See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Business — MannKind Corporation and its subsidiaries (the “Company”) is a biopharmaceutical company focused on the development and commercialization of innovative therapeutic products and devices to address serious unmet medical needs for those living with endocrine and orphan lung diseases. The Company is currently commercializing Afrezza (insulin human) Inhalation Powder, an ultra rapid-acting inhaled insulin indicated to improve glycemic control in adults with diabetes, and the V-Go wearable insulin delivery device, which provides continuous subcutaneous infusion of insulin in adults that require insulin. The Company also collaborates with third parties to formulate their drugs on the Company’s Technosphere drug delivery platform. Tyvaso DPI (treprostinil) inhalation powder received FDA approval in May 2022, for the treatment of pulmonary arterial hypertension and for the treatment of pulmonary hypertension associated with interstitial lung disease. UT began commercializing Tyvaso DPI in June 2022 and is obligated to pay the Company a royalty on net sales of the product. The Company also receives a margin on supplies of Tyvaso DPI that it manufactures for UT.
Basis of Presentation — The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Principles of Consolidation — The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.
Reclassifications — Certain prior year reported amounts have been reclassified to conform with the current year presentation. Changes were made to the consolidated statements of operations to present selling expense as a separate line item and to disclose a single caption for interest expense on all outstanding notes. Changes were made to the consolidated balance sheets to reclassify interest receivable from investments from accounts receivable, net to other assets.
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.
2. Summary of Significant Accounting Policies
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. These effects could have a material impact on the estimates and assumptions used in the preparation of the accompanying consolidated financial statements. The more significant estimates include revenue recognition, including gross-to-net adjustments, stand-alone selling price considerations for recognition of collaboration revenue assessing long-lived assets for impairment, clinical trial expenses, inventory costing and recoverability, recognized loss on purchase commitment, 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.
Revenue Recognition — 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 Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 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 ASC 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 ASC 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, specialty and retail pharmacies and (ii) collaboration arrangements.
Revenue Recognition – Net Revenue – Commercial Product Sales – The Company sells its products to a limited number of wholesale distributors, specialty and retail pharmacies, and durable medical equipment suppliers (“DME”) 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 and retail 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.
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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. The Company recognizes revenue on product sales to a retail pharmacy as the product is dispensed to patients. 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 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 ASC 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 of gross-to-net adjustments as of December 31, 2022 and, therefore, the transaction price was not reduced further during the year ended December 31, 2022. 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.
Significant judgment is required in estimating gross-to-net adjustments, historical experience, payer channel mix, unbilled claims, claim submission 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 the Company’s 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 products from the Company. Customers charge the Company for the difference between what they pay for products 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
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judgment due to timing lags in receiving invoices for claims from states. For Afrezza, 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 products that have 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 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 products that have 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.
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 commercial manufacturing 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. With respect to our significant collaboration and service agreement with UT that includes a long-term commercial supply agreement (“as amended, the CSA”), we have identified three distinct performance obligations: (1) the license, supply of product to be used in clinical development, and continued development and approval support for Tyvaso DPI (“R&D Services and License’), (2) development activities for the next generation of the product (“Next-Gen R&D Services”), and (3) a material right associated with current and future manufacturing and supply of product (“Manufacturing Services”). Pre-production activities under the CSA, such as facility expansion services and other administrative services, were considered bundled services under the Manufacturing Services performance obligation as required by ASC 606. Following the FDA’s approval of Tyvaso DPI, UT began issuing purchase orders for the supply of product, which represents distinct contracts and performance obligations under ASC 606. Revenue is recognized for the supply of product at a point in time, once control is transferred to UT. See Note 11 – Collaboration, Licensing and Other Arrangements.
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 11 – 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. If the license is considered to be a distinct performance obligation, then the estimated revenue is included in the transaction price for the contract, which is then allocated to each performance obligation based on the respective standalone selling prices.
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
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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 been 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, semi-finished goods 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. Accordingly, the Company concluded that its collaborative agreements must generally be accounted for pursuant to ASC 606.
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. The Company assessed the CSA agreement with UT and determined that a material right existed for the manufacturing services performance obligation. The transaction price is allocated to the material right as well as the remaining performance obligations in accordance with ASC 606. The Company also evaluates grants of additional licensing rights upon option exercises to determine whether such should be accounted for as separate contracts.
Revenue Recognition — Royalties — The Company recognizes royalty revenue for a sales-based or usage-based royalty if it is promised in exchange for an intellectual property license. The royalty revenue is recognized as the latter of the subsequent sale of the product occurs or if the performance obligation to which the royalty has been allocated has been satisfied or partially satisfied. The Company’s collaborative agreement with UT entitles it to receive low double-digit royalties on net sales of Tyvaso DPI for the license of the Company’s IP that was considered to be interdependent with the development activities that supported the approval of Tyvaso DPI.
The Company’s net revenue and cost of revenue and goods sold as shown on the consolidated statement of operations is comprised of revenue generated from product sales, services and royalties as shown below (in thousands):
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Net revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Product sales (1) |
|
|
81,073 |
|
|
|
39,435 |
|
|
|
32,324 |
|
Services (2) |
|
|
3,098 |
|
|
|
36,007 |
|
|
|
32,820 |
|
Royalties (3) |
|
|
15,599 |
|
|
|
— |
|
|
|
— |
|
Total net revenue |
|
$ |
99,770 |
|
|
$ |
75,442 |
|
|
$ |
65,144 |
|
_________________________
(1) |
Amounts represent the net sales of Afrezza and V-Go to wholesalers and specialty pharmacies and Tyvaso DPI to UT. |
(2) |
Amounts represent revenue generated from the Company’s collaboration arrangements, including Next-Gen R&D Services (as defined in Note 11) for UT as well as arrangements with other collaboration partners. See Note 11 – Collaboration, Licensing and Other Arrangements. |
(3) |
Amounts represent royalties on UT’s net sales of Tyvaso DPI. |
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Cost of goods sold and cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
55,071 |
|
|
$ |
16,833 |
|
|
$ |
15,084 |
|
Services |
|
|
2,426 |
|
|
|
22,024 |
|
|
|
9,557 |
|
Total cost of goods sold and cost of revenue |
|
$ |
57,497 |
|
|
$ |
38,857 |
|
|
$ |
24,641 |
|
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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 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 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 for standard costing, 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. Cost of goods sold excludes the cost of insulin purchased under the Company’s 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 2016.
Cost of Revenues – Collaborations and Services — Cost of revenues – collaborations and services includes material, labor costs, manufacturing overhead, and excess capacity costs. These costs, in addition to the write-offs of inventory are recorded as expenses in the period in which they are incurred, rather than as a portion of inventory costs. Cost of revenues – collaborations and services also includes the cost of product development.
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 December 31, 2022 and 2021, cash equivalents were comprised of money market, corporate bonds and commercial paper accounts with original 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.
Held-to-Maturity Investments — The Company’s investments generally consist of commercial paper, corporate notes or bonds and U.S. Treasury securities. For the year ended December 31, 2022, the Company held short-term and long-term investments of debt securities, including commercial paper and bonds. The Company assesses whether it has any intention to sell the investment before maturity, whether any declines in fair value are the result of credit losses, as well as whether there were other-than-temporary impairments associated with the available for sale investment. The Company intends to hold its investments until maturity; therefore, these investments are stated at amortized cost. The investments with maturities less than 12 months are included in short-term investments and investments with maturities in excess of twelve months are included in long-term investments in the consolidated balance sheets. The amortization or accretion of the Company’s investments is recognized as interest income in the consolidated statements of operations.
Available-for-Sale Investment — In June 2021, the Company purchased a $3.0 million convertible promissory note (the “Thirona convertible note”) issued by Thirona Bio, Inc. (“Thirona”). In January 2022, the Company purchased an additional $5.0 million convertible promissory note issued by Thirona. Unless earlier converted into conversion shares pursuant to the note purchase agreement, the principal and accrued interest shall be due and payable by Thirona on demand by the Company at any time after the maturity date of December 31, 2023. Interest accrues at a rate of 6% per annum. The Thirona convertible notes are general unsecured obligations of Thirona. The Thirona convertible notes are classified as an available-for-sale security and are included in other assets in the consolidated balance sheet. Available-for-sale investments are subsequently measured at fair value. Unrealized holding gains and losses are excluded from earnings and reported in other comprehensive income until realized. The Company assesses whether it has any intention to sell the investment, determines fair value of its available-for-sale investments using level 3 inputs as well as assesses its allowance for credit losses associated with the available for sale investment. In June 2021, the Company and Thirona also entered into a collaboration agreement to develop a compound for the treatment of fibrotic lung diseases. See Note 11 – Collaboration, Licensing and Other Arrangements for additional information.
Concentration of Credit Risk — Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and investments. Cash and cash equivalents are held in high credit quality institutions. Cash equivalents consist of interest-bearing money market funds and U.S. Treasury securities with original or remaining maturities of 90 days or less at the time of purchase. Investments generally consist of commercial paper, corporate notes or bonds and U.S. Treasury securities. The cash equivalents and investments are regularly monitored by management.
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Accounts Receivable and Allowance for Credit Losses — Accounts receivable are recorded at the invoiced amount and are not interest bearing. Accounts receivable are presented net of an allowance for credit losses 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 credit losses. The allowance for expected credit losses is based primarily on past collections experience relative to the length of time receivables are past due. However, when available evidence reasonably supports an assumption that future economic conditions will differ from current and historical payment collections, an adjustment is reflected in the allowance for expected credit losses. 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 fumaryl diketopiperazine (“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 uses a contract manufacturing organization outside of the U.S. for certain stages of V-Go inventory.
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.
Property and equipment — Property and equipment is recorded at historical cost, net of accumulated depreciation. Depreciation expense is recorded over the assets’ useful lives on a straight-line basis. See Note 7 – Property and Equipment.
Impairment of Long-Lived Assets — Long-lived assets include property and equipment, operating lease right-of-use assets and other intangible asset. 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 is considered to be unrecoverable.
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 and a $0.4 million other asset for deferred debt issuance costs related to the future funding commitments of the MidCap Credit Facility. A quarterly assessment was performed during the second quarter of 2020 to determine if the Company was on target to achieve certain required milestone conditions 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 were unlikely to be achieved. As a result, an asset impairment of $1.9 million was recognized during the second quarter of 2020 and is reflected in the Company’s consolidated statement of operations. See Note 10 – Borrowings for further information on the MidCap Credit Facility.
The Company recorded $0.1 million of asset impairments for the year ended December 31, 2021. There were no asset impairments for the year ended December 31, 2022.
Acquisitions — The Company first determines whether a set of assets acquired constitute a business and should be accounted for as a business combination. If the assets acquired do not constitute a business, the Company accounts for the transaction as an asset acquisition. Business combinations are accounted for by means of the acquisition method of accounting. Under the acquisition method, assets acquired,
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including in-process research and development (“IPR&D”) projects, and liabilities assumed are recorded at their respective fair values as of the acquisition date in the Company’s consolidated financial statements. The excess of the fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill. Contingent consideration obligations incurred in connection with a business combination (including the assumption of an acquiree’s liability arising from an acquisition it consummated prior to the Company’s acquisition) are recorded at their fair values on the acquisition date and remeasured at their fair values each subsequent reporting period until the related contingencies have been resolved. The resulting changes in fair values are recorded in earnings. In contrast, asset acquisitions are accounted for by using a cost accumulation and allocation model. Under this model, the cost of the acquisition is allocated to the assets acquired and liabilities assumed. IPR&D projects with no alternative future use are recorded in R&D expense upon acquisition, and contingent consideration obligations incurred in connection with an asset acquisition are recorded when it is probable that they will occur and they can be reasonably estimated. See Note 3 – Acquisitions.
Goodwill and Other Intangible Assets — The fair value of acquired intangible assets is determined using an income-based approach referred to as the excess earnings method utilizing Level 3 fair value inputs. Market participant valuations assume a global view considering all potential jurisdictions and indications based on discounted after-tax cash flow projections, risk adjusted for estimated probability of technical and regulatory success.
The Company tests for impairment annually on a reporting unit basis, at the beginning of the Company’s fourth fiscal quarter and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. To the extent the carrying amount of a reporting unit is less than its estimated fair value, an impairment charge will be recorded.
Finite-lived intangible assets are amortized on a straight-line basis over the estimated useful life. Estimated useful lives are determined considering the period assets are expected to contribute to future cash flows. Finite-lived intangible assets are tested for impairment when facts or circumstances suggest that the carrying value of the asset may not be recoverable. If the carrying value exceeds the projected undiscounted pretax cash flows of the intangible asset, an impairment loss equal to the excess of the carrying value over the estimated fair value (discounted after-tax cash flows) is recognized.
No impairments to goodwill or other intangible assets were recorded during the year ended December 31, 2022.
Recognized Loss on Purchase Commitments — The 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 consolidated statements of operations. The liability balance of the recognized loss on insulin purchase commitments as of December 31, 2022 and 2021 was $72.3 million and $82.8 million, respectively. No new contracts were identified in 2022 that required a new loss on purchase commitment accrual.
Milestone Rights Liability — In July 2013, in conjunction with the execution of a (now repaid) loan agreement with Deerfield Private Design Fund II, L.P. and Deerfield Private Design International II, L.P. (collectively, “Deerfield”), the Company entered into Milestone Rights Purchase Agreement (the “Milestone Rights Agreement”) pursuant to which the Company issued certain milestone rights to Deerfield Private Design Fund II, L.P. and Horizon Santé FLML SÀRL, (the “Original Milestone Purchasers”). The foregoing milestone rights provided the Original Milestone Purchasers certain rights to receive payments of up to $90.0 million upon the occurrence of specified strategic and sales milestones, $60.0 million of which remains payable upon achievement of such milestones (collectively, the “Milestone Rights’). In December 2021, the Milestone Rights were purchased by Barings Global Special Situations Credit Fund 4 (Delaware), L.P. and Barings Global Special Situations Credit 4 (LUX) S.ar.l. (together the “Milestone Purchasers”). As a result, the Milestone Purchasers have assumed the obligations of the Original Milestone Purchasers and is now entitled to all rights under the Milestone Rights Agreement. As of December 31, 2022, $60.0 million remained payable pursuant to the Milestone Rights Agreement upon achievement of Afrezza net sales milestones. The Milestone Rights liability is reported at fair value at the date of the agreement which is periodically offset against payments. See Note 12 – Fair Value of Financial Instruments.
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 10 – Borrowings.
78
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.
For uncertain tax positions, the Company determines whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. For those tax positions where it is “not more likely than not” that a tax benefit will be sustained, no tax benefit is recognized. Penalties, if probable and reasonably estimable, are recognized as a component of income tax expense. The Company has reduced its deferred tax assets for uncertain tax positions but has not recorded liabilities for income tax expense, penalties, or interest.
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 RSUs, performance-based non-qualified stock options awards (“PNQs”), restricted stock units with market conditions (“Market RSUs”), options and the compensatory elements of employee stock purchase plans, are recognized in the consolidated statements of operations based upon the fair value of the awards at the grant date. RSUs are valued based on the market price on the grant date. Market RSUs are valued using a Monte Carlo valuation model and RSUs with performance conditions are evaluated for 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. The Company uses the Black-Scholes option valuation model to estimate the grant date fair value of employee options and the compensatory elements of employee stock purchase plans.
Clinical Trial Expenses — Clinical trial expenses, which are primarily reflected in research and development expenses in the accompanying consolidated statements of operations, result from obligations under contracts with vendors, consultants and clinical site agreements in addition to internal costs associated 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.
Recently Adopted Accounting Standards — In March 2020, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard to ease the financial reporting burdens caused by the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, commonly referred to as reference rate reform. The new standard provides temporary optional expedients and exceptions to current GAAP guidance on contract modifications and hedge accounting. In January 2021, the FASB issued a new accounting standard that expanded the scope of the original March 2020 standard to include derivative instruments on discounting transactions. In December 2022, the FASB deferred the sunset date to an alternative reference rate from December 31, 2022 to December 31, 2024. The Company adopted these standards in the third quarter of 2022 using the prospective method and determined there was no impact on the Company’s consolidated financial statements.
79
Recently Issued Accounting Standards — In November 2021, the FASB issued a new accounting standard around the recognition and measurement of contract assets and contract liabilities from revenue contracts with customers acquired in a business combination. The new standard clarifies that contract assets and contract liabilities acquired in a business combination from an acquiree should initially be recognized by applying revenue recognition principles and not at fair value. The standard is effective for interim and annual periods beginning on January 1, 2023, and early adoption is permitted. The impact of this standard will depend on the facts and circumstances of future transactions.
From time to time, new accounting pronouncements are issued by the 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 consolidated financial position or results of operations upon adoption.
3. Acquisitions
V-Go
In May 2022, the Company entered into an Asset Purchase Agreement (the “APA”) to purchase from Zealand Pharma A/S and Zealand Pharma US, Inc. (together “Zealand”) certain assets and assume certain liabilities associated with the V-Go wearable insulin delivery device. The transaction closed on May 31, 2022 (the “Acquisition Date”).
Under the terms of the APA, the Company paid up-front consideration of $15.3 million for certain assets and assumed liabilities related to V-Go. In addition, the Company will be obligated to make one-time, sales-based milestone payments to Zealand totaling up to a maximum of $10.0 million upon the achievement of specified annual revenue milestones between $40 million and $100 million.
The total preliminary purchase consideration for V-Go was as follows (in thousands):
Fair value of consideration: |
|
Amount |
|
Cash consideration |
|
$ |
15,341 |
|
Fair value of contingent consideration |
|
|
610 |
|
Total |
|
$ |
15,951 |
|
The transaction was accounted for using the acquisition method of accounting, which requires, among other things, the assets acquired and liabilities assumed to be recognized at their respective fair values as of the Acquisition Date. The excess of the purchase price over those fair values was recorded as goodwill, which will be amortized over a period of 15 years for tax purposes. The estimates and assumptions used include the projected timing and amount of future cash flows and discount rates to reflect the risk inherent in the future cash flows. The estimated fair values of assets acquired and liabilities assumed and resulting goodwill are subject to adjustment as the Company finalizes its purchase price accounting. The significant items for which a final fair value has not been determined include, but are not limited to the valuation of the intangible asset and assumed liabilities for rebates and return reserves. The Company does not expect its fair value determinations to materially change; however, there may be differences between the amounts recorded at the Acquisition Date and the final fair value analysis, which is expected to be complete no later than the second quarter of 2023.
The information below reflects the preliminary amounts of identifiable assets acquired and liabilities assumed as of the Acquisition Date (in thousands):
|
|
Amount |
|
Assets: |
|
|
|
|
Inventory |
|
$ |
11,152 |
|
Property and equipment |
|
|
2,921 |
|
Goodwill |
|
|
2,428 |
|
Intangible asset - Developed technology |
|
|
1,200 |
|
Operating lease right-of-use assets |
|
|
1,812 |
|
Total assets |
|
|
19,513 |
|
Liabilities: |
|
|
|
|
Liabilities assumed |
|
|
1,750 |
|
Operating lease liability |
|
|
1,812 |
|
Total liabilities |
|
|
3,562 |
|
Net assets acquired |
|
$ |
15,951 |
|
Inventory of $11.2 million consisted of raw materials, semi-finished goods and finished goods. The fair value of the inventory was determined based on the estimated selling price to be generated from the finished goods, less costs to sell, including a reasonable margin, which are level 3 inputs not observable in the market. Property and equipment and assumed liabilities were recorded at their carrying amounts which were deemed to approximate their fair values based on level 3 unobservable inputs. The fair values of the right-of-use assets and lease liabilities for assumed operating leases were assessed in accordance with ASC Topic 842, Leases, based on discounted cash flow from lease payments, utilizing the Company’s incremental borrowing rate of 7.25%.
The fair value of the intangible asset was determined by applying the income approach based on significant level 3 unobservable inputs.
80
The income approach estimates fair value based on the present value of cash flow that the assets could be expected to generate in the future. We developed internal estimates for expected cash flows in the present value calculation using inputs and significant assumptions that include historical revenues and earnings, long-term growth rate, discount rate, contributory asset charges and future tax rates, among others.
The fair value of the contingent milestone liability was estimated using the Monte Carlo simulation method for the calculation of the potential payment and the Geometric Brownian Motion forecasting model to estimate the underlying revenue. Market based inputs and other level 3 inputs were used to forecast future revenue. The key inputs used included a risk-free rate of 2.95%, dividend yield of 0%, volatility of 65%, period of 15 years and credit risk of 12%.
The Company incurred acquisition-related costs of approximately $0.4 million for the year ended December 31, 2022.
Net revenue and loss from operations for the year ended December 31, 2022 was $12.9 million and $0.3 million, respectively, since the Acquisition Date. The following unaudited pro-forma summary presents consolidated information of the Company as if the acquisition had occurred on January 1, 2021 (in thousands):
Supplemental Pro Forma Information (unaudited)
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Net revenue |
|
$ |
109,933 |
|
|
$ |
98,278 |
|
Net loss |
|
|
(86,967 |
) |
|
|
(80,806 |
) |
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted |
|
$ |
(0.34 |
) |
|
$ |
(0.32 |
) |
QrumPharma
In December 2020, the Company acquired QrumPharma, Inc., a privately held pharmaceutical company developing inhalation treatments for severe chronic and recurrent pulmonary infections. The Company purchased all of the outstanding capital stock of QrumPharma for consideration consisting of cash and shares of the Company’s common stock, subject to adjustment for cash on hand, unpaid indebtedness, unpaid transaction expenses, and net working capital as follows (in thousands):
Consideration |
|
|
|
|
Cash consideration |
|
$ |
3,574 |
|
Stock consideration (3,067,179 shares at $3.01 per share) |
|
|
9,250 |
|
Transaction costs |
|
|
531 |
|
Repayment of debt |
|
|
11 |
|
Liabilities assumed |
|
|
22 |
|
Cash acquired |
|
|
(155 |
) |
Total consideration paid for IPR&D |
|
$ |
13,233 |
|
The stock purchase of QrumPharma was accounted for under ASC 805, Business Combinations, as an asset acquisition since the transaction did not include the acquisition of inputs or processes and the fair value of the assets acquired were concentrated in a single identifiable asset, MNKD-101, which consisted of an in-process research and development asset (“IPR&D”). Under ASC 805, an entity that acquires IPR&D in an asset acquisition should follow the guidance in ASC 730, Research and Development, which requires that both tangible and intangible identifiable research and development assets with no alternative future use be allocated a portion of the consideration transferred and charged to expense at the acquisition date. Due to the stage of development of MNKD-101 at the date of acquisition, significant risk remained that the product would not obtain regulatory approval and it was not yet probable that there would be future economic benefit for the Company. Absent successful clinical results and regulatory approval, it was determined that there was no alternative future use associated with MNKD-101. Accordingly, the value of this asset was expensed at the time of acquisition and the total accumulated cost of $13.2 million, was allocated to the IPR&D asset using a relative fair value basis and the total consideration was recognized as in-process research and development expense in the consolidated statement of operations.
The acquisition of QrumPharma also included a potential future royalty payment of 1.5% of net sales in each of the calendar years in which the total annual and global adjusted net sales of specified products exceeds $50 million and a royalty payment of 1.0% of net sales in each of the calendar years in which the total annual and global adjusted net sales of nebulized clofazimine are greater than or equal to $200 million. The contingent consideration in the form of royalty payments will be expensed as incurred since the probability of MNKD-101 obtaining FDA approval and generating net sales that exceed the specified thresholds could not be reasonably estimated on the date of acquisition.
81
4. Investments
Cash Equivalents — Cash equivalents consist of highly liquid investments with original or remaining maturities of 90 days or less at the time of purchase that are readily convertible into cash. As of December 31, 2022 and 2021, the Company held $69.8 million and $124.2 million, respectively, of cash and cash equivalents.
Available-for-Sale Investment — The Thirona convertible note is classified as an available-for-sale security and is included in other assets in the consolidated balance sheet. Available-for-sale investments are subsequently measured at fair value. Unrealized holding gains and losses are excluded from earnings and reported in other comprehensive income until realized. The Company determines fair value of its available-for-sale investments using level 3 inputs. As of December 31, 2022, the Company evaluated the fair value of its investment in Thirona using a Monte Carlo simulation which resulted in a fair value of $7.1 million. In addition, the Company determined that there was a related credit loss of $0.9 million on the investment which was recognized in the consolidated statements of operations for the year ended December 31, 2022.
Held-to-Maturity Investments — Investments consist of highly liquid investments that are intended to facilitate liquidity and capital preservation. As of December 31, 2022, the Company held $101.1 million of short-term investments and $2.0 million of long-term investments. As of December 31, 2021, the Company held $79.9 million of short-term investments and $56.6 million of long-term investments. The amortization or accretion of the Company’s investments is recognized as interest income in the consolidated statements of operations and was approximately $0.7 million and $0.5 million for the years ended December 31, 2022 and 2021, respectively. No allowance for credit losses on held-to-maturity securities was required as of December 31, 2022 or 2021.
The contractual maturities of the Company’s held to maturity investments as of December 31, 2022 and 2021 are summarized below (in thousands):
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
|
|
Amortized
Cost Basis |
|
|
Aggregate
Fair Value |
|
|
Amortized
Cost Basis |
|
|
Aggregate
Fair Value |
|
Due in one year or less(1) |
|
|
152,862 |
|
|
|
156,976 |
|
|
$ |
103,733 |
|
|
$ |
103,669 |
|
Due after one year through five years |
|
|
1,961 |
|
|
|
1,948 |
|
|
|
56,619 |
|
|
|
56,433 |
|
Total |
|
|
154,823 |
|
|
|
158,924 |
|
|
$ |
160,352 |
|
|
$ |
160,102 |
|
___________________________
(1) |
The investments due in one year or less include cash equivalents of $51.8 million as of December 31, 2022 and $23.8 million as of December 31, 2021. |
The fair value of the cash equivalents, long-term and short-term investments are disclosed below (in millions):
|
|
December 31, 2022 |
|
|
|
Investment Level |
|
Amortized Cost
(Carrying Value) |
|
|
Gross Unrealized
Holding Losses |
|
|
Estimated
Fair Value |
|
Commercial bonds and paper |
|
Level 2 |
|
$ |
66.8 |
|
|
$ |
(0.6 |
) |
|
$ |
66.2 |
|
Money market funds |
|
Level 1 |
|
|
51.8 |
|
|
|
— |
|
|
$ |
51.8 |
|
U.S. Treasuries |
|
Level 2 |
|
|
36.3 |
|
|
|
(0.6 |
) |
|
$ |
35.7 |
|
Total cash equivalents and investments |
|
|
|
$ |
154.9 |
|
|
$ |
(1.2 |
) |
|
$ |
153.7 |
|
Less cash equivalents |
|
|
|
|
(51.8 |
) |
|
|
— |
|
|
|
(51.8 |
) |
Total Investments |
|
|
|
$ |
103.1 |
|
|
$ |
(1.2 |
) |
|
$ |
101.9 |
|
|
|
December 31, 2021 |
|
|
|
Investment Level |
|
Amortized Cost
(Carrying Value) |
|
|
Gross Unrealized
Holding Losses |
|
|
Estimated
Fair Value |
|
Commercial bonds and paper |
|
Level 2 |
|
$ |
115.2 |
|
|
$ |
0.2 |
|
|
$ |
115.0 |
|
Money market funds |
|
Level 1 |
|
|
21.3 |
|
|
|
— |
|
|
|
21.3 |
|
U.S. Treasuries |
|
Level 2 |
|
|
23.9 |
|
|
|
0.1 |
|
|
|
23.8 |
|
Total cash equivalents and investments |
|
|
|
$ |
160.4 |
|
|
$ |
0.3 |
|
|
$ |
160.1 |
|
Less cash equivalents |
|
|
|
|
(23.8 |
) |
|
|
— |
|
|
|
(23.8 |
) |
Total Investments |
|
|
|
$ |
136.6 |
|
|
$ |
0.3 |
|
|
$ |
136.3 |
|
As of December 31, 2022, there was $0.6 million of accrued interest receivable and $5.1 million of amount receivable on matured investment recognized as prepaid expense and other current assets in our consolidated balance sheets. As of December 31, 2021, there was $0.3 million of accrued interest receivable recognized as other assets in our consolidated balance sheets.
82
5. Accounts Receivable
Accounts receivable, net consists of the following (in thousands):
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Accounts receivable – commercial |
|
|
|
|
|
|
|
|
Accounts receivable, gross |
|
$ |
19,359 |
|
|
$ |
7,939 |
|
Wholesaler distribution fees and prompt pay discounts |
|
|
(2,536 |
) |
|
|
(1,696 |
) |
Reserve for returns |
|
|
(4,108 |
) |
|
|
(2,797 |
) |
Total accounts receivable – commercial, net |
|
|
12,715 |
|
|
|
3,446 |
|
Accounts receivable – collaborations and services |
|
|
|
|
|
|
|
|
Accounts receivable, gross |
|
|
4,086 |
|
|
|
2,060 |
|
Allowance for credit losses |
|
|
— |
|
|
|
(767 |
) |
Total accounts receivable – collaborations and services, net |
|
|
4,086 |
|
|
|
1,293 |
|
Total accounts receivable, net |
|
$ |
16,801 |
|
|
$ |
4,739 |
|
As of December 31, 2022 and December 31, 2021, the allowance for credit losses was de minimis. As of December 31, 2022 and December 31, 2021, the Company had three wholesale distributors representing approximately 74% and 80% of gross sales and 79% and 79% of accounts receivable, respectively.
As of December 31, 2022, there was no allowance for credit losses for accounts receivable – collaborations and revenue. The Company had one collaboration partner, United Therapeutics, that comprised 100% of the collaboration and services net accounts receivable as of December 31, 2022 and approximately 98% of gross revenue from collaborations and services for the year ended December 31, 2022.
The Company recognizes revenue net of gross-to-net adjustments. The activities and ending reserve balance consists of the following (in thousands):
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Prompt Pay Discount Reserve, Allowance for Wholesale Distribution Fees
and Accounts Receivables Return Reserve: |
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
4,493 |
|
|
$ |
3,873 |
|
Provisions |
|
|
17,471 |
|
|
|
11,494 |
|
Deductions |
|
|
(15,320 |
) |
|
|
(10,874 |
) |
Ending balance |
|
$ |
6,644 |
|
|
$ |
4,493 |
|
6. Inventories
Inventories consist of the following (in thousands):
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Raw materials |
|
$ |
5,739 |
|
|
$ |
2,703 |
|
Work-in-process |
|
|
13,815 |
|
|
|
2,522 |
|
Finished goods |
|
|
2,218 |
|
|
|
1,927 |
|
Total inventory |
|
$ |
21,772 |
|
|
$ |
7,152 |
|
Work-in-process and finished goods as of December 31, 2022 and 2021 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 2016. Raw materials inventory included $0.8 million of pre-launch inventory as of December 31, 2022 and 2021, 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 2024.
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 at December 31, 2022 and 2021. Inventory that was forecasted to become obsolete due to expiration as well as inventory that does not meet acceptable standards is recorded in costs of goods sold in the accompanying consolidated statements of operations. There was an inventory write-off of $2.2 million as a result of this assessment for the year ended December 31, 2022. For the year ended December 31, 2021, there was an inventory write-off of $1.9 million as a result of this assessment, including $0.7 million related to the start of an agreement with a retail pharmacy. There was an inventory write-off of $0.5 million for the year ended December 31, 2020.
83
7. Property and Equipment
Property and equipment consist of the following (in thousands):
|
|
Estimated Useful |
|
|
December 31, |
|
|
|
|
Life (Years) |
|
|
2022 |
|
|
2021 |
|
|
Land |
|
|
— |
|
|
$ |
875 |
|
|
$ |
875 |
|
|
Buildings |
|
39-40 |
|
|
|
17,389 |
|
|
|
17,389 |
|
|
Building improvements |
|
5-40 |
|
|
|
38,952 |
|
|
|
38,651 |
|
|
Machinery and equipment |
|
3-15 |
|
|
|
58,542 |
|
|
|
55,334 |
|
|
Furniture, fixtures and office equipment |
|
5-10 |
|
|
|
2,976 |
|
|
|
2,969 |
|
|
Computer equipment and software |
|
|
3 |
|
|
|
8,246 |
|
|
|
8,163 |
|
|
Construction in progress |
|
|
— |
|
|
|
16,706 |
|
|
|
10,892 |
|
(1) |
|
|
|
|
|
|
|
143,686 |
|
|
|
134,273 |
|
|
Less accumulated depreciation |
|
|
|
|
|
|
(98,560 |
) |
|
|
(97,661 |
) |
|
Total property and equipment, net |
|
|
|
|
|
$ |
45,126 |
|
|
$ |
36,612 |
|
|
_________________________
(1) |
As of December 31, 2021 construction in progress included $4.7 million of equipment under construction for the manufacturing expansion for UT (the “UT Equipment”). There is no balance under construction for the UT Equipment as of December 31, 2022. The Company acts as agent on behalf of UT for the procurement of the UT Equipment. The Company has received $5.0 million in deposit for this service, which was recognized as deposits from customer in the consolidated balance sheet as of December 31, 2021. In April 2022, the Company and UT agreed that UT would hold title to the UT Equipment at all times. As such, there is no balance related to the UT Equipment included in construction in progress or deposits from customer in our consolidated balance sheet as of December 31, 2022. See Note 11 – Collaboration, Licensing and Other Arrangements. |
Depreciation expense related to property and equipment for the years ended December 31, 2022, 2021 and 2020 was $3.3 million, $2.0 million and $1.8 million, respectively. During the years ended December 31, 2022 and 2021, the Company retired $2.4 million and $1.1 million, respectively of manufacturing equipment, computer hardware and software, computer equipment, lab equipment, and building improvements, as it was no longer in service. The net book value for the disposed assets was de minimis.
On November 8, 2021, the Company sold certain land, building and improvements located in Danbury, CT (the “Property”) to an affiliate of Creative Manufacturing Properties (the “Purchaser”) for a sales price of $102.3 million, subject to the terms and the conditions contained in a purchase and sale agreement. Effective with the closing of this transaction, the Company entered into a 20-year lease agreement with the Purchaser (the “Sale-Leaseback Transaction”). The sale of the Property and subsequent lease did not result in the transfer of control of the Property to the Purchaser; therefore, the Sale-Leaseback Transaction qualified as a failed sale leaseback transaction whereby the lease is accounted for as finance lease and the Property remains as a long-lived asset of the Company and is depreciated at its remaining useful life of 20 years or less. See Note 16 – Commitments and Contingencies.
8. Goodwill and Other Intangible Asset
Goodwill — Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired plus liabilities assumed arising from business combinations. The balance of goodwill was approximately $2.4 million as of December 31, 2022 as a result of our acquisition of V-Go in May 2022. Goodwill is tested at least annually for impairment by assessing qualitative factors in determining whether it is more likely than not that the fair value of net assets is below their carrying amounts. See Note 2 – Summary of Significant Accounting Policies.
Other Intangible Asset — Other intangible asset consisted of the following (in thousands):
|
|
Estimated Useful |
|
|
December 31, 2022 |
|
|
|
Life (Years) |
|
|
Cost |
|
|
Accumulated
Amortization |
|
|
Net Book Value |
|
Developed technology |
|
|
15 |
|
|
$ |
1,200 |
|
|
$ |
(47 |
) |
|
$ |
1,153 |
|
Amortization expense related to the other intangible asset was de minimis for the year ended December 31, 2022.
The estimated annual amortization expense for the other intangible asset for the years ended December 31, 2023 through 2027 will be approximately $0.1 million per year and $0.7 million, thereafter.
The Company evaluates its other intangible asset for potential impairment when events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. See Note 2 – Summary of Significant Accounting Policies.
84
9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the following (in thousands):
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Salary and related expenses |
|
$ |
14,906 |
|
|
$ |
14,022 |
|
Discounts and allowances for commercial product sales |
|
|
8,504 |
|
|
|
4,227 |
|
Returns reserve for acquired product |
|
|
1,013 |
|
|
|
— |
|
Professional fees |
|
|
1,136 |
|
|
|
895 |
|
Deferred lease liability |
|
|
1,304 |
|
|
|
1,380 |
|
Current portion of milestone rights liability |
|
|
924 |
|
|
|
1,088 |
|
Accrued interest |
|
|
2,201 |
|
|
|
2,166 |
|
Retail inventory purchase |
|
|
— |
|
|
|
875 |
|
Danbury facility buildout |
|
|
846 |
|
|
|
786 |
|
Other |
|
|
4,719 |
|
|
|
1,980 |
|
Accrued expenses and other current liabilities |
|
$ |
35,553 |
|
|
$ |
27,419 |
|
The provision for discounts and allowances for commercial product sales is reflected as a component of net revenues. The activities and ending balance consists of the following (in thousands):
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Discounts and allowances for commercial product sales: |
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
4,227 |
|
|
$ |
3,688 |
|
Provisions |
|
|
23,369 |
|
|
|
13,057 |
|
Deductions |
|
|
(20,603 |
) |
|
|
(12,518 |
) |
V-Go opening balance sheet |
|
|
1,511 |
|
|
|
— |
|
Ending balance |
|
$ |
8,504 |
|
|
$ |
4,227 |
|
10. Borrowings
Carrying amount of the Company’s borrowings consist of the following (in thousands):
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Senior convertible notes |
|
$ |
225,397 |
|
|
$ |
223,944 |
|
Mann Group promissory notes(1) |
|
|
8,829 |
|
|
|
18,425 |
|
MidCap credit facility |
|
|
39,264 |
|
|
|
38,833 |
|
Total debt — net carrying amount |
|
$ |
273,490 |
|
|
$ |
281,202 |
|
_________________________
(1) |
The amendment to the Mann Group convertible note in the second quarter of 2021 resulted in a substantial premium of $22.1 million based on the fair value post modification, which contributed to the loss on extinguishment in the consolidated statement of operations for the year ended December 31, 2021 and was recognized as additional paid-in capital in the consolidated balance sheet as of December 31, 2021. The accounting for the $22.1 million loss on extinguishment did not result in a change in the financial position of the Company. |
The following table provides a summary of the Company’s debt and key terms:
|
|
Amount Due |
|
Terms |
|
|
December 31, 2022 |
|
December 31, 2021 |
|
Annual Interest Rate |
|
|
|
|
Maturity Date |
|
|
|
Conversion Price |
Senior convertible notes |
|
$230.0 million |
|
$230.0 million |
|
2.50% |
|
|
|
|
March 2026 |
|
|
|
$5.21
per share |
MidCap credit facility(1) |
|
$40.0 million |
|
$40.0 million |
|
one-month
SOFR (1% floor)
plus 6.25%;
cap of 8.25% |
|
|
(1 |
) |
August 2025 |
|
(1 |
) |
N/A |
Mann Group convertible note |
|
$8.8 million |
|
$18.4 million (plus $0.4 million accrued interest paid-in-kind) |
|
2.50% |
|
|
(2 |
) |
December 2025 |
|
(2 |
) |
$2.50
per share |
_________________________
(1) |
In April 2021, the Company prepaid $10.0 million principal balance and amended the MidCap credit facility. The interest rate prior to the amendment was one-month LIBOR (2% floor) plus 6.75% and the maturity date was in August 2024. In August 2022, the Company amended the MidCap credit facility and transitioned to the benchmark interest rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”). The interest rate prior to the amendment was one-month LIBOR (1% floor) plus 6.25% (cap of 8.25%). |
85
(2) |
In April 2021, the Mann Group convertible note was amended. The interest rate prior to the amendment was 7.00% and the maturity date was in November 2024. |
The maturities of the Company’s borrowings as of December 31, 2022 are as follows (in thousands):
|
Amounts |
|
2023 |
$ |
6,667 |
|
2024 |
|
20,000 |
|
2025 |
|
22,163 |
|
2026 |
|
230,000 |
|
Total principal payments |
|
278,830 |
|
Unamortized discount |
|
(235 |
) |
Debt issuance costs |
|
(5,105 |
) |
Total debt |
$ |
273,490 |
|
Senior convertible notes – In March 2021, the Company issued $200.0 million aggregate principal amount of Senior convertible notes in a private offering. Pursuant to an option to purchase additional senior convertible notes in the purchase agreement between the Company and the initial purchasers of the Senior convertible notes, the Company issued an additional $30.0 million aggregate principal amount of Senior convertible notes on March 15, 2021. The Senior convertible notes were issued pursuant to an indenture, dated March 4, 2021 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee.
The Senior convertible notes are general unsecured obligations of the Company and will mature on March 1, 2026, unless earlier converted, redeemed or repurchased. The Senior convertible notes will bear cash interest from March 4, 2021 at an annual rate of 2.50% payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2021. The Senior convertible notes are convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding December 1, 2025, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2021 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock, par value $0.01 per share, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the Senior convertible notes on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which the trading price (as defined in the Indenture) per $1,000 principal amount of the Senior convertible notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate on each such trading day; (3) if the Company calls such Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the Senior convertible notes called (or deemed called) for redemption; or (4) upon the occurrence of specified corporate events as set forth in the Indenture. On or after December 1, 2025 until the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the common stock or a combination of cash and shares of common stock, at the Company’s election, in the manner and subject to the terms and conditions provided in the Indenture.
The initial conversion rate is 191.8281 shares of common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $5.21 per share of common stock). The initial conversion price of the Senior convertible notes represents a premium of approximately 30% to the last reported sale price of the common stock on the Nasdaq Global Market on March 1, 2021. The conversion rate for the Senior convertible notes is subject to adjustment under certain circumstances in accordance with the terms of the Indenture, but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date of the Senior convertible notes or if the Company delivers a notice of redemption in respect of the Senior convertible notes, the Company will, in certain circumstances, increase the conversion rate of the Senior convertible notes for a holder who elects to convert its Senior convertible notes in connection with such a corporate event or convert its Notes called for redemption during the related redemption period (as defined in the Indenture), as the case may be.
The Company may not redeem the Senior convertible notes prior to March 6, 2024. The Company may redeem for cash all or any portion of the Senior convertible notes, at its option, on or after March 6, 2024 and prior to the 36th scheduled trading day immediately preceding the maturity date, if the last reported sale price of common stock has been at least 130% of the conversion price for the Senior convertible notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Senior convertible notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If the Company elects to redeem less than all of the outstanding Senior convertible notes, at least $75.0 million aggregate principal amount of Senior convertible notes must be outstanding and not subject to redemption as of the relevant redemption notice date. No sinking fund is provided for the Senior convertible notes.
If the Company undergoes a fundamental change (as defined in the Indenture), then, subject to certain conditions and except as described in the Indenture, holders may require the Company to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Senior convertible notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
86
The Indenture includes customary covenants and sets forth certain events of default after which the Senior convertible notes may be declared immediately due and payable.
If certain bankruptcy and insolvency-related events of default involving the Company (and not just any of its significant subsidiaries) occur, 100% of the principal of and accrued and unpaid interest on the Senior convertible notes will automatically become due and payable. If an event of default with respect to the Senior convertible notes, other than certain bankruptcy and insolvency-related events of default involving the Company (and not just any of its significant subsidiaries), occurs and is continuing, the trustee, by notice to the Company, or the holders of at least 25% in principal amount of the outstanding Senior convertible notes by notice to the Company and the trustee, may, and the trustee at the request of such holders shall, declare 100% of the principal of and accrued and unpaid interest, if any, on all the Senior convertible notes to be due and payable. Notwithstanding the foregoing, the Indenture provides that, to the extent the Company so 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 365 days after the occurrence of such an event of default consist exclusively of the right to receive additional interest on the Senior convertible notes as set forth in the Indenture.
The Indenture provides that the Company shall not consolidate with or merge with or into, or sell, convey, transfer or lease all or substantially all of the consolidated properties and assets of the Company and its subsidiaries, taken as a whole, to, another person (other than any such sale, conveyance, transfer or lease to one or more of the Company’s direct or indirect wholly owned subsidiaries), unless: (i) the resulting, surviving or transferee person (if not the Company) is a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia, and such corporation (if not the Company) expressly assumes by supplemental indenture all of the Company’s obligations under the Senior convertible notes and the Indenture; and (ii) immediately after giving effect to such transaction, no default or event of default has occurred and is continuing under the Indenture.
During the year ended December 31, 2021, the Company’s net proceeds from the offering were approximately $222.7 million, after deducting the initial purchasers’ discounts and commissions and the estimated offering expenses payable by the Company. As of December 31, 2022 and 2021, the unamortized debt issuance cost was $4.6 million and $6.1 million, respectively.
MidCap credit facility — In August 2019, the Company entered into the MidCap credit facility and borrowed the first advance of $40.0 million (“Tranche 1”) in August 2019 and the second advance of $10.0 million (“Tranche 2”) in December 2020. In April 2021, $10.0 million was prepaid. Under the terms of the MidCap credit facility, a third advance of $60.0 million (“Tranche 3”) became available to the Company after the Tyvaso DPI approval by the FDA through June 30, 2022 (see Note 11 – Collaboration, Licensing and Other Arrangements). The Company did not exercise its right to borrow Tranche 3.
The Mid Cap credit facility has been amended several times, including in April 2021, when the parties agreed to, among other things, (i) increase the amount available under the third advance from $25.0 million to $60.0 million and extend the date through which the third advance is available to June 30, 2022, (ii) amend the conditions to the third advance of $60.0 million being available to draw, including certain milestone conditions associated with Tyvaso DPI, (iii) remove the Company’s obligation to issue a warrant to purchase shares of the Company’s common stock upon drawing down the third advance, (iv) extend the interest-only period until September 1, 2023 and extend the maturity date until August 1, 2025, (v) amend the financial covenant relating to trailing 12 month minimum Afrezza net revenue, (vi) decrease the minimum cash covenant, (vii) decrease the interest rate on any amounts outstanding, now or in the future, under the MidCap credit facility, (viii) permit the Company to make certain acquisitions, subject to requirements, and (ix) permit the Company to make investments of up to an additional $9.0 million so long as the Company has $90.0 million or more of unrestricted cash and short-term investments following such investment. Concurrent with entering into this amendment, the Company made a $10.0 million principal prepayment against outstanding term loans under the MidCap credit facility and paid a related $1.0 million exit fee in lieu of the unaccrued portion of the original exit fee and prepayment penalties that would otherwise have been due with respect to the partial prepayment.
During the year ended December 31, 2021, the prepayment penalty of $1.0 million related to the payment of $10.0 million was capitalized and will be amortized over the remaining life of the debt. As of December 31, 2022, the unamortized debt discount was $0.2 million and the unamortized prepayment penalty was $0.5 million. As of December 31, 2021, the unamortized debt discount was $0.4 million and the unamortized prepayment penalty was $0.8 million.
In August 2022, the Company entered into the tenth amendment to the MidCap credit facility to change the benchmark interest rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”).
87
Tranche 1 and Tranche 2 accrue interest at an annual rate equal to the lesser of (i) 8.25% and (ii) the one-month SOFR (subject to a one-month SOFR floor of 1.00%) plus 6.25%. Interest on each term loan advance is due and payable monthly in arrears. Principal on each term loan advance under Tranche 1 and Tranche 2 are payable in 24 equal monthly installments beginning September 1, 2023, until paid in full on August 1, 2025. The Company has the option to prepay its existing 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 April 22, 2022; 2.00% of principal prepaid if prepayment occurs on or after April 23, 2022 through and including April 22, 2023; and 1.00% of principal prepaid if prepayment occurs on or after April 23, 2023 through the maturity date.
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, as amended, 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, unless the Company has $90.0 million or more of unrestricted cash and short-term investments. As of December 31, 2022, the Company was in compliance with the financial 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 Tranches 1 and 2 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. As a result of Tranche 2, the Company issued warrants to purchase an aggregate of 111,853 shares of the Company’s common stock, at an exercise price equal to $2.91 per share. The Company determined that these warrants met the criteria for equity classification and accounted for such warrants in additional paid-in capital. During the year ended December 31, 2021, the Tranche 1 and Tranche 2 MidCap warrants were exercised in full.
Mann Group promissory notes — In August 2019, the Company 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 issued a non-convertible note to 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”) as part of a restructuring of its then existing indebtedness to Mann Group.
The Mann Group promissory notes originally accrued 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. In April 2021, the Company repaid the entire principal amount of $35.1 million outstanding under the Mann Group non-convertible note, together with all accrued and unpaid interest thereon. On the same date, the Company and Mann Group amended the Mann Group convertible note, pursuant to which the parties agreed to (i) reduce the interest rate from 7.0% to 2.5% effective on April 22, 2021, and (ii) extend the maturity date from November 3, 2024 to December 31, 2025.
The amendment to the Mann Group convertible note resulted in a debt extinguishment with a substantial premium based on the fair value post extinguishment. The fair value in excess of the face amount of $18.4 million contributed to a loss on extinguishment of $22.1 million in the consolidated statement of operations for the year ended December 31, 2021 and resulted in a corresponding debt premium of $22.1 million which was recognized as additional paid-in capital in the consolidated balance sheet as of December 31, 2021. The accounting for the $22.1 million loss on extinguishment did not result in a change in the financial position of the Company. The Company wrote off a de minimis amount of debt issuance cost.
The principal and any accrued and unpaid interest under the Mann Group convertible note may be converted, at the option of 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 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 Company’s common stock at a price per shall equal to the last reported sale price on the trading day immediately prior to the payment date.
88
Pursuant to the terms of the Mann Group convertible note, Mann Group converted $3.0 million of accrued interest and $7.0 million of principal into 1.2 million shares and 2.8 million shares, respectively, of the Company’s common stock in the fourth quarter of 2020. During the year ended December 31, 2021, Mann Group converted $0.4 million of interest and $9.6 million of principal into 4,000,000 shares of common stock. During the year ended December 31, 2022, Mann Group converted $10.0 million of principal and capitalized interest into 4,000,000 shares of common stock. In addition, the Company paid $0.3 million of interest by issuing the Mann Group 75,487 shares of common stock during the year ended December 31, 2022.
PPP loan – In April 2020, the Company received the proceeds from the PPP loan from JPMorgan Chase Bank, N.A., as lender, in the amount of approximately $4.9 million pursuant to the PPP of the CARES Act. In July 2021, the Company received notification from the U.S Small Business Administration that the full principal amount of the PPP loan was forgiven. The Company recognized a $4.9 million gain on extinguishment of debt for the forgiveness of the principal amount and accrued but unpaid interest for the year ended December 31, 2021.
Prior to being forgiven, the PPP loan was evidenced by a promissory note dated April 9, 2020 that matured on April 9, 2022 and bore interest at a rate of 0.98% per annum (which was being deferred). The Company used all proceeds from the PPP loan to retain employees, maintain payroll and make lease, interest and utility payments.
Amortization of the premium and accretion of debt issuance costs related to all borrowings for the years ended December 31, 2022, 2021 and 2020 are as follows (in thousands):
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Amortization of debt discount |
|
$ |
431 |
|
|
$ |
377 |
|
|
$ |
268 |
|
Amortization of debt issuance cost |
|
|
1,453 |
|
|
|
1,215 |
|
|
|
101 |
|
Milestone Rights — As of December 31, 2022 and 2021, the remaining Milestone Rights liability balance was $4.8 million and $5.9 million, respectively, which was based on initial fair value estimates calculated using the income approach and reduced by milestone achievement payments made. During the second quarter of 2022, the Company achieved an Afrezza net sales milestone specified by the Milestone Rights. The carrying value of the Milestone Rights liability related to the $5.0 million payment, which was made in the third quarter of 2022, was approximately $1.1 million and represented the fair value as determined in 2013 (the most recent measurement date). As of December 31, 2022, the $4.8 million liability consisted of a $0.9 million current liability which was presented as accrued expenses and other current liabilities and a $3.9 million long-term liability which was presented in milestone liabilities in our consolidated balance sheets.
During the first quarter of 2021, the Company achieved the second Afrezza net sales milestone specified by the Milestone Rights. The milestone carrying value of the Milestone Rights liability related to the $5.0 million payment, which was made in the second quarter of 2021, was approximately $1.3 million, and represented the fair value as determined in 2013 (the most recent measurement date). As of December 31, 2021, the $5.9 million liability consisted of a $1.1 million current liability which was presented as accrued expenses and other current liabilities and a $4.8 million long-term liability which was presented in milestone liabilities in our consolidated balance sheets.
The Milestone Rights Agreement includes customary representations and warranties and covenants by the Company, including restrictions on transfers of intellectual property related to Afrezza. The Milestone Rights are subject to acceleration in the event the Company transfers its intellectual property related to Afrezza in violation of the terms of such agreement.
11. Collaboration, Licensing and Other Arrangements
Revenue from collaborations and services for the years ended December 31, 2022, 2021 and 2020 are as follows (in thousands):
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
UT CSA Agreement (1) |
|
$ |
24,826 |
|
|
$ |
267 |
|
|
$ |
— |
|
UT License Agreement (2) |
|
|
2,426 |
|
|
|
34,145 |
|
|
|
32,213 |
|
Vertice Pharma Co-Promotion Agreement |
|
|
325 |
|
|
|
1,147 |
|
|
|
— |
|
Other |
|
|
200 |
|
|
|
323 |
|
|
|
— |
|
Cipla License and Distribution Agreement |
|
|
147 |
|
|
|
147 |
|
|
|
147 |
|
Receptor CLA |
|
|
— |
|
|
|
245 |
|
|
|
250 |
|
UT Research Agreement |
|
|
— |
|
|
|
— |
|
|
|
210 |
|
Total revenue from collaborations and services |
|
$ |
27,924 |
|
|
$ |
36,274 |
|
|
$ |
32,820 |
|
_________________________
(1) |
Amount consists of revenue recognized for Manufacturing Services and sales of product to UT for the periods presented. |
(2) |
Amount consists of revenue recognized for Next-Gen R&D Services and R&D Services and License for the periods presented. |
89
The activity related to deferred revenue and the related revenue recognized for collaborations and services is as follows (in thousands):
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Deferred revenue: |
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
20,370 |
|
|
$ |
34,937 |
|
Additions |
|
|
46,971 |
|
|
|
21,707 |
|
Revenue — collaborations and services |
|
|
(27,924 |
) |
|
|
(36,274 |
) |
Ending balance |
|
$ |
39,417 |
|
|
$ |
20,370 |
|
United Therapeutics License Agreement — In September 2018, the Company and UT entered into an exclusive global license and collaboration agreement (the “UT License Agreement”), pursuant to which UT is responsible for global development, regulatory and commercial activities with respect to Tyvaso DPI. The Company is responsible for manufacturing clinical supplies and commercial supplies of Tyvaso DPI.
Revenue from UT for the years ended December 31, 2022, 2021 and 2020 are as follows (in thousands):
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
UT Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
UT CSA Agreement |
|
$ |
24,826 |
|
|
$ |
267 |
|
|
$ |
— |
|
UT License Agreement |
|
|
2,426 |
|
|
|
34,145 |
|
|
|
32,213 |
|
Royalties — Collaborations (1) |
|
|
15,599 |
|
|
|
— |
|
|
|
— |
|
Total revenue from UT |
|
$ |
42,851 |
|
|
$ |
34,412 |
|
|
$ |
32,213 |
|
_________________________
(1) |
Amount consists of royalties associated with the UT License Agreement. |
The current portion of contract assets related to the royalties is included in prepaid expense and other current assets in the consolidated balance sheets.
Under the terms of the UT License Agreement, the Company received an upfront payment of $45.0 million in October 2018 and four $12.5 million milestone payments between April 2019 and November 2020. The Company will also be entitled to receive low double-digit royalties on net sales of Tyvaso DPI as well as a manufacturing margin on commercial supplies of the product. UT, at its option, may expand the scope of the products covered by the UT License Agreement to include products with certain other active ingredients for the treatment of pulmonary arterial hypertension. Each such optioned product would be subject to UT’s payment to the Company of up to $40.0 million in additional option exercise and development milestone payments, as well as a low double-digit royalty on net sales of any such product.
At the inception of the agreement, the Company identified one distinct, performance obligation. The Company determined that the key deliverables include the license, supply of product to be used in clinical development, and certain research services upon achievement of specified development targets (“R&D Services”). Due to the specialized and unique nature of these services and their direct relationship with the license, the Company has determined that these deliverables represent one distinct bundle and thus, one performance obligation. The Company also determined that UT’s option to expand the scope of the products to include products with other active ingredients is not a material right, and thus, not a performance obligation at the onset of the agreement. The consideration for the option will be accounted for upon exercise of the option.
The Company expected to complete the activities specified in the initial development plan and to achieve the milestone events by December 31, 2021 for total consideration of approximately $105.8 million, which included an upfront payment, four milestone payments, various pass-through costs and payments for clinical supplies. Revenue was allocated as follows:
Distinct Performance Obligation |
|
Transaction Price |
|
|
Allocation of Price |
|
|
Recognition Method |
|
Progress Measure |
|
Recognition Period |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
R&D Services and License |
|
$ |
105.8 |
|
|
100% |
|
|
Over time |
|
Ratably |
|
Sep 2018 - Dec 2021 |
(1) |
_________________________
(1) |
Recognition period represents the estimated period to satisfy the performance obligation. |
In May 2021, UT and the Company updated the development plan under the UT License Agreement to provide for additional process-development and stability-testing activities as well as the expansion of the Company’s commercial manufacturing capacity. The activities and deliverables under the current development plan resulted in four distinct performance obligations which include: (1) the continued development and approval process for an NDA (“R&D Services”); (2) certain pre-commercial services in preparation for commercial launch of Tyvaso DPI (“Pre-Commercial Services”); (3) development activities for the next generation of Tyvaso DPI (“Next-Gen R&D Services”); and (4) certain design and construction activities in anticipation of expansion of the Company’s commercial manufacturing facility (“Facility Expansion Services”).
90
The total consideration for the updated development plan of $50.9 million was allocated to the four distinct performance obligations based on management’s assessment of the stand-alone selling price of each performance obligation. Revenue was allocated as follows:
Description |
|
Transaction Price |
|
|
Allocation of Price(1) |
|
|
Recognition Method |
|
Progress Measure |
|
Revenue
Recognition |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
Total transaction price |
|
$ |
50.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Distinct Performance Obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D Services and License |
|
|
|
|
|
$ |
18.4 |
|
|
Over time |
|
Ratably |
|
May 2021 - Oct 2021 |
(2) |
Pre-Commercial Services |
|
|
|
|
|
$ |
4.6 |
|
|
Over time |
|
Input |
|
% of completion of costs |
(3) |
Next-Gen R&D Services |
|
|
|
|
|
$ |
7.2 |
|
|
Over time |
|
Input |
|
% of completion of costs |
(3) |
Facility Expansion Services(4) |
|
|
|
|
|
$ |
20.7 |
|
|
Point in time |
|
|
|
Transfer of control |
(5) |
|
_________________________
(1) |
Allocation is based on management’s assessment of the stand-alone selling price of each performance obligation. |
(2) |
Represents the estimated period when the R&D Services performance obligation will be substantially complete. |
(3) |
Pre-Commercial Services and Next-Gen R&D Services performance obligations will be satisfied over time using the input method based on the costs incurred to date as a percentage of the total estimated costs to fulfill the contract. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. |
(4) |
The Company also acts as agent for the procurement of equipment for the manufacturing expansion for the UT Equipment. The Company received $5.0 million from UT for the UT Equipment, which was recognized as deposits from customer on the consolidated balance sheet and will be released as the title is transferred to UT. |
(5) |
The Facility Expansion Services performance obligation would be recognized as control of manufactured products is transferred to the customer. |
In August 2021, the Company and UT entered into a commercial supply agreement (as amended, the “CSA”), pursuant to which the Company is responsible for manufacturing and supplying to UT, and UT is responsible for purchasing from the Company on a cost-plus basis, Tyvaso DPI and BluHale inhalation profiling devices, as required for commercial distribution and sale by UT. In addition, UT is responsible for supplying treprostinil at its expense in quantities necessary to enable the Company to manufacture Tyvaso DPI as required by the CSA. Also pursuant to the CSA, UT will remit a reimbursement of certain pre-production costs incurred by the Company to support the manufacturing and supply of Tyvaso DPI.
The activities and deliverables under the CSA and the current development plan resulted in three distinct performance obligations which include: (1) the license, supply of product to be used in clinical development, and continued development and approval support for Tyvaso DPI (“R&D Services and License”); (2) development activities for the next generation of Tyvaso DPI (“Next-Gen R&D Services”); and (3) a material right associated with current and future commercial manufacturing and supply of product (“Manufacturing Services”).
The total revised anticipated cash flows of $221.5 million from the transaction was allocated to the three distinct performance obligations as follows.
|
|
Anticipated |
|
|
|
|
|
|
|
|
Description |
|
Cash Flow |
|
|
Revenue Allocation(1) |
|
|
Recognition Method |
|
Progress Measure |
|
Revenue
Recognition |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
Total anticipated cash flow |
|
$ |
221.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Distinct Performance Obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D Services and License(2) |
|
|
|
|
|
$ |
6.0 |
|
|
Over time |
|
Ratably |
|
Aug 2021 - Oct 2021 |
(3) |
Next-Gen R&D Services |
|
|
|
|
|
$ |
8.8 |
|
|
Over time |
|
Input |
|
% of completion of costs |
(4) |
Manufacturing Services |
|
|
|
|
|
$ |
206.7 |
|
|
Point in time |
|
|
|
Transfer of control |
(5) |
_________________________
(1) |
Allocation is based on management’s assessment of the stand-alone selling price of each performance obligation. |
(2) |
The license for the Company’s IP was considered to be interdependent with the development activities to support approval of Tyvaso DPI. A sales-based royalty is promised in exchange for the IP license; therefore, the royalties associated with the license are excluded from the determination of the transaction price and the Company will recognize revenue as the sale of Tyvaso DPI to a patient occurs. |
(3) |
Represents the estimated period when the R&D Services performance obligation will be substantially complete. |
(4) |
The Next-Gen R&D Services performance obligation will be satisfied over time using the input method based on the costs incurred to date as a percentage of the total estimated costs to fulfill the contract. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. |
(5) |
The Manufacturing Services performance obligation will be recognized as control of manufactured products is transferred to the customer; therefore, no revenue associated with this obligation was recognized during the year ended December 31, 2021. The allocation of transaction price includes a material right related to manufacturing services. The total anticipated cash flow is based on the Company’s estimated production and the ultimate cash flows may vary as manufacturing purchase orders are received. |
91
As amended , the term of the CSA continues until December 31, 2031 (unless earlier terminated) and is thereafter renewed automatically for additional, successive two-year terms unless (i) United Therapeutics provides notice to the Company at least 24 months in advance of such renewal that United Therapeutics does not wish to renew the CSA or (ii) the Company provides notice to United Therapeutics at least 48 months in advance of such renewal that the Company does not wish to renew the CSA. The Company and United Therapeutics each have normal and customary termination rights, including termination for material breach that is not cured within a specific timeframe or in the event of liquidation, bankruptcy or insolvency of the other party.
The Company accounted for the contract modification as if it were part of the existing contract since the amendment modified the scope and price of the CSA by extending the term and increasing the occupancy rate. The effect of the modification on the transaction price and on the measure of progress is recognized as an adjustment to revenue as of the date of the modification. The modification did not result in a change the activities and deliverables under the CSA. The total revised anticipated cash flows of $463.5 million from the transaction was allocated to the three distinct performance obligations as follows.
|
|
Anticipated |
|
|
|
|
|
|
|
|
Description |
|
Cash Flow |
|
|
Revenue Allocation(1) |
|
|
Recognition Method |
|
Progress Measure |
|
Revenue
Recognition |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
Total anticipated cash flow(2) |
|
$ |
463.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Distinct Performance Obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D Services and License(3) |
|
|
|
|
|
$ |
— |
|
|
Over time |
|
Ratably |
|
Aug 2021 - Oct 2021 |
(4) |
Next-Gen R&D Services(5) |
|
|
|
|
|
$ |
4.8 |
|
|
Over time |
|
Input |
|
% of completion of costs |
(6) |
Manufacturing Services(7) |
|
|
|
|
|
$ |
458.7 |
|
|
Point in time |
|
|
|
Transfer of control |
(8) |
_________________________
(1) |
Allocation is based on management’s assessment of the stand-alone selling price of each performance obligation. |
(2) |
The total anticipated cash flow includes a transaction price of $64.3 million for the contractual obligations under the CSA for the Manufacturing Services and the Next-Gen R&D Services performance obligations and $399.2 million for future supply of Tyvaso DPI over the remaining term of the CSA. |
(3) |
The license for the Company’s IP was considered to be interdependent with the development activities to support approval of Tyvaso DPI. A sales-based royalty is promised in exchange for the IP license; therefore, the royalties associated with the license are excluded from the determination of the transaction price and the Company will recognize revenue as the sale of Tyvaso DPI to a patient occurs. |
(4) |
Represents the period when the revenue for the R&D Services performance obligation was recognized. |
(5) |
The standalone selling price (“SSP”) for the Next-Gen R&D Services performance obligation was based on industry ratios as well as the Company’s historical R&D projects. The transaction price for the Next-Gen R&D Services was based on fixed consideration which was allocated between performance obligations as discussed in note (2) above. |
(6) |
The Next-Gen R&D Services performance obligation will be satisfied over time using the input method based on the costs incurred to date as a percentage of the total estimated costs to fulfill the contract. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. |
(7) |
Pre-production activities under the CSA, such as facility expansion services and certain other administrative services, were considered bundled services that are part of the Company’s Manufacturing Services performance obligation, given the nature of the Company’s contractual responsibilities and ASC 606 requirements. |
(8) |
The Manufacturing Services performance obligation will be recognized as control of manufactured products is transferred to the customer. The modification did not result in a cumulative catch-up adjustment as a result of the revenue being deferred for the performance obligations that were affected by the modification. The allocation of the transaction price for the Manufacturing Services includes a material right related to the Company’s estimated production of product in the amount of $144.5 million. The Company will sell product to UT under individual purchase orders, which represent distinct performance obligations. The total anticipated cash flow is based on the Company’s estimated production and the ultimate cash flows may vary as manufacturing purchase orders are received. |
92
In April 2022, the Company and UT agreed to fund $2.3 million in capital improvements to support commercialization and continuous improvement activities and $0.7 million in the development of alternative manufacturing processes. The Company determined that the capital improvements and continuous improvements should be combined with the manufacturing services performance obligation and the alternative manufacturing processes should be combined with the Next-Gen R&D Services and as such no additional performance obligations were noted. The total revised anticipated cash flows of $483.2 million from the transaction was allocated to the three distinct performance obligations as follows.
|
|
Anticipated |
|
|
|
|
|
|
|
|
Description |
|
Cash Flow |
|
|
Revenue Allocation |
|
|
Recognition Method |
|
Progress Measure |
|
Revenue
Recognition |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
Total anticipated cash flow(1) |
|
$ |
483.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Distinct Performance Obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D Services and License |
|
|
|
|
|
$ |
— |
|
|
Over time |
|
Ratably |
|
Aug 2021 - Oct 2021 |
|
Next-Gen R&D Services |
|
|
|
|
|
$ |
5.9 |
|
|
Over time |
|
Input |
|
% of completion of costs |
|
Manufacturing Services and
Product Sales(2) |
|
|
|
|
|
$ |
477.2 |
|
|
Point in time |
|
|
|
Transfer of control |
|
_________________________
(1) |
The total anticipated cash flow includes a transaction price of $71.5 million for the contractual obligations under the CSA for the Manufacturing Services and the Next-Gen R&D Services performance obligations and $411.7 million for future supply of Tyvaso DPI over the remaining term of the CSA. |
(2) |
The Manufacturing Services performance obligation will be recognized as control of manufactured products is transferred to UT. The modification did not result in a cumulative catch-up adjustment as a result of the revenue being deferred for the performance obligations that were affected by the modification. The allocation of the transaction price for the Manufacturing Services includes a material right related to the Company’s estimated production of product in the amount of $150.2 million. The Company will sell product to UT under individual purchase orders, which represent distinct performance obligations. The ultimate cash flows may vary as manufacturing purchase orders are received. |
In December 2022, the Company and UT agreed to fund an additional $39.5 million to support capital and continuous improvement activities and $2.3 million in the development of alternative manufacturing processes. The Company determined that the capital and continuous improvements should be combined with the manufacturing services performance obligation and the alternative manufacturing processes should be combined with the Next-Gen R&D Services. The total revised anticipated cash flows of $722.3 million from the transaction was allocated to the three distinct performance obligations as follows.
|
|
Anticipated |
|
|
|
|
|
|
|
|
Description |
|
Cash Flow |
|
|
Revenue Allocation |
|
|
Recognition Method |
|
Progress Measure |
|
Revenue
Recognition |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
Total anticipated cash flow(1) |
|
$ |
722.3 |
|
|
|
|
|
|
|
|
|
|
|
|
Distinct Performance Obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D Services and License |
|
|
|
|
|
$ |
— |
|
|
Over time |
|
Ratably |
|
Aug 2021 - Oct 2021 |
|
Next-Gen R&D Services |
|
|
|
|
|
$ |
10.0 |
|
|
Over time |
|
Input |
|
% of completion of costs |
|
Manufacturing Services and
Product Sales(2) |
|
|
|
|
|
$ |
712.3 |
|
|
Point in time |
|
|
|
Transfer of control |
|
__________________________
(1) |
The total anticipated cash flow includes a transaction price of $120.0 million for the contractual obligations under the CSA for the Manufacturing Services and the Next-Gen R&D Services performance obligations and $602.3 million for future supply of Tyvaso DPI over the remaining term of the CSA. |
(2) |
The Manufacturing Services performance obligation will be recognized as control of manufactured products is transferred to UT. The modification did not result in a cumulative catch-up adjustment as a result of the revenue being deferred for the performance obligations that were affected by the modification. The allocation of the transaction price for the Manufacturing Services includes a material right related to the Company’s estimated production of product in the amount of $220.8 million. The Company will sell product to UT under individual purchase orders, which represent distinct performance obligations. The ultimate cash flows may vary as manufacturing purchase orders are received. |
As of December 31, 2022, deferred revenue consisted of $37.9 million, of which $1.6 million was classified as current and $36.3 million was classified as long-term on the consolidated balance sheet. As of December 31, 2021, deferred revenue consisted of $18.6 million, of which $0.6 million was classified as current and $18.0 million was classified as long-term on the consolidated balance sheet.
Vertice Pharma Co-Promotion Agreement — In December 2020, the Company entered into a co-promotion agreement with Vertice Pharma pursuant to which the Company’s sales force promoted Thyquidity to healthcare providers who treat hypothyroidism. Vertice Pharma was obligated to pay fixed quarterly payments to the Company, as well as variable consideration based on gross profits resulting from all sales of Thyquidity. Vertice Pharma launched Thyquidity in collaboration with the Company in February 2021.
93
At inception of the agreement, the Company identified a single performance obligation that the Company will satisfy over time. The Company estimated the total transaction price was approximately $6.3 million, consisting of fixed consideration and the unconstrained amount of estimated variable consideration, which was based on gross profit applied to defined revenue benchmarks. The amount of variable consideration was constrained to the amount for which it was probable that a significant reversal of cumulative revenue recognized will not occur and the payments will be received. At the end of each subsequent reporting period, the Company re-evaluated the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjusted its estimate of the overall transaction price. Any such adjustments were recorded on a cumulative catch-up basis in the period of adjustment. The total transaction price was recognized over a two-year period during which the Company was required to satisfy its performance obligation, using the input method based on the costs incurred to date as a percentage of the total estimated costs to fulfill the contract. Incurred cost represents work performed, which corresponded with, and thereby best depicts, the transfer of control to the customer. In July 2021, the Company and Vertice Pharma entered into an amendment to the Vertice Pharma Co-Promotion Agreement that modified the terms of payment where 50% of the previously fixed consideration was subject to certain promotional conditions, resulting in variable consideration.
In September 2021, the Company and Vertice Pharma mutually agreed that the Company would cease promotional activities under the co-promotion agreement effective September 30, 2021, other than certain transitional activities that continued until October 15, 2021.
As of December 31, 2021, the Company fully reserved $0.8 million of revenue from the co-promotion of Thyquidity, which was recognized as allowance for credit losses – collaborations and services, which is included in accounts receivable, net in the consolidated balance sheet. In addition, the Company recognized an impairment on contract assets of $0.1 million related to variable consideration from gross profits which was recognized during the year ended December 31, 2021.
In June 2022, the Company and Vertice Pharma reached a final settlement of all obligations related to the termination of the co-promotion agreement of $0.3 million, which was recognized as revenue from collaboration and services in the Company’s consolidated statement of operations and the balance was written off against the reserve.
Thirona Collaboration Agreement — In June 2021, the Company and Thirona entered into a collaboration agreement to evaluate the therapeutic potential of Thirona’s compound for the treatment of pulmonary fibrosis. If initial studies are promising, the Company can exercise certain rights to seek a full license to the compound for clinical development and commercialization. The parties will perform their respective obligations and provide reasonable support for research, clinical development and regulatory strategy. The collaboration agreement will be accounted for under ASC 808, Collaborative Agreements; however, no consideration will be exchanged between the parties. The Company will expense the costs incurred as research and development in the consolidated statements of operations. In December 2022, the Company and Thirona extended the collaboration agreement through February 28, 2023.
Biomm Supply and Distribution Agreement — In May 2017, the Company and Biomm S.A. (“Biomm”) entered into a supply and distribution agreement for the commercialization of Afrezza in Brazil. Under this agreement, Biomm was responsible for pursuing regulatory approvals of Afrezza in Brazil, including from the ANVISA and, with respect to pricing matters, from the Camara de Regulação de Mercado de Medicamentos (“CMED”), both of which have been received. Biomm commenced product sales in January 2020. During the year ended December 31, 2020, the Company sold $0.2 million of product to Biomm. No shipments of product were made to Biomm during the years ended December 31, 2022 and 2021.
Cipla License and Distribution Agreement — In May 2018, the Company and Cipla Ltd. (“Cipla”) entered into an exclusive agreement for the marketing and distribution of Afrezza in India and the Company received a $2.2 million nonrefundable license fee. Under the terms of the agreement, Cipla is responsible for obtaining regulatory approvals to distribute Afrezza in India and for all marketing and sales activities of Afrezza in India. The Company is responsible for supplying Afrezza to Cipla. The Company has the potential to receive an additional regulatory milestone payment, minimum purchase commitment revenue and royalties on Afrezza sales in India once cumulative gross sales have reached a specified threshold.
The nonrefundable licensing fee was recorded in deferred revenue and is being recognized in net revenue – collaborations over 15 years, representing the estimated period to satisfy the performance obligation. The additional milestone payments represent variable consideration for which the Company has not recognized any revenue because of the uncertainty of obtaining marketing approval.
As of December 31, 2022, the deferred revenue balance was $1.5 million, of which $0.1 million is classified as current and $1.4 million is classified as long term in the consolidated balance sheets. As of December 31, 2021, the deferred revenue balance was $1.7 million, of which $0.1 million is classified as current and $1.6 million is classified as long term in the consolidated balance sheets.
12. Fair Value of Financial Instruments
The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level input that is significant to the overall fair value measurement. The Company uses the exit price method for estimating the fair
94
value of loans for disclosure purposes. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, 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.
The carrying amounts reported in the accompanying consolidated financial statements for cash, accounts receivable, accounts payable, and accrued expenses and other current liabilities (excluding the Milestone Rights liability) approximate their fair value due to their relatively short maturities. The fair value of the cash equivalents, long- and short-term investments, MidCap credit facility, Mann Group promissory notes, 2024 convertible notes, Senior convertible notes, Milestone Rights liabilities and Financing liability are disclosed below (amounts in millions).
Cash Equivalents — Cash equivalents consist of highly liquid investments with original or remaining maturities of 90 days or less at the time of purchase that are readily convertible into cash. As of December 31, 2022 and 2021, the Company held $69.8 million and $124.2 million, respectively, of cash and cash equivalents.
Financial Liabilities — The following tables set forth the fair value of the Company’s financial instruments (Level 3 in the fair value hierarchy) (in millions):
|
|
December 31, 2022 |
|
|
|
|
|
|
|
Fair Value |
|
|
|
Carrying Amount |
|
|
Significant
Unobservable
Inputs (Level 3) |
|
|
Total Fair Value |
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Senior convertible notes(1) |
|
$ |
225.4 |
|
|
$ |
253.9 |
|
|
$ |
253.9 |
|
MidCap credit facility(2) |
|
|
39.3 |
|
|
|
41.1 |
|
|
|
41.1 |
|
Mann Group convertible note(3) |
|
|
8.8 |
|
|
|
20.8 |
|
|
|
20.8 |
|
Milestone rights(4) |
|
|
4.8 |
|
|
|
12.6 |
|
|
|
12.6 |
|
Contingent milestone liability (4) |
|
|
0.6 |
|
|
|
1.0 |
|
|
|
1.0 |
|
_________________________
(1) |
Fair value determined by applying a discounted cash flow analysis to the straight note with a hypothetical yield of 13%, volatility of 75.8% and a Monte Carlo simulation for the value of the conversion feature. A change in yield of + or – 2% would result in a fair value of $245.0 million and $263.4 million, respectively. |
(2) |
Fair value determined by applying a discounted cash flow analysis with a hypothetical yield of 12%. A change in yield of + or – 2% would result in a fair value of $40.0 million and $42.4 million, respectively. |
(3) |
The April 2021 amendment to the Mann Group convertible note resulted in a substantial premium of $22.1 million based on the fair value post modification which was recognized as additional paid-in capital in the consolidated balance sheet as of December 31, 2021. The accounting for the $22.1 million loss on extinguishment did not result in a change in the financial position of the Company. The fair value assessed as of December 31, 2022 was determined by applying a discounted cash flow analysis with a hypothetical yield of 13% and volatility of 77.8% to the straight note and a binomial option pricing model for the value of the conversion feature. A change in yield of + or – 2% would result in a fair value of $20.5 million and $21.2 million, respectively. |
(4) |
Fair value determined by applying a Monte Carlo simulation. |
|
|
December 31, 2021 |
|
|
|
|
|
|
|
Fair Value |
|
|
|
Carrying Value |
|
|
Significant
Unobservable
Inputs (Level 3) |
|
|
Total Fair Value |
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Senior convertible notes (1) |
|
$ |
223.9 |
|
|
$ |
237.5 |
|
|
$ |
237.5 |
|
MidCap credit facility (2) |
|
|
38.8 |
|
|
|
40.8 |
|
|
|
40.8 |
|
Mann Group convertible note(3) |
|
|
18.4 |
|
|
|
37.8 |
|
|
|
37.8 |
|
Milestone Rights (4) |
|
|
5.9 |
|
|
|
18.1 |
|
|
|
18.1 |
|
__________________________
(1) |
Fair value determined by applying a discounted cash flow analysis to the straight note with a hypothetical yield of 12%, volatility of 90% and a Monte Carlo simulation for the value of the conversion feature. A change in yield of + or – 2% would result in a fair value of $226.6 million and $249.4 million, respectively. |
(2) |
Fair value determined by applying a discounted cash flow analysis with a hypothetical yield of 10%. A change in yield of + or – 2% would result in a fair value of $39.1 million and $42.7 million, respectively. |
95
(3) |
The April 2021 amendment to the Mann Group convertible note resulted in a substantial premium of $22.1 million based on the fair value post modification which was recognized as additional paid-in capital in the consolidated balance sheet as of December 31, 2021. The accounting for the $22.1 million loss on extinguishment did not result in a change in the financial position of the Company. The fair value assessed as of December 31, 2021 was determined by applying a discounted cash flow analysis with a hypothetical yield of 12% and volatility of 85% to the straight note and a binomial option pricing model for the value of the conversion feature. A change in yield of + or – 2% would result in a fair value of $36.9 million and $38.8 million, respectively. |
(4) |
Fair value determined by applying a Monte Carlo simulation. |
Milestone Rights Liability — The fair value measurement of the Milestone Rights liability is sensitive to the discount rate and the timing of achievement of milestones. The Company utilized Monte-Carlo Simulation Method to simulate the Afrezza net sales under a neutral framework to estimate the payment. The Company then discounted the future expected payments at cost of debt with a term equal to the simulated time to payout based on cumulative sales.
Contingent milestone liability — The acquisition of V-Go in May 2022 resulted in a contingent milestone liability which could result in obligations to the seller if certain revenue thresholds are met. The initial fair value of the contingent milestone liability was recorded as an adjustment to the purchase price. Subsequent changes in the fair value are reported in general and administrative expenses.
Financing Liability — The failed Sale Leaseback Transaction in November 2021 resulted in a financing liability which is included in the Company’s consolidated balance sheets as a current financing liability of $9.6 million and a long-term financing liability of $94.5 million. The fair value of $103.2 million was determined using level 3 inputs. As of December 31, 2022, the fair value was determined using a discounted cash flow analysis with a hypothetical yield of 10%. As December 31, 2021, the Company evaluated the fair value of its financing liability and determined that the fair value approximates the carrying value.
13. Common and Preferred Stock
The Company is authorized to issue 400,000,000 shares of common stock, par value $0.01 per share, and 10,000,000 shares of undesignated preferred stock, par value $0.01 per share, issuable in one or more series as designated by the Company’s board of directors. No other class of capital stock is authorized. As of December 31, 2022 and 2021, 263,793,305 and 251,477,562 shares of common stock, respectively, were issued and outstanding and no shares of preferred stock were outstanding.
In February 2018, the Company entered into a controlled equity offering sales agreement (the “CF Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor Fitzgerald”), as sales agent, pursuant to which the Company may offer and sell, from time to time, through Cantor Fitzgerald, shares of the Company’s common stock in such amount as may be permitted by the Sales Agreement. The original amount of common stock authorized for sale under the CF Sales Agreement was $50.0 million. Under the Sales Agreement, Cantor Fitzgerald may sell shares by any method deemed to be an “at-the-market offering” as defined in Rule 415 under the Securities Act of 1933, as amended. In February 2022, the Company filed a sales agreement prospectus under a registration statement on Form S-3 (File No. 333-262981) covering the sale of up to $50.0 million of common stock through Cantor Fitzgerald under the CF Sales Agreement. For the year ended December 31, 2022, the Company sold 5,059,856 shares of common stock at a weighted average purchase price of $3.91 per share for gross proceeds of approximately $19.8 million pursuant to the CF Sales Agreement. For the year ended December 31, 2021, the Company sold an aggregate of 578,063 shares of the Company’s common stock at a weighted average purchase price of $3.26 per share for aggregate gross proceeds of approximately $1.9 million pursuant to the Sales Agreement. For the year ended December 31, 2020, the Company sold an aggregate of 11,851,566 shares of the Company’s common stock at a weighted average purchase price of $1.99 per share for aggregate gross proceeds of approximately $23.5 million pursuant to the CF Sales Agreement.
In June 2020, the Company prepaid the June 2020 note with the issuance of 1,235,094 shares of the Company’s common stock, in accordance with the terms of the June 2020 note. In October 2020, the Company prepaid the December 2020 note with the issuance of 1,377,356 shares of the Company’s common stock, in accordance with the terms of the December 2020 note. The number of shares issued for the prepayments in June and October 2020 were determined based on the Company’s closing stock price on the day preceding the settlement date. See Note 10 – Borrowings.
In June 2020, 7,250,000 warrants were exercised at a price of $1.60 per share. The warrants were issued pursuant to an underwriting agreement with Leerink Partners LLC for a public offering of 26,666,667 shares of the Company’s common stock and warrants to purchase up to an aggregate of 26,666,667 shares of the Company’s common stock. There are no remaining warrants outstanding under this agreement.
In the fourth quarter of 2020, the Mann Group converted $3.0 million of accrued interest and $7.0 million of principal under the Mann Group convertible note into 1.2 million shares and 2.8 million shares, respectively, of the Company’s common stock, in accordance with the terms of the convertible note.
In December 2020, the Company issued 111,853 warrants to purchase shares of the Company’s common stock in connection with the third amendment to the Midcap Credit Facility.
In December 2020, the Company issued 3,067,179 shares of the Company’s common stock as consideration for the acquisition of QrumPharma. See Note 3 – Acquisitions.
96
In February 2021, the Company converted $5.0 million principal amount of 2024 convertible notes into 1,666,667 shares of the Company’s common stock.
In October 2021, MidCap exercised 1,171,614 and 111,853 warrants issued in association with Tranches 1 and 2, respectively, under the MidCap credit facility, as amended, to purchase an aggregate of 1,283,467 shares of the Company’s common stock through a cashless exercise that resulted in the net issuance of 964,113 shares. See Note 10 – Borrowings.
In December 31, 2021, the Mann Group converted $0.4 million of interest and $9.6 million of principal into 4.0 million shares of common stock. See Note 10 – Borrowings.
During the year ended December 31, 2021, the Company received $0.1 million from the market price stock purchase plan (“MPSPP”) for 25,000 shares and a de minimis amount during the year ended December 31, 2020.
During the year ended December 31, 2022, pursuant to the terms of the Mann Group convertible note, Mann Group converted $10.0 million of principal and capitalized interest into 4,000,000 shares of common stock. In addition, the Company paid quarterly interest payments on the Mann Group convertible note on April 1, 2022, July 1, 2022 and October 1, 2022 by issuing Mann Group an aggregate of 75,487 shares of common stock.
During the year ended December 31, 2022, the Company received $0.7 million from the market price stock purchase plan (“MPSPP”) for 252,176 shares.
14. Earnings per Common Share (“EPS”)
Basic EPS excludes dilution for potentially dilutive securities and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS 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 EPS as they would be antidilutive.
The following tables summarize the components of the basic and diluted EPS computations (in thousands, except per share amounts):
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
EPS — basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (numerator) |
|
$ |
(87,400 |
) |
|
$ |
(80,926 |
) |
|
$ |
(57,240 |
) |
Weighted average common shares (denominator) |
|
|
257,092 |
|
|
|
249,244 |
|
|
|
222,585 |
|
Net loss per share |
|
$ |
(0.34 |
) |
|
$ |
(0.32 |
) |
|
$ |
(0.26 |
) |
Common shares issuable represents incremental shares of common stock which consist of stock options, restricted stock units, warrants, and shares that could be issued upon conversion of the Senior convertible notes and the Mann Group convertible notes.
Potentially dilutive securities outstanding that are considered antidilutive are summarized as follows (in shares):
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Senior convertible notes |
|
|
44,120,463 |
|
|
|
44,120,463 |
|
|
|
— |
|
Common stock options and PNQs |
|
|
9,074,587 |
|
|
|
10,655,146 |
|
|
|
12,264,616 |
|
Mann Group convertible notes |
|
|
3,370,000 |
|
|
|
7,370,000 |
|
|
|
11,200,000 |
|
Warrants associated with MidCap credit facility |
|
|
— |
|
|
|
— |
|
|
|
1,283,467 |
|
2024 convertible notes |
|
|
— |
|
|
|
— |
|
|
|
1,666,667 |
|
RSUs and Market RSUs(1) |
|
|
18,886,710 |
|
|
|
7,609,025 |
|
|
|
6,037,542 |
|
Employee stock purchase plan |
|
|
— |
|
|
|
243,375 |
|
|
|
292,981 |
|
Total shares |
|
|
75,451,760 |
|
|
|
69,998,009 |
|
|
|
32,745,273 |
|
_________________________
|
|
(1) |
Market RSUs are included at the maximum share delivery percentage. |
15. Stock Award Plans
In May 2018, the Company adopted the 2018 Equity Incentive Plan (the “2018 Plan”) as the successor to and continuation of the 2013 Equity Incentive Plan (the “2013 Plan”). The 2018 Plan initially consisted of 12,000,000 new shares plus the number of unallocated shares remaining available for grant for new awards under the 2013 Plan. In May 2020, the 2018 Plan was amended to increase the number of shares of common stock that may be issued under the 2018 Plan by 12,500,000 shares.
97
Effective upon the approval of the 2018 Plan by the Company’s stockholders in May 2018, no additional awards have been or may be granted under the 2013 Plan. Any Prior Plans’ (as defined below) returning shares will increase the number of shares issuable under the 2018 Plan. The Prior Plans’ returning shares are shares subject to outstanding stock awards granted under the 2013 Plan or the 2004 Equity Incentive Plan (collectively, “Prior Plans”) that, from and after the effective date of the 2018 Plan, (i) expire or terminate for any reason prior to exercise or settlement, (ii) are forfeited, cancelled or otherwise returned to the Company because of the failure to meet a contingency or condition required for the vesting of such shares, or (iii) other than with respect to outstanding stock options and stock appreciation rights granted under the Prior Plans with an exercise or strike price of at least 100% of the fair market value of the underlying common stock on the date of grant, are reacquired or withheld (or not issued) by the Company to satisfy a tax withholding obligation in connection with a stock award.
The 2018 Plan provides for the granting of stock awards including stock options and restricted stock units to employees, directors and consultants.
The Company’s board of directors or its compensation committee determines eligibility, vesting schedules and criteria, and exercise prices for stock awards granted under the 2018 Plan. Options and restricted stock unit awards under the 2018 Plan, or the Prior Plans expire not more than ten years from the date of the grant and are exercisable upon vesting. Stock options that vest over time generally vest over four years. Current time-based vesting stock option grants vest and become exercisable at the rate of 25% after one year and ratably on a monthly basis over a period of 36 months thereafter. The Company also issues PNQ awards with performance conditions. For PNQs, the Company evaluates the probability that the performance conditions will be met and estimates the service period for recognition of the associated expense. RSUs with time-based vesting generally vest at a rate of 25% per year over four years with consideration satisfied by service to the Company. Certain RSUs issued to nonemployee directors vest immediately upon grant, but the underlying shares of common stock will not be delivered until there is a separation of service such as resignation, retirement or death. The Company also issued Market RSUs. The grant date fair value and the effect of the market conditions was estimated using a Monte Carlo valuation.
Market RSUs issued during the year ended December 31, 2022 had a grant date fair value of $6.10 per share and will vest on May 10, 2025 provided that the closing price of the Company’s common stock on such vesting date is not less than the closing price on May 10, 2022. The fair value of the Market RSUs was determined using a share price of $2.95, risk-free interest rate of 2.81%, volatility of 75%, and a dividend yield of 0%. The number of shares delivered on the vesting date is determined by the percentile ranking of MannKind total shareholder return (TSR) over the period from May 10, 2022 until May 10, 2025 relative to the TSR of the Russell 3000 Pharmaceutical & Biotechnology Index over the same period, as follows: less than 25th percentile=0% of target, 25th percentile=50% of target, 50th percentile=100% of target, 75th percentile=200% of target, 90th percentile or higher=300% maximum. Payout values will be interpolated between the percentile rankings above. The resulting stock-based compensation expense will be recognized over the service period regardless of whether the market conditions are achieved, as long as the service condition is satisfied.
The following table summarizes information about the Company’s stock-based award plans as of December 31, 2022:
|
|
Outstanding
Options |
|
|
Outstanding
Restricted
Stock Units |
|
|
Shares Available
for Future
Issuance |
|
2004 Equity Incentive Plan |
|
|
1,320 |
|
|
|
— |
|
|
|
— |
|
2013 Equity Incentive Plan |
|
|
3,240,690 |
|
|
|
— |
|
|
|
— |
|
2018 Equity Incentive Plan |
|
|
5,832,577 |
|
|
|
11,838,329 |
|
|
|
2,802,796 |
|
Total |
|
|
9,074,587 |
|
|
|
11,838,329 |
|
|
|
2,802,796 |
|
Share-based payment transactions are recognized as compensation cost based on the fair value of the instrument on the date of grant. The Company uses the Black-Scholes option valuation model to estimate the grant date fair value of employee stock options. The expected term of an option granted is based on combining historical exercise data with expected weighted time outstanding. Expected weighted time outstanding is calculated by assuming the settlement of outstanding awards is at the midpoint between the remaining weighted average vesting date and the expiration date. The Company recognizes forfeitures as they occur. During the years ended December 31, 2022, 2021 and 2020, the Company recorded RSU and option-based stock compensation expense of $12.8 million, $11.5 million and $6.2 million, respectively and employee stock purchase plan compensation of $0.6 million, $0.7 million and $0.3 million, respectively.
Total stock-based compensation expense recognized in the accompanying consolidated statements of operations is included in the following categories (in thousands):
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Cost of goods sold |
|
$ |
329 |
|
|
$ |
407 |
|
|
$ |
446 |
|
Cost of revenue — collaborations and services |
|
|
1,425 |
|
|
|
1,708 |
|
|
|
626 |
|
Research and development |
|
|
1,044 |
|
|
|
614 |
|
|
|
338 |
|
Selling |
|
|
1,194 |
|
|
|
2,578 |
|
|
|
1,158 |
|
General and administrative |
|
|
9,455 |
|
|
|
6,893 |
|
|
|
3,943 |
|
Total |
|
$ |
13,447 |
|
|
$ |
12,200 |
|
|
$ |
6,511 |
|
98
The expected volatility assumption used in the Company’s Black-Sholes option valuation model is based on an assessment of the historical volatility derived from an analysis of historical trade activity. The Company has selected risk-free interest rates based on U.S. Treasury securities with an equivalent expected term in effect on the date the options were granted. Additionally, the Company uses historical data and management judgment to estimate stock option exercise behavior and employee turnover rates to estimate the number of stock option awards that will eventually vest. There were no options issued in the years ended December 31, 2022 and 2021. The Company calculated the fair value of employee stock options granted during the year ended December 31, 2020 using the following assumptions:
|
|
Year Ended December 31, |
|
|
|
2020 |
|
Risk-free interest rate |
|
0.39% — 1.52% |
|
Expected lives |
|
5.67 — 7.0 years |
|
Volatility |
|
93.83% — 94.25% |
|
Dividends |
|
|
— |
|
The following table summarizes information relating to stock options:
|
|
Number of
Shares |
|
|
Weighted
Average Exercise
Price per Share |
|
|
Weighted
Average
Remaining
Contractual
Term
(Years) |
|
|
Aggregate
Intrinsic
Value ($000) |
|
Outstanding at January 1, 2022 |
|
|
10,732,513 |
|
|
$ |
3.01 |
|
|
|
5.49 |
|
|
$ |
34,543 |
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,196,391 |
) |
|
|
1.79 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(116,767 |
) |
|
|
1.82 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(344,768 |
) |
|
|
6.31 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2022 |
|
|
9,074,587 |
|
|
$ |
3.06 |
|
|
|
5.10 |
|
|
$ |
29,512 |
|
Exercisable at December 31, 2022 |
|
|
7,776,518 |
|
|
$ |
3.23 |
|
|
|
5.15 |
|
|
$ |
25,315 |
|
There were no options granted in the years ended December 31, 2022 and 2021. The weighted average grant date fair value of the stock options granted during the year ended December 31, 2020 was $0.97. Total fair value of stock options vested during the years ended December 31, 2022, 2021 and 2020 was 3.2 million, $2.3 million and $4.5 million, respectively. The total intrinsic value of options exercised during the years ended December 31, 2022, 2021 and 2020 was $2.4 million, $1.7 million and $0.5 million, respectively. Intrinsic value is measured using the fair market value at the date of exercise for options exercised or at December 31 for outstanding options, less the applicable exercise price.
Cash received from the exercise of options during the years ended December 31, 2022, 2021 and 2020 was approximately $3.0 million, $1.0 million and $0.6 million, respectively.
As of December 31, 2022, 2021 and 2020, the Company recognized $0.1 million, $0.1 million and $0.2 million, respectively, of compensation costs related to the performance-based stock options. As of December 31, 2022 and 2021, there were $0.2 million and $0.3 million, respectively of unrecognized compensation costs related to performance-based stock options subject to performance conditions.
The following table summarizes information relating to restricted stock units:
|
|
Number of
Shares |
|
|
Weighted
Average
Grant Date
Fair Value
per Share |
|
Outstanding at January 1, 2022 |
|
|
9,538,032 |
|
|
$ |
3.40 |
|
Granted |
|
|
5,120,682 |
|
|
|
3.95 |
|
Vested |
|
|
(1,551,088 |
) |
|
|
2.82 |
|
Forfeited |
|
|
(1,269,297 |
) |
|
|
3.97 |
|
Outstanding at December 31, 2022 |
|
|
11,838,329 |
|
|
|
3.65 |
|
Total fair value of restricted stock units vested during the years ended December 31, 2022, 2021 and 2020 was $4.4 million $6.7 million and $2.5 million, respectively. Intrinsic value of restricted stock units vested is measured using the closing share price on the day prior to the vest date. The total grant date fair value of restricted stock units outstanding as of December 31, 2022, 2021 and 2020 was $43.2 million, $19.3 million and $13.3 million, respectively.
As of December 31, 2022, there was $0.6 million of unrecognized compensation expense related to options and PNQs and $25.0 million of unrecognized compensation expense related to restricted stock units and market based stock units, which are expected to be recognized over the weighted average period of 2.08 to 2.22 years. The Company evaluates stock awards with performance conditions as to the probability that
99
the performance conditions will be met and uses that information to estimate the date at which those performance conditions will be met in order to properly recognize stock-based compensation expense over the requisite service period.
Employee Stock Purchase Plan
The Company provides all employees, including executive officers, the ability to purchase its common stock at a discount under the Company’s 2004 employee stock purchase plan (the “ESPP”). The ESPP is designed to comply with Section 423 of the Internal Revenue Code (“IRC”) and provides all employees with the opportunity to purchase up to $25,000 worth of common stock (based on the undiscounted fair market value at the commencement of the offering period) each year at a purchase price that is the lower of 85% of the fair market value of the common stock on either the date of purchase or the commencement of the offering period. An employee may not purchase more than 5,000 shares of common stock on any purchase date. The executives’ rights under the ESPP are identical to those of all other employees.
The Company issued 0.7 million, 0.5 million and 0.6 million shares of common stock pursuant to the ESPP for the years ended December 31, 2022, 2021 and 2020, respectively. There were approximately 0.4 million shares of common stock available for issuance under the ESPP as of December 31, 2022.
16. Commitments and Contingencies
Guarantees and Indemnifications — In the ordinary course of its business, the Company makes certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. The Company, as permitted under Delaware law and in accordance with its Bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that may enable it to recover a portion of any future amounts paid. The Company believes the fair value of these indemnification agreements is minimal. The Company has not recorded any liability for these indemnities in the accompanying consolidated balance sheets. However, the Company accrues for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable and the amount can be reasonably estimated. No such losses have been recorded to date.
Litigation — The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. As of December 31, 2022, the Company believes that the final disposition of such matters will not have a material adverse effect on the financial position, results of operations or cash flows of the Company and no accrual has been recorded. The Company maintains liability insurance coverage to protect the Company’s assets from losses arising out of or involving activities associated with ongoing and normal business operations. The Company records a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company’s policy is to accrue for legal expenses in connection with legal proceedings and claims as they are incurred.
Contingencies — In July 2013, the Company entered into the Milestone Rights Agreement with the Original Milestone Purchasers, pursuant to which the Company granted the Milestone Rights to receive payments up to $90.0 million upon the occurrence of specified strategic and sales milestones, $60.0 million of which remains payable to the Original Purchasers upon achievement of such milestones (see Note 10 — Borrowings). As of December 31, 2022, the initial fair value of the Milestone Rights is recorded in the consolidated balance sheet, including $0.9 million in accrued expenses and other current liabilities and $3.9 million in milestone rights liability.
Sale-Leaseback Transaction — In November 2021, the Company sold the Property to the Purchaser for a sales price of $102.3 million, subject to terms and the conditions contained in a purchase and sale agreement.
Effective with the closing of the Sale-Leaseback Transaction, the Company and the Purchaser entered into a lease agreement (the “Lease”), pursuant to which the Company leased the Property from the Purchaser for an initial term of 20 years, with four renewal options of five years each. The total annual rent under the Lease starts at approximately $9.5 million per year, subject to a 50% rent abatement during the first year of the Lease, and will increase annually by (i) 2.5% in the second through fifth year of the Lease and (ii) 3% in the sixth and each subsequent year of the Lease, including any renewal term. The Company is responsible for payment of operating expenses, property taxes and insurance for the Property. The Purchaser will hold a security deposit of $2.0 million during the Lease term. Pursuant to the terms of the Lease, the Company has four options to repurchase the Property, in 2026, 2031, 2036 and 2041, for the greater of (i) $102.3 million and (ii) the fair market value of the Property.
Effective with the closing of the Sale-Leaseback Transaction, the Company and the Purchaser also entered into a right of first refusal agreement (the “ROFR”), pursuant to which the Company has a right to re-purchase the Property from the Purchaser in accordance with terms and conditions set forth in the ROFR. Specifically, if the Purchaser receives, and is willing to accept, a bona fide purchase offer for the Property from a third-party purchaser, the Company has certain rights of first refusal to purchase the Property on the same material terms as proposed in such bona fide purchase offer.
As of December 31, 2022, the related financing liability was $104.1 million, which was recognized in the Company’s consolidated balance sheet as $94.5 million of financing liability — long-term and $9.6 million of financing liability — short-term. As of December 31,
100
2021, the related financing liability was $100.5 million, which was recognized in our consolidated balance sheet as $93.5 million of financing liability — long-term and $7.0 million of financing liability — short-term.
Financing liability information is as follows (in thousands):
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
Weighted average remaining lease term (in years) |
|
|
18.8 |
|
|
|
19.8 |
|
Weighted average discount rate |
|
|
9.0 |
% |
|
|
9.0 |
% |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Interest expense on financing liability |
|
$ |
9,758 |
|
|
$ |
1,373 |
|
Financing liability payments as of December 31, 2022 was as follows (in thousands):
|
|
December 31, 2022 |
|
2023 |
|
$ |
9,774 |
|
2024 |
|
|
10,018 |
|
2025 |
|
|
10,269 |
|
2026 |
|
|
10,533 |
|
2027 |
|
|
10,849 |
|
Thereafter |
|
|
188,453 |
|
Total |
|
|
239,896 |
|
Interest payments |
|
|
(132,936 |
) |
Debt issuance costs |
|
|
(2,883 |
) |
Total financing liability |
|
$ |
104,077 |
|
Commitments — In July 2014, the Company entered into the Insulin Supply Agreement with Amphastar pursuant to which Amphastar manufactures for and supplies to the Company certain quantities of recombinant human insulin for use in Afrezza. Under the terms of the Insulin Supply Agreement, Amphastar is responsible for manufacturing the insulin in accordance with the Company’s specifications and agreed-upon quality standards.
In May 2021, the Company and Amphastar amended the Insulin Supply Agreement to extend the term and restructure the annual purchase commitments. In connection with the amendment, the Company agreed to pay $2.0 million of amendment fees, which were recognized in cost of goods sold for the year ended December 31, 2021. The remaining purchase commitments as of December 31, 2022 were as follows ( € in millions):
|
December 31, 2022 |
|
2023 |
|
|
8.8 |
|
2024 |
|
|
14.6 |
|
2025 |
|
|
15.5 |
|
2026 |
|
|
19.4 |
|
2027 |
|
|
9.2 |
|
Pursuant to the amendment, the term of the Insulin Supply Agreement expires on December 31, 2027, unless terminated earlier, and can be renewed for additional, successive two-year terms upon 12 months’ written notice given prior to the end of the initial term or any additional two-year term. The Company and Amphastar each have normal and customary termination rights, including termination for a material breach that is not cured within a specific time frame or in the event of liquidation, bankruptcy or insolvency of the other party. In addition, the Company may terminate the Insulin Supply Agreement upon two years’ prior written notice to Amphastar without cause or upon 30 days’ prior written notice to Amphastar if a controlling regulatory authority withdraws approval for Afrezza, provided, however, in the event of a termination pursuant to either of the latter two scenarios, the provisions of the Insulin Supply Agreement require the Company to pay the full amount of all unpaid purchase commitments due over the initial term within 60 calendar days of the effective date of such termination.
Vehicle Leases – During the second quarter of 2018, the Company entered into a lease agreement with Enterprise Fleet Management Inc. During 2021, 85 vehicles were retired and all of those vehicles were replaced, resulting in a fleet size of 89 vehicles. The Company received proceeds for the gain on the retired vehicles residual value in the amount of $0.5 million, which is included as a reduction to the Company’s lease expense. The revised monthly payment inclusive of maintenance fees, insurance and taxes is approximately $0.1 million. The lease expense is included in selling expenses in the consolidated statements of operations.
Office Leases — In May 2017, the Company executed an office lease with Russell Ranch Road II LLC for offices in Westlake Village, California. The office lease commenced in August 2017. The Company agreed to pay initial monthly lease payments of $40,951, subject to 3% annual increases, plus the estimated cost of maintaining the property and common areas by the landlord, with a five-month concession from
101
October 2017 through February 2018. The lease also provides for allowances for tenant alterations and maintenance. The lease expense is included in general and administrative expenses in the accompanying consolidated statement of operations.
In November 2017, the Company executed an office lease with Russell Ranch Road II LLC to expand the office space for the Company’s corporate offices in Westlake Village, California which was renewed in April 2022. Pursuant to the renewal, the Company will pay initial monthly lease payments of $79,543, beginning in February 2023, subject to a 3% annual increase, plus the estimated operating cost of maintaining the property by the landlord. The Company will receive a six-month concession at the start of the lease extension period on July 31, 2023. The Company has no further right to extend the lease term beyond the extension period.
The Company assumed certain leased real property (the “Marlborough Lease”) pursuant to the APA entered into in May 2022. The Marlborough Lease pertains to certain premises in a building located in Marlborough, Massachusetts. The Company has paid initial monthly payments of $28,895, beginning in June 2022, subject to approximately 3% annual increases through February 28, 2026.
The Company also acquired rights to a manufacturing service agreement where V-Go is manufactured using Company-owned equipment located at the manufacturing facility. The Company determined that this arrangement results in an embedded lease which grants the Company exclusive use of space within the manufacturing facility. The Company assessed the embedded lease cost to be $14,370 per month through February 28, 2026.
Lease information is as follows (in thousands):
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
Operating lease right-of-use assets(1) |
|
$ |
6,714 |
|
|
$ |
2,284 |
|
|
|
|
|
|
|
|
|
|
Operating lease liability-current (2) |
|
$ |
1,304 |
|
|
$ |
1,380 |
|
Operating lease liability-long-term |
|
|
5,343 |
|
|
|
1,040 |
|
Total |
|
$ |
6,647 |
|
|
$ |
2,420 |
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in years) |
|
|
4.6 |
|
|
|
2.6 |
|
Weighted average discount rate |
|
|
7.3 |
% |
|
|
7.3 |
% |
__________________________
(1) |
Operating right-of-use assets related to vehicles, offices and the manufacturing facility are included in other assets in the consolidated balance sheets. |
(2) |
Operating lease liability – current are included in accrued expenses and other current liabilities in the consolidated balance sheets. |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Operating lease costs |
|
$ |
1,525 |
|
|
$ |
863 |
|
|
$ |
1,403 |
|
Variable lease costs |
|
|
274 |
|
|
|
515 |
|
|
|
394 |
|
Cash paid |
|
|
1,823 |
|
|
|
1,867 |
|
|
|
1,797 |
|
Future minimum office and vehicle lease payments as of December 31, 2022 are as follows (in thousands):
|
|
December 31, 2022 |
|
2023 |
|
$ |
1,368 |
|
2024 |
|
|
1,892 |
|
2025 |
|
|
1,861 |
|
2026 |
|
|
1,140 |
|
2027 |
|
|
1,072 |
|
Thereafter |
|
|
643 |
|
Total |
|
|
7,976 |
|
Interest expense |
|
|
(1,329 |
) |
Total operating lease liability |
|
$ |
6,647 |
|
17. Employee Benefit Plans
The Company administers a defined contribution 401(k) savings retirement plan for its employees. The Company may make discretionary matching contributions. For the years ended December 31, 2022 and 2021, the Company matched each participant’s deferral at the rate of 50% of each participant’s deferral up to the first 10% of compensation. Participants hired after March 31, 2021 became vested in Company contributions at 100% after two years of service. For the year ended December 31, 2020, the Company matched each participant’s deferral at the rate of 50% of each participant’s deferral up to the first 6% of compensation. Participants are vested in Company contributions at 50% after one year of service and are 100% vested after two years of service.
The Company’s total discretionary matching contributions were $1.8 million, $1.5 million and $0.9 million for the years ended December 31, 2022, 2021 and 2020, respectively.
102
18. Income Taxes
Loss from continuing operations before provision for income taxes for the Company’s domestic and international operations was as follows (in thousands):
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
United States |
|
$ |
(87,400 |
) |
|
$ |
(80,926 |
) |
|
$ |
(57,458 |
) |
Foreign |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Loss before provision for income taxes |
|
$ |
(87,400 |
) |
|
$ |
(80,926 |
) |
|
$ |
(57,458 |
) |
At December 31, 2022, the Company has concluded that it is more likely than not that the Company may not realize the benefit of its deferred tax assets due to its history of losses. The Company has incurred operating losses since inception. Accordingly, the net deferred tax assets have been fully reserved. The provision for income taxes consists of the following (in thousands):
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
U.S. state |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Non-U.S. |
|
|
— |
|
|
|
— |
|
|
|
(218 |
) |
Total current |
|
|
— |
|
|
|
— |
|
|
|
(218 |
) |
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
|
(5,606 |
) |
|
|
(5,170 |
) |
|
|
(4,377 |
) |
U.S. state |
|
|
(4,334 |
) |
|
|
(14,461 |
) |
|
|
(469 |
) |
Non-U.S. |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total deferred |
|
|
(9,940 |
) |
|
|
(19,631 |
) |
|
|
(4,846 |
) |
Valuation allowance |
|
|
9,940 |
|
|
|
19,631 |
|
|
|
4,846 |
|
Total |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(218 |
) |
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established when uncertainty exists as to whether all or a portion of the net deferred tax assets will be realized. Components of the net deferred tax assets as of December 31, 2022 and 2021, are approximately as follows (in thousands):
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
542,537 |
|
|
$ |
542,800 |
|
Research and development credits |
|
|
78,804 |
|
|
|
78,804 |
|
Capitalized research costs |
|
|
4,369 |
|
|
|
- |
|
Milestone Rights |
|
|
1,331 |
|
|
|
1,440 |
|
Accrued expenses |
|
|
2,675 |
|
|
|
2,591 |
|
Loss on purchase commitment |
|
|
23,117 |
|
|
|
24,845 |
|
Non-qualified stock option expense |
|
|
7,686 |
|
|
|
5,684 |
|
Capitalized patent costs |
|
|
8,058 |
|
|
|
7,518 |
|
Other |
|
|
3,204 |
|
|
|
2,568 |
|
Lease liability |
|
|
1,624 |
|
|
|
588 |
|
Interest expense limitation |
|
|
10,991 |
|
|
|
5,696 |
|
Depreciation |
|
|
22,157 |
|
|
|
22,983 |
|
Deferred Product Revenue & Costs |
|
|
370 |
|
|
|
404 |
|
Total net deferred tax assets |
|
|
706,923 |
|
|
|
695,921 |
|
Valuation allowance |
|
|
(705,034 |
) |
|
|
(695,094 |
) |
Net deferred tax assets |
|
$ |
1,889 |
|
|
$ |
827 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Right of use asset |
|
$ |
(1,640 |
) |
|
$ |
(555 |
) |
Other prepaids |
|
|
(249 |
) |
|
|
(272 |
) |
Total deferred tax liabilities |
|
|
(1,889 |
) |
|
|
(827 |
) |
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
103
The Company’s effective tax rate differs from the statutory federal income tax rate as follows for the years ended December 31, 2022, 2021 and 2020:
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Federal tax benefit rate |
|
|
21.0 |
% |
|
|
21.0 |
% |
|
|
21.0 |
% |
Permanent items |
|
|
-1.2 |
% |
|
|
-4.4 |
% |
|
|
-6.1 |
% |
Stock based compensation |
|
|
0.4 |
% |
|
|
0.3 |
% |
|
|
-0.5 |
% |
Tax attribute expirations |
|
|
-13.2 |
% |
|
|
-5.9 |
% |
|
|
-6.6 |
% |
Foreign withholding tax |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.4 |
% |
Valuation allowance |
|
|
-7.2 |
% |
|
|
-11.2 |
% |
|
|
-7.8 |
% |
Other |
|
|
0.2 |
% |
|
|
0.2 |
% |
|
|
0.0 |
% |
Effective income tax rate |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.4 |
% |
As of December 31, 2022 and 2021, management assessed the realizability of deferred tax assets. Management evaluated the need for an amount of any valuation allowance for deferred tax assets on a jurisdictional basis. This evaluation utilizes the framework contained in ASC 740, Income Taxes, wherein management analyzes all positive and negative evidence available at the balance sheet date to determine whether all or some portion of our deferred tax assets will not be realized. Under this guidance, a valuation allowance must be established for deferred tax assets when it is more likely than not (a probability level of more than 50 percent) that they will not be realized. In assessing the realization of the Company's deferred tax assets, the Company considers all available evidence, both positive and negative.
In concluding on the evaluation, management placed significant emphasis on guidance in ASC 740, which states that “a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome.” Based upon available evidence as of December 31, 2022, it was concluded on a more-likely-than-not basis that all deferred tax assets were not realizable. Accordingly, a valuation allowance of $705.0 million has been recorded to offset this deferred tax asset. During the years ended December 31, 2022 and 2021, the change in valuation allowance was $9.9 million and $19.6 million, respectively.
As of December 31, 2022, the Company had federal and state net operating loss carryforwards of approximately $2.2 billion and $1.7 billion available, respectively, to reduce future taxable income. $499.6 million of the federal losses do not expire and the remaining federal losses have started expiring, beginning in the current year through various future dates.
Pursuant to IRC Sections 382 and 383, annual use of the Company’s federal and California net operating loss and research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. As a result of the Company's initial public offering, an ownership change within the meaning of IRC Section 382 occurred in August 2004. As a result, federal net operating loss and credit carryforwards of approximately $105.8 million are subject to an annual use limitation of approximately $13.0 million. The annual limitation is cumulative and therefore, if not fully utilized in a year can be utilized in future years in addition to the Section 382 limitation for those years. We have completed a Section 382 analysis beginning from the date of our initial public offering through December 31, 2022, to determine whether additional limitations may be placed on the net operating loss carryforwards and other tax attributes, and no additional changes in ownership that met Section 382 study ownership change threshold has been identified through December 31, 2022. There is a risk that changes in ownership may occur in tax years after December 31, 2022. If a change in ownership were to occur, our net operating loss carryforwards and other tax attributes could be further limited or restricted. If limited, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance. Due to the existence of the valuation allowance, limitations created by future ownership changes, if any, related to the Company’s operations in the U.S. will not impact the Company’s effective tax rate.
At December 31, 2022, the Company had $54.2 million of U.S. federal research and development credits which expire beginning in 2024, and $24.6 million of state research and development credits. The California credits are indefinite and do not expire and $0.2 million of the available New Jersey credits expire at the end of 2023. The Company also had two types of credits in Connecticut of which $19.8 million do not expire and the $1.1 million of the R&D credit expire at the end of 2023.
The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. In the normal course of business the Company is subject to examination by taxing authorities throughout the country. These audits could include examining the timing and amount of deductions, the allocation of income among various tax jurisdictions and compliance with federal, state, and local tax laws. The Company's tax years since 2018 remain subject to examination by federal, state and foreign tax authorities.
104
A reconciliation of beginning and ending amounts of unrecognized tax benefits in 2022, 2021 and 2020, respectively, was as follows (in thousands):
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Unrecognized Tax Benefit |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of Year |
|
$ |
268,902 |
|
|
$ |
268,902 |
|
|
$ |
— |
|
Gross increases for tax positions of prior years |
|
|
— |
|
|
|
— |
|
|
|
268,902 |
|
Gross decreases for tax positions of current year |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Settlements |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Lapse of statute of limitations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
End of Year |
|
$ |
268,902 |
|
|
$ |
268,902 |
|
|
$ |
268,902 |
|
At December 31, 2022, 2021 and 2020, the Company has not recognized a liability for unrecognized tax benefits. If any were recognized, it would affect the Company’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2022, 2021 and 2020, the Company did not recognize any interest and/or penalties.
105