

Cost of revenue - collaborations and services

 

 

2,139

 

 

 

 

 

 

3,676

 

 

 

 

Research and development

 

 

1,632

 

 

 

2,967

 

 

 

3,299

 

 

 

5,611

 

Selling, general and administrative

 

 

16,609

 

 

 

21,731

 

 

 

42,282

 

 

 

42,349

 

(Gain) loss on foreign currency translation

 

 

1,247

 

 

 

(5,363

)

 

 

(688

)

 

 

(2,379

)

Total expenses

 

 

25,954

 

 

 

24,430

 

 

 

56,916

 

 

 

54,684

 

Loss from operations

 

 

(10,952

)

 

 

(20,537

)

 

 

(24,466

)

 

 

(47,326

)

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

255

 

 

 

55

 

 

 

573

 

 

 

161

 

Interest expense on notes

 

 

(564

)

 

 

(1,709

)

 

 

(1,157

)

 

 

(3,503

)

Interest expense on note payable to related party

 

 

(1,109

)

 

 

(1,046

)

 

 

(2,189

)

 

 

(2,160

)

Gain (loss) on extinguishment of debt

 

 

 

 

 

772

 

 

 

 

 

 

(53

)

Other income (expense)

 

 

(17

)

 

 

30

 

 

 

(31

)

 

 

61

 

Total other expense

 

 

(1,435

)

 

 

(1,898

)

 

 

(2,804

)

 

 

(5,494

)

Loss before provision for income taxes

 

 

(12,387

)

 

 

(22,435

)

 

 

(27,270

)

 

 

(52,820

)

Provision for income taxes

 

 

 

 

 

(240

)

 

 

 

 

 

(240

)

Net loss

 

$

(12,387

)

 

$

(22,675

)

 

$

(27,270

)

 

$

(53,060

)

Net loss per share - basic and diluted

 

$

(0.07

)

 

$

(0.16

)

 

$

(0.15

)

 

$

(0.41

)

Shares used to compute basic and diluted net loss per share

 

 

188,054

 

 

 

140,054

 

 

 

187,744

 

 

 

130,535

 

 

See notes to condensed consolidated financial statements.

 

3


 

MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net loss

 

$

(12,387

)

 

$

(22,675

)

 

$

(27,270

)

 

$

(53,060

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation loss

 

 

 

 

$

(3

)

 

 

 

 

 

 

Comprehensive loss

 

$

(12,387

)

 

$

(22,678

)

 

$

(27,270

)

 

$

(53,060

)

 

See notes to condensed consolidated financial statements.

 

4


 

MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited)

(In thousands, except per share data)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Total

 

BALANCE, JANUARY 1, 2018

 

 

119,053

 

 

$

1,191

 

 

$

2,638,992

 

 

$

(18

)

 

$

(2,854,898

)

 

$

(214,733

)

Adjustment to adopt ASU 2016-09

 

 

 

 

 

 

 

 

 

 

 

 

1,873

 

 

 

1,873

 

Issuance of common shares from the release of restricted

   stock units

 

60

 

 

 

1

 

 

 

(82

)

 

 

 

 

 

 

(81

)

Issuance of common shares under Employee Stock

   Purchase Plan

 

137

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Stock-based compensation expense

 

 

 

 

 

 

1,943

 

 

 

 

 

 

 

1,943

 

Issuance of shares pursuant to conversion of Facility

   Financing Obligation

 

 

3,549

 

 

 

35

 

 

 

9,372

 

 

 

 

 

 

 

9,407

 

Issuance of shares pursuant to conversion of Related

   Party Notes

 

 

3,000

 

 

 

30

 

 

 

8,130

 

 

 

 

 

 

8,160

 

Cumulative translation gain

 

 

 

 

 

 

 

 

3

 

 

 

 

 

3

 

Amortization of shelf fees

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

(5

)

Issuance of at-the-market placement

 

214

 

 

 

2

 

 

 

632

 

 

 

 

 

 

 

634

 

Issuance costs associated with at-the-market placement

 

 

 

 

 

 

(25

)

 

 

 

 

 

 

(25

)

Net loss

 

 

 

 

 

 

 

 

 

 

(30,385

)

 

 

(30,385

)

BALANCE, MARCH 31, 2018

 

 

126,013

 

 

$

1,260

 

 

$

2,658,957

 

 

$

(15

)

 

$

(2,883,410

)

 

$

(223,208

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares from the release of restricted

   stock units

 

 

108

 

 

$

1

 

 

$

(105

)

 

$

 

 

$

 

 

$

(104

)

Exercise of Stock Options

 

 

3

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

2

 

Stock-based compensation expense

 

 

 

 

 

 

2,209

 

 

 

 

 

 

 

2,209

 

Issuance of shares pursuant to conversion of Facility

   Financing Obligation

 

 

3,061

 

 

 

31

 

 

 

5,969

 

 

 

 

 

 

 

6,000

 

Issuance of shares pursuant to conversion of Senior

   Convertible Notes

 

 

2,250

 

 

 

22

 

 

 

4,420

 

 

 

 

 

 

 

4,442

 

Cumulative translation loss

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

(3

)

Amortization of shelf fees

 

 

 

 

 

 

(7

)

 

 

 

 

 

 

(7

)

Issuance of shares under Market Price Stock

   Purchase Plan

 

 

184

 

 

 

2

 

 

 

333

 

 

 

 

 

 

 

335

 

Issuance of direct placement — common stock

 

 

 

 

 

 

 

 

 

27,860

 

 

 

 

 

 

 

27,860

 

Issuance costs associated with direct placement

 

 

14,000

 

 

 

140

 

 

 

(1,610

)

 

 

 

 

 

 

 

 

 

 

(1,470

)

Net loss

 

 

 

 

 

 

 

 

 

 

(22,675

)

 

 

(22,675

)

BALANCE, JUNE 30, 2018

 

 

145,619

 

 

$

1,456

 

 

$

2,698,028

 

 

$

(18

)

 

$

(2,906,085

)

 

$

(206,619

)

 

 

 

 

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

)

Exercise of stock options

 

3

 

 

 

 

 

3

 

 

 

 

 

 

 

3

 

Issuance of common shares from the release of restricted

   stock units

 

63

 

 

1

 

 

 

(2

)

 

 

 

 

 

 

(1

)

Issuance of common shares under Employee Stock

   Purchase Plan

 

296

 

 

3

 

 

 

314

 

 

 

 

 

 

 

317

 

Stock-based compensation expense

 

 

 

 

 

 

1,104

 

 

 

 

 

 

 

1,104

 

Issuance of shares pursuant to conversion of Senior

   Convertible Notes

 

386

 

 

4

 

 

 

534

 

 

 

 

 

 

 

538

 

Net loss

 

 

 

 

 

 

 

 

 

 

(14,883

)

 

 

(14,883

)

BALANCE, MARCH 31, 2019

 

 

187,778

 

 

$

1,878

 

 

$

2,765,020

 

 

$

(19

)

 

$

(2,954,883

)

 

$

(188,004

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

14

 

 

 

 

$

15

 

 

 

 

 

 

$

15

 

Issuance of common shares from the release of restricted

   stock units

 

 

87

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

2,568

 

 

 

 

 

 

 

2,568

 

Issuance of at-the-market placement

 

 

1,568

 

 

 

15

 

 

 

1,835

 

 

 

 

 

 

 

1,850

 

Issuance costs associated with at-the-market placement

 

 

 

 

 

 

(41

)

 

 

 

 

 

 

(41

)

Net loss

 

 

 

 

 

 

 

 

 

 

(12,387

)

 

 

(12,387

)

BALANCE, JUNE 30, 2019

 

 

189,447

 

 

$

1,894

 

 

$

2,769,396

 

 

$

(19

)

 

$

(2,967,270

)

 

$

(195,999

)

 

See notes to condensed consolidated financial statements.  

5


 

MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(27,270

)

 

$

(53,060

)

Adjustments to reconcile net loss to net cash (used in) provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

739

 

 

 

1,459

 

Amortization of right-of-use assets

 

 

618

 

 

 

 

Stock-based compensation expense

 

 

3,672

 

 

 

4,152

 

Loss on extinguishment of debt

 

 

 

 

 

53

 

(Gain) Loss on foreign currency translation

 

 

(688

)

 

 

(2,379

)

Interest on note payable to related party

 

 

2,297

 

 

 

2,219

 

Write-off of inventory

 

 

 

 

 

779

 

Other, net

 

 

 

 

 

106

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(957

)

 

 

(170

)

Inventory

 

 

(366

)

 

 

(1,798

)

Prepaid expenses and other current assets

 

 

(150

)

 

 

440

 

Right-of-use and other assets

 

 

(356

)

 

 

79

 

Accounts payable

 

 

2,154

 

 

 

2,253

 

Accrued expenses and other current liabilities

 

 

460

 

 

 

818

 

Deferred revenue

 

 

(6,795

)

 

 

2,049

 

Recognized loss on purchase commitments

 

 

(3,984

)

 

 

(5,800

)

Operating lease payments

 

 

(699

)

 

 

 

Net cash used in operating activities

 

 

(31,325

)

 

 

(48,800

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,493

)

 

 

 

Purchase of short-term investments

 

 

(24,909

)

 

 

 

Net cash used in investing activities

 

 

(26,402

)

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Exercise of stock options

 

18

 

 

 

Proceeds from direct placement of common stock

 

 

 

 

 

28,000

 

Issuance cost associated with direct placement

 

 

 

 

 

(1,610

)

Principal payments on facility financing obligation

 

 

(2,500

)

 

 

 

Payment of employment taxes related to vested restricted stock units

 

 

 

 

 

(184

)

Proceeds from issuance of common stock pursuant to at-the-market issuance

 

 

1,850

 

 

 

634

 

Issuance cost of at-the-market transactions

 

 

(41

)

 

 

(25

)

Proceeds from executive stock purchase plan

 

 

 

 

 

335

 

Net cash (used) provided by financing activities

 

 

(673

)

 

 

27,150

 

NET DECREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED

   CASH

 

 

(58,400

)

 

 

(21,650

)

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING

   OF PERIOD

 

 

71,684

 

 

 

48,355

 

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF

   PERIOD

 

$

13,284

 

 

$

26,705

 

SUPPLEMENTAL CASH FLOWS DISCLOSURES:

 

 

 

 

 

 

 

 

Interest paid in cash, net of amounts capitalized

 

$

 

 

$

1,860

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Payment of note obligations through common stock issuance

 

$

 

 

$

20,405

 

Payment of note payable to related party through common stock issuance

 

$

 

 

$

8,160

 

Accrued but unpaid debt issuance costs

 

$

 

 

$

156

 

Payment of interest on senior convertible notes through common stock issuance

 

$

538

 

 

$

 

Property and equipment in progress in accounts payable

 

$

790

 

 

$

 

Common stock issuance to settle employee stock purchase plan liability

 

$

317

 

 

 

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

 

$

5,192

 

 

$

 

 

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, 2018 filed with the SEC on February 26, 2019 (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 and six months ended June 30, 2019 may not be indicative of the results that may be expected for the full year.

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. The more significant estimates reflected in these accompanying condensed consolidated financial statements include revenue recognition and gross-to-net adjustments, assessing long-lived assets for impairment, inventory costing and recoverability, recognized loss on purchase commitments, 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 diseases such as diabetes and pulmonary arterial hypertension. The Company’s only approved product, Afrezza (insulin human) Inhalation Powder, is a 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.

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. As of June 30, 2019, the Company had an accumulated deficit of $3.0 billion.

At June 30, 2019, the Company’s capital resources consisted of cash and cash equivalents and restricted cash of $13.3 million and short-term investments of $24.9 million. The Company expects to continue to incur significant expenditures to support commercial manufacturing, sales and marketing of Afrezza, collaboration work and the development of product candidates in the Company’s pipeline. The facility agreement (as amended, the “Facility Agreement” or “Facility Financing Obligation”) with Deerfield Private Design Fund II, L.P. and Deerfield Private Design International II, L.P. (collectively, “Deerfield”) that resulted in the issuance of 9.75% Senior Convertible Notes due 2019 (“2019 notes”) (see Note 7 — Borrowings) as well as 8.75% Senior Convertible Notes (holder “Bruce & Co.”) due 2019 (“Tranche B notes”) which were repaid in full as of May 2019, requires the Company to maintain at least $25.0 million in cash and cash equivalents, including short-term investments, as of the end of each fiscal quarter after December 31, 2018.

At June 30, 2019, the Company had   $99.2 million principal amount of outstanding borrowings. The Company has entered into certain transactions related to these borrowings that are more fully described in Note 6 — Related-Party Arrangements, and Note 7 – Borrowings.

7


 

The Company’s currently available cash and financing sources will not be sufficient to continue to meet its current and anticipa ted cash requirements within one year from the date these financial statements are issued. The Company plans to raise additional capital through a sale of equity or debt securities, strategic business collaboration agreements with other companies, the esta blishment of other funding facilities, licensing arrangements, asset sales or other means, in order to continue the development and commercialization of Afrezza and other product candidates and to support its other ongoing activities. The Company cannot pr ovide assurances that such additional capital will be available on acceptable terms or at all. Successful completion of these plans is dependent on factors outside of the Company’s control. As such, management cannot be certain that such plans will be effe ctively implemented within one year after the date that the financial statements are issued. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that migh t 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.

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 Recognition The 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, up until December 31, 2018, 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”). These Customers 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 health care providers and 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 a point in time (based on the terms of the relevant contracts which are at delivery for wholesale distributors and at shipment for specialty pharmacies). Product revenues are recorded net of applicable reserves for variable consideration, including discounts and allowances.

 

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. On a net basis, it is not probable that the Company will receive the consideration from these products. Therefore, the Company excludes such amounts from both gross and net revenue. The cost of product associated with the free goods program is included in the cost of goods sold.

8


 

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 t rade 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 an d 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 receivabl e or establishment of a current liability.  

 

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 analyses 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 June 30, 2019 and, therefore, the transaction price was not reduced further during the six months ended June 30, 2019. 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 incentive fees, 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 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