MANNKIND CORP 10-Q

ITEM 1. FINANCIAL STATEMENTS MANNKIND CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except per share data) September 30, 2020 December 31, 2019 ASSETS Current assets: Cash and cash equivalents $ 52,398 $ 29,906 Restricted cash 316 316 Short-term investments — 19,978 Accounts receivable, net 4,135 3,513 Inventory 4,881 4,155 Prepaid expenses and other current assets 4,616 2,889 Total current assets 66,346 60,757 Property and equipment, net 25,736 26,778 Other assets 3,599 6,190 Total assets $ 95,681 $ 93,725 LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 5,797 $ 4,789 Accrued expenses and other current liabilities 15,814 15,904 Short-term notes payable 45,379 5,028 Deferred revenue — current 28,867 32,503 Recognized loss on purchase commitments — current 10,267 7,394 Total current liabilities 106,124 65,618 Promissory notes 70,025 70,020 Accrued interest — promissory notes 5,854 2,002 Long-term Midcap credit facility — 38,851 Senior convertible notes 5,000 5,000 Paycheck Protection Program loan — long term 1,421 — Recognized loss on purchase commitments — long term 84,529 84,639 Operating lease liability 1,523 2,514 Deferred revenue — long term 1,699 8,344 Milestone rights liability 5,926 7,263 Total liabilities 282,101 284,251 Commitments and contingencies (Note 11) Stockholders' deficit: Undesignated preferred stock, $ 0.01 par value — 10,000,000 shares authorized; no shares issued or outstanding as of September 30, 2020 and December 31, 2019 — — Common stock, $ 0.01 par value - 400,000,000 and 280,000,000 shares authorized, 230,922,513 and 211,787,573 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively 2,309 2,118 Additional paid-in capital 2,834,003 2,799,278 Accumulated other comprehensive loss — ( 19 ) Accumulated deficit ( 3,022,732 ) ( 2,991,903 ) Total stockholders' deficit ( 186,420 ) ( 190,526 ) Total liabilities and stockholders' deficit $ 95,681 $ 93,725 See notes to condensed consolidated financial statements. 2 MANNKIND CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenues: Net revenue — commercial product sales $ 7,275 $ 6,402 $ 22,260 $ 17,543 Revenue — collaborations and services 8,077 8,193 24,441 29,502 Total revenues 15,352 14,595 46,701 47,045 Expenses: Cost of goods sold 3,591 7,099 11,432 15,446 Cost of revenue — collaborations and services 1,581 1,836 6,926 5,512 Research and development 1,484 1,580 4,703 4,879 Selling, general and administrative 13,899 16,666 41,919 58,948 Asset impairment — — 1,889 — Loss (gain) on foreign currency translation 3,927 ( 3,807 ) 3,998 ( 4,495 ) Total expenses 24,482 23,374 70,867 80,290 Loss from operations ( 9,130 ) ( 8,779 ) ( 24,166 ) ( 33,245 ) Other (expense) income: Interest income 18 220 165 794 Interest expense on notes ( 1,057 ) ( 4,126 ) ( 3,212 ) ( 5,283 ) Interest expense on promissory notes ( 1,318 ) ( 1,162 ) ( 3,858 ) ( 3,351 ) Gain on extinguishment of debt — 3,529 — 3,529 Other income (expense) 14 ( 52 ) 24 ( 84 ) Total other expense ( 2,343 ) ( 1,591 ) ( 6,881 ) ( 4,395 ) Loss before provision for income taxes ( 11,473 ) ( 10,370 ) ( 31,047 ) ( 37,640 ) Benefit for income taxes 218 — 218 — Net loss $ ( 11,255 ) $ ( 10,370 ) $ ( 30,829 ) $ ( 37,640 ) Net loss per share - basic and diluted $ ( 0.05 ) $ ( 0.05 ) $ ( 0.14 ) $ ( 0.20 ) Shares used to compute basic and diluted net loss per share 229,668 199,906 218,559 191,786 See notes to condensed consolidated financial statements. 3 MANNKIND CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) (In thousands) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net loss $ ( 11,255 ) $ ( 10,370 ) $ ( 30,829 ) $ ( 37,640 ) Other comprehensive loss: Cumulative translation loss — ( 1 ) ( 19 ) ( 1 ) Comprehensive loss $ ( 11,255 ) $ ( 10,371 ) $ ( 30,848 ) $ ( 37,641 ) See notes to condensed consolidated financial statements. 4 MANNKIND CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (Unaudited) (In thousands) Common Stock Additional Paid-In Accumulated Other Comprehensive Accumulated Shares Amount Capital Loss Deficit Total BALANCE, JANUARY 1, 2019 187,030 $ 1,870 $ 2,763,067 $ ( 19 ) $ ( 2,940,000 ) $ ( 175,082 ) Net issuance of common stock associated with stock options and restricted stock units 66 1 1 — — 2 Issuance of common stock under Employee Stock Purchase Plan 296 3 314 — — 317 Stock-based compensation expense — — 999 — — 999 Issuance of common stock pursuant to conversion of Senior Convertible Notes 386 4 534 — — 538 Restricted stock unit award — — 105 — — 105 Net loss — — — — ( 14,883 ) ( 14,883 ) BALANCE, MARCH 31, 2019 187,778 $ 1,878 $ 2,765,020 $ ( 19 ) $ ( 2,954,883 ) $ ( 188,004 ) Net issuance of common stock associated with stock options and restricted stock units 101 1 14 — — 15 Stock-based compensation expense — — 2,568 — — 2,568 Issuance of common stock in at the market offering 1,568 15 1,835 — — 1,850 Issuance costs associated with at the market offering — — ( 41 ) — — ( 41 ) Net loss — — — — ( 12,387 ) ( 12,387 ) BALANCE, JUNE 30, 2019 189,447 $ 1,894 $ 2,769,396 $ ( 19 ) $ ( 2,967,270 ) $ ( 195,999 ) Net issuance of common stock associated with stock options and restricted stock units 576 6 25 — — 31 Issuance of common stock under Employee Stock Purchase Plan 356 4 335 — — 339 Stock-based compensation expense — — 1,640 — — 1,640 Issuance of common stock pursuant to conversion of Senior Convertible Notes 4,525 45 4,992 — — 5,037 Issuance of common stock pursuant to conversion of Facility Financing Obligation 4,193 42 4,533 — — 4,575 Issuance of common stock pursuant to conversion of Promissory Notes 7,143 71 7,929 — — 8,000 Issuance of common stock in at-the-market offering 168 2 186 — — 188 Issuance of warrants pursuant to Credit facility — — 1,854 — — 1,854 Cumulative translation loss — — — ( 1 ) — ( 1 ) Net loss — — — — ( 10,370 ) ( 10,370 ) BALANCE, SEPTEMBER 30, 2019 206,408 $ 2,064 $ 2,790,890 $ ( 20 ) $ ( 2,977,640 ) $ ( 184,706 ) 5 Common Stock Additional Paid-In Accumulated Other Comprehensive Accumulated Shares Amount Capital Loss Deficit Total BALANCE, JANUARY 1, 2020 211,788 $ 2,118 $ 2,799,278 $ ( 19 ) $ ( 2,991,903 ) $ ( 190,526 ) Issuance of common stock under Employee Stock Purchase Plan 334 3 315 — — 318 Stock-based compensation expense — — 1,128 — — 1,128 Issuance of common stock associated with debt interest payment 99 1 143 — — 144 Net issuance of common stock associated with stock options and restricted stock units 504 5 ( 322 ) — — ( 317 ) Issuance of common stock in at the market offering 413 4 518 — — 522 Issuance cost associated with at the market offering — — ( 16 ) — — ( 16 ) Write-off of cumulative translation loss — — — 19 — 19 Net loss — — — — ( 9,322 ) ( 9,322 ) BALANCE, MARCH 31, 2020 213,138 $ 2,131 $ 2,801,044 $ — $ ( 3,001,225 ) $ ( 198,050 ) Stock-based compensation expense — — 2,185 — — 2,185 Issuance of common stock from the exercise of warrants 7,250 73 11,527 — — 11,600 Issuance of common stock pursuant to conversion of the June 2020 note 1,235 12 2,618 — — 2,630 Net issuance of common stock associated with stock options and restricted stock units 297 3 114 — — 117 Issuance of common stock in at the market offering 7,459 75 12,291 — — 12,366 Issuance cost associated with at the market offering — — ( 320 ) — — ( 320 ) Issuance of common stock from market price stock purchase 10 — 14 — — 14 Adjustment of common stock in association with restricted stock units ( 461 ) ( 5 ) 5 — — — Net loss — — — — ( 10,252 ) ( 10,252 ) BALANCE, JUNE 30, 2020 228,928 $ 2,289 $ 2,829,478 $ — $ ( 3,011,477 ) $ ( 179,710 ) Stock-based compensation expense — — 1,294 — — 1,294 Issuance of common stock associated with debt interest payment 89 1 143 — — 144 Net issuance of common stock associated with stock options and restricted stock units 82 1 100 — — 101 Issuance of common stock in at the market offering 1,531 15 2,664 — — 2,679 Issuance cost associated with at the market offering — — ( 39 ) — — ( 39 ) Issuance of common stock under Employee Stock Purchase Plan 293 3 363 — — 366 Net loss — — — — ( 11,255 ) ( 11,255 ) BALANCE, SEPTEMBER 30, 2020 230,923 $ 2,309 $ 2,834,003 $ — $ ( 3,022,732 ) $ ( 186,420 ) See notes to condensed consolidated financial statements. 6 MANNKIND CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Nine Months Ended September 30, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 30,829 ) $ ( 37,640 ) Adjustments to reconcile net loss to net cash used in operating activities: Interest expense on promissory notes 3,852 3,517 Stock-based compensation expense 4,607 5,312 Asset impairment 1,889 — Depreciation, amortization and accretion 1,639 407 Amortization of right-of-use assets 879 903 Write-off of inventory 496 — Loss (gain) on foreign currency translation 3,998 ( 4,495 ) Payment-in-kind interest on promissory notes — ( 32,822 ) Gain on extinguishment of debt — ( 3,529 ) Other, net 19 103 Changes in operating assets and liabilities: Accounts receivable, net ( 622 ) ( 76 ) Inventory ( 1,222 ) ( 95 ) Prepaid expenses and other current assets ( 1,306 ) ( 1,028 ) Other assets 191 ( 356 ) Accounts payable 1,008 6,282 Accrued expenses and other current liabilities 641 ( 134 ) Deferred revenue ( 10,281 ) ( 12,721 ) Operating lease liabilities ( 2,087 ) ( 1,064 ) Recognized loss on purchase commitments ( 1,235 ) ( 4,395 ) Accrued interest on promissory notes — ( 1,545 ) Net cash used in operating activities ( 28,363 ) ( 83,376 ) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of treasury bills 20,000 24,995 Purchase of property and equipment ( 304 ) ( 2,456 ) Purchase of treasury bills — ( 44,880 ) Purchase of limited liability company ownership interest — ( 300 ) Net cash provided by (used in) investing activities 19,696 ( 22,641 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from at the market offering 15,139 2,042 Issuance costs associated with at the market offering ( 368 ) ( 47 ) Issuance of common stock from the exercise of warrants 11,600 — Proceeds from Paycheck Protection Program loan 4,873 — Payment of employment taxes related to vested restricted stock units and exercise of stock options ( 99 ) 50 Proceeds from market price stock purchase plan 14 — Proceeds from promissory notes — 70,051 Proceeds from MidCap Credit Facility — 40,000 Proceeds from senior convertible notes — 9,910 Principal payments on promissory notes — ( 38,264 ) Principal payments on senior convertible notes — ( 11,081 ) Principal payments on facility financing obligation — ( 6,920 ) Issuance cost associated with MidCap Credit Facility — ( 886 ) Issuance cost associated with promissory notes — ( 33 ) Net cash provided by (used in) financing activities 31,159 64,822 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH 22,492 ( 41,195 ) CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD 30,222 71,684 CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD $ 52,714 $ 30,489 SUPPLEMENTAL CASH FLOWS DISCLOSURES: Interest paid in cash, net of amounts capitalized $ 2,861 $ — NON-CASH INVESTING AND FINANCING ACTIVITIES: Payment of principal on senior convertible notes through common stock issuance 2,630 4,500 Receivable from at the market offering 574 — Common stock issuance to settle employee stock purchase plan liability 684 656 Payment of interest on senior convertible notes through common stock issuance 288 1,075 Payment on promissory notes through issuance of common stock — 8,000 Addition of right-of-use assets upon adoption of new lease guidance — 5,192 Payment of facility obligation through common stock issuance — 4,575 Non-cash construction in progress and property and equipment — 203 See notes to condensed consolidated financial statements. 7 MANNKIND CORPORATION AND SUBSIDIAR Y NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Description of Business and Significant Accounting Policies The accompanying unaudited condensed consolidated financial statements of MannKind Corporation and its subsidiary (“MannKind,” the “Company,” “we” or “us”), have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information included in this quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on February 25, 2020 (the “Annual Report”). In the opinion of management, all adjustments, consisting only of normal, recurring adjustments, considered necessary for a fair presentation of the results of these interim periods have been included. The results of operations for the three and nine months ended September 30, 2020 may not be indicative of the results that may be expected for the full year. Financial Statement Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates or assumptions. Management considers many factors in selecting appropriate financial accounting policies, and in developing the estimates and assumptions that are used in the preparation of the financial statements. Management must apply significant judgment in this process and the COVID-19 pandemic has increased the level of judgment used by management in developing these estimates and assumptions. The COVID-19 pandemic continues to rapidly evolve and the ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. These effects could have a material impact on the estimates and assumptions used in the preparation of the accompanying condensed consolidated financial statements. The more significant estimates include revenue recognition and gross-to-net adjustments, assessing long-lived assets for impairment, clinical trial expenses, inventory costing and recoverability, recognized loss on purchase commitment, milestone rights liability, stock-based compensation and the determination of the provision for income taxes and corresponding deferred tax assets and liabilities, and the valuation allowance recorded against net deferred tax assets. Business — The Company is a biopharmaceutical company focused on the development and commercialization of inhaled therapeutic products for diabetes and orphan lung diseases, such as pulmonary arterial hypertension. The Company’s only approved product, Afrezza (insulin human) Inhalation Powder, is an ultra rapid-acting inhaled insulin that was approved by the U.S. Food and Drug Administration (the “FDA”) in June 2014 to improve glycemic control in adults with diabetes. Afrezza became available by prescription in United States retail pharmacies in February 2015. Currently, the Company promotes Afrezza to endocrinologists and certain high-prescribing primary care physicians in the United States through its specialty sales force. The Company’s partner in Brazil, Biomm S.A. (“Biomm”), commenced commercialization of Afrezza in January 2020. The Company’s partners in India and Australia are preparing for regulatory submissions and have not yet commenced commercialization in their respective territories. Basis of Presentation — The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company is not currently profitable and has rarely generated positive net cash flow from operations. In addition, the Company expects to continue to incur significant expenditures for the foreseeable future in support of its manufacturing operations, sales and marketing costs for Afrezza, and development costs for product candidates in the Company’s pipeline. As of September 30, 2020, the Company had an accumulated deficit of $ 3.0 billion and $ 122.6 million of total principal amount of outstanding borrowings, with limited capital resources of $ 52.4 million in cash and cash equivalents. These financial conditions raise substantial doubt about the Company’s ability to continue as a going concern. In August 2019, the Company and its wholly owned subsidiary, MannKind LLC, entered into a credit and security agreement with MidCap Financial Trust (as amended, the “MidCap Credit Facility”) to restructure its existing debts and to provide additional operating capital (the “recapitalization”) (Refer to Note 6 – Borrowings for further details). The MidCap Credit Facility provides a secured term loan facility with an aggregate principal amount of up to $ 65.0 million, of which $ 40.0 million was outstanding as of September 30, 2020 and December 31, 2019. The availability of the remaining $ 25.0 million will be available to the Company until June 30, 2021, subject to the satisfaction of certain milestone conditions associated with Afrezza net revenue and certain milestone conditions related to the Company’s collaboration with United Therapeutics (see Note 7 – Collaboration and Licensing Arrangements for more information on the collaboration agreement with United Therapeutics). 8 Principal payments on the MidCap Credit Facility begin in September 2021. In addition, the MidCap Credit Facility contains certain covenants, one of which includes a requirement to maintain a minimum of $ 15.0 million of unrestricted cash and cash equivalents at all times. This amount will increase to $ 20.0 million if the Company draws additional funding under the MidCap Credit Facility. In August 2020, the Company entered into an amendment to the MidCap Credit Facility, pursuant to which the parties agreed that no breach of the minimum Afrezza net revenue covenant for any trailing twelve-month reporting period between July 31, 2020 and November 30, 2020 will be deemed to occur if the Company delivers satisfactory evidence that it had unrestricted cash of at least $ 40.0 million. Without this amendment, the Company would have been in violation of the minimum Afrezza net revenue covenant as of September 30, 2020. After the November 30, 2020 reporting period, the amendment will expire and a breach of the minimum Afrezza net revenue covenant is probable. The Company intends to amend the MidCap Credit Facility to address this probable covenant violation; however, such amendment, if completed, would occur after the date of this report. Accordingly, the $ 40.0 million outstanding principal under the MidCap Credit Facility was classified as current debt in the September 30, 2020 balance sheet, even though the 36 equal monthly principal payments remain payable over the period of September 1, 2021 through August 1, 2024 . This debt will continue to be classified as current unless the MidCap Credit Facility is further amended or the debt is repaid. The Company’s capital resources may not be sufficient to continue to meet its current and anticipated obligations over the next twelve months if the Company cannot increase its operating cash inflows by growing revenue or obtaining access to the remaining $25.0 million in borrowings that may become available under its MidCap Credit Facility. In the event these capital resources are not sufficient, the Company may need to raise additional capital by selling equity or debt securities, entering into strategic business collaboration agreements with other companies, seeking other funding facilities, or licensing arrangements, selling assets or by other means. However, the Company cannot provide assurances that additional capital will be available on acceptable terms or at all. If the Company is unable to meet its current and anticipated obligations over the next twelve months through its existing capital resources, or obtain new sources of capital when needed, the Company may have to reduce the scope of its commercial operations, reduce or eliminate one or more of its development programs, or make significant changes to its operating plan. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. Principles of Consolidation — The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. Intercompany balances and transactions have been eliminated. Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported condensed consolidated balance sheets or statements of operations. Changes were made to the condensed consolidated statements of stockholder’s deficit as of September 30, 2019, June 30, 2019 and March 31, 2019 to combine the exercise of stock options and the issuance of common stock from the release of restricted stock units (“RSUs”). Changes were also made to Note 10 — Stock-Based Compensation Expense to separately disclose the stock-based compensation expense related to the employee stock purchase plan from the expense for RSUs and options for the three and nine months ended September 30, 2019. Segment Information — Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed its operations and manages its business as one segment operating in the United States of America. Revenue Recognition — The Company adopted Accounting Standards Codification (“ASC”) Topic 606 - Revenue from Contracts with Customers (“the new revenue guidance”), on January 1, 2018. Under Topic 606, the Company recognizes revenue when its customers obtain control of promised goods or services, in an amount that reflects the consideration which the Company expects to be entitled in exchange for those goods or services. To determine revenue recognition for arrangements that are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to arrangements that meet the definition of a contract under Topic 606, including when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company has two types of contracts with customers: (i) contracts for commercial product sales with wholesale distributors and specialty pharmacies and (ii) collaboration arrangements. 9 Revenue Recognition – Net Revenue – Commercial Product Sales – The Company sells Afrezza to a limited number of wholesale distributors and specialty pharmacies in the U.S. (collectively, its “Customers”). Wholesale distributors subsequently resell the Company’s products to retail pharmacies and certain medical centers or hospitals. Specialty pharmacies sell directly to patients. In addition to distribution agreements with Customers, the Company enters into arrangements with payors that provide for government mandated and/or privately negotiated rebates, chargebacks, and discounts with respect to the purchase of the Company’s products. The Company recognizes revenue on product sales when the Customer obtains control of the Company's product, which occurs at delivery for wholesale distributors and generally at delivery for specialty pharmacies. Product revenues are recorded net of applicable reserves for variable consideration, including discounts and allowances. Free Goods Program – From time to time, the Company offers programs to potential new patients that allow them to obtain free goods (prescription fills) from a pharmacy. T he Company excludes such amounts related to these programs from both gross and net revenue. The cost of product associated with the free goods program is recognized as cost of goods sold in the condensed consolidated statements of operations. Reserves for Variable Consideration — Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, provider chargebacks and discounts, government rebates, payor rebates, and other incentives, such as voluntary patient assistance, and other allowances that are offered within contracts between the Company and its Customers, payors, and other indirect customers relating to the Company’s sale of its products. These reserves, as further detailed below, are based on the amounts earned, or to be claimed on the related sales, and result in a reduction of accounts receivable or establishment of a current liability. Significant judgments are required in making these estimates. Where appropriate, these estimates take into consideration a range of possible outcomes, which are probability-weighted in accordance with the expected value method in Topic 606 for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reduce recognized revenue to the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts. The amount of variable consideration that is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. The Company’s analysis also contemplates application of the constraint in accordance with the guidance, under which it determined a material reversal of revenue would not occur in a future period for the estimates detailed below as of September 30, 2020 and, therefore, the transaction price was not reduced further during the three and nine months ended September 30, 2020. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net revenue — commercial product sales and earnings in the period such variances become known. Trade Discounts and Allowances — The Company generally provides Customers with discounts which include incentives, such as prompt pay discounts, that are explicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, the Company compensates (through trade discounts and allowances) its Customers for sales order management, data, and distribution services. However, the Company has determined such services received to date are not distinct from the Company’s sale of products to the Customer and, therefore, these payments have been recorded as a reduction of revenue and as a reduction to accounts receivable, net. Product Returns — Consistent with industry practice, the Company generally offers Customers a right of return for unopened product that has been purchased from the Company for a period beginning six months prior to and ending 12 months after its expiration date , which lapses upon shipment to a patient. The Company estimates the amount of its product sales that may be returned by its Customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized, as well as reductions to accounts receivable, net. The Company currently estimates product returns using available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel. The Company’s current return reserve percentage is estimated to be in the single-digits. Adjustments to the returns reserve have been made in the past and may be necessary in the future based on revised estimates to our assumptions. Provider Chargebacks and Discounts — Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to Customers who directly purchase the product from the Company. Customers charge the Company for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability 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 10 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 judgement due to timing lags in receiving invoices for claims from states. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period. Payor Rebates — The Company contracts with certain private payor organizations, primarily insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of its products. The Company estimates these rebates, including estimates for product that has been recognized as revenue, but which remains in the distribution channel, and records such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses and other current liabilities. Other Incentives — Other incentives which the Company offers include voluntary patient support programs, such as the Company's co-pay assistance program, which are intended to provide financial assistance to qualified commercially-insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with the product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period. The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability that is included in accrued expenses and other current liabilities. Revenue Recognition — Revenue — Collaborations and Services — The Company enters into licensing or research agreements under which the Company licenses certain rights to its product candidates to third parties or conducting research services to third parties. The terms of these arrangements may include , but are not limited to payment to the Company of one or more of the following: up-front license fees; development, regulatory, and commercial milestone payments; payments for manufacturing commercial and clinical supply services the Company provides; and royalties on net sales of licensed products and sublicenses of the rights. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment such as determining the performance obligation in the contract and determining the stand-alone selling price for each performance obligation identified in the contract. If an arrangement has multiple performance obligations, the allocation of the transaction price is determined from observable market inputs, and the Company uses key assumptions to determine the stand-alone selling price, which may include development timelines, reimbursement rates for personnel costs, discount rates, and probabilities of technical and regulatory success. Revenue is recognized based on the measurement of progress as the performance obligation is satisfied and consideration received that does not meet the requirements to satisfy the revenue recognition criteria is recorded as deferred revenue. Current deferred revenue consists of amounts that are expected to be recognized as revenue in the next 12 months. Amounts that the Company expects will not be recognized within the next 12 months are classified as long-term deferred revenue. For further information see Note 7 – Collaboration and Licensing Arrangements . The Company recognizes upfront license payments as revenue upon delivery of the license only if the license is determined to be a separate unit of accounting from the other undelivered performance obligations. The undelivered performance obligations typically include manufacturing or development services or research and/or steering committee services. If the license is not considered as a distinct performance obligation, then the license and other undelivered performance obligations would be evaluated to determine if such should be accounted for as a single unit of accounting. If concluded to be a single performance obligation, the transaction price for the single performance obligation is recognized as revenue over the estimated period of when the performance obligation is satisfied. Whenever the Company determines that an arrangement should be accounted for over time, the Company determines the period over which the performance obligations will be performed, and revenue will be recognized over the period the Company is expected to complete its performance obligations. Significant management judgment is required in determining the level of effort required under an arrangement and the period over which the Company is expected to complete its performance obligations under an arrangement. The Company’s collaboration agreements typically entitle the Company to additional payments upon the achievement of development, regulatory and sales milestones. If the achievement of a milestone is considered probable at the inception of the collaboration, the related milestone payment is included with other collaboration consideration, such as upfront fees and research funding, in the Company’s revenue calculation. If these milestones are not considered probable at the inception of the collaboration, the milestones will typically be recognized in one of two ways depending on the timing of when the milestone is achieved. If the milestone is improbable at inception and subsequently deemed probable of achievement, such will be added to the transaction price, resulting in a 11 cumulative adjustment to revenue. If the milestone is achieved after the performance period has completed and all performance obligations have been delivered, the Company will recognize the milestone payment as revenue in its entirety in the period the milestone was achieved. The Company’s collaborative agreements, for accounting purposes, represent contracts with customers and therefore are not subject to accounting literature on collaborative agreements. The Company grants licenses to its intellectual property, supplies raw materials or finished goods and provides research and development services, all of which are outputs of the Company’s ongoing activities, in exchange for consideration. The Company does not develop assets jointly with collaboration partners, and does not share in significant risks of their development or commercialization activities. Accordingly, the Company concluded that its collaborative agreements must be accounted for pursuant to Topic 606, Revenue from Contracts with Customers. For collaboration agreements that allow collaboration partners to select additional optioned products or services, the Company evaluates whether such options contain material rights (i.e., have exercise prices that are discounted compared to what the Company would charge for a similar product or service to a new collaboration partner). The exercise price of these options includes a combination of licensing fees, event-based milestone payments and royalties. When these amounts in aggregate are not offered at a discount that exceeds discounts available to other customers, the Company concludes the option does not contain a material right, and therefore is not included in the transaction price at contract inception. Rather, the Company evaluates grants of additional licensing rights upon option exercises to determine whether such should be accounted for as separate contracts. The Company concluded there is no material right in these options. The Company follows detailed accounting guidance in measuring revenue and certain judgments affect the application of its revenue policy. For example, in connection with its existing collaboration agreements, the Company has recorded on its condensed consolidated balance sheets short-term and long-term deferred revenue based on its best estimate of when such revenue will be recognized. Short-term deferred revenue consists of amounts that are expected to be recognized as revenue in the next 12 months. Amounts that the Company expects will not be recognized within the next 12 months are classified as long-term deferred revenue. However, this estimate is based on the Company’s current project development plan and, if the development plan should change in the future, the Company may recognize a different amount of deferred revenue over the next 12-month period. Milestone Payments — At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the customer, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as, or when, the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company will re-evaluate the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration, other revenue, and earnings in the period of adjustment. Paycheck Protection Program Loan — On April 10, 2020, the Company received the proceeds from a loan in the amount of approximately $ 4.9 million (the “PPP Loan”) from JPMorgan Chase Bank, N.A., as lender, pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Company accounted for the PPP Loan as a financial liability in accordance with Accounting Standards Codification (“ASC”) Topic 470 Debt . Accordingly, the PPP Loan was recognized as current and long-term debt in the Company’s consolidated balance sheets and is included as short-term notes payable and PPP Loan — long term. In addition, a di minimis amount of accrued interest is included in accrued expenses and other current liabilities. See Note 6 – Borrowings for additional information. Cost of Goods Sold — Cost of goods sold includes material, labor costs and manufacturing overhead. Cost of goods sold also includes a significant component of current period manufacturing costs in excess of costs capitalized into inventory (excess capacity costs). These costs, in addition to the impact of the annual revaluation of inventory to standard costs, and write-offs of inventory are recorded as expenses in the period in which they are incurred, rather than as a portion of inventory costs. The cost of goods sold excludes the cost of insulin purchased under our Insulin Supply Agreement (see Note 11 – Commitments and Contingencies ). All insulin inventory on hand was written off and the full purchase commitment contract to purchase future insulin was accrued as a recognized loss on purchase commitments as of the end of 2015. Cash and Cash Equivalents and Restricted Cash —The Company considers all highly liquid investments with original or remaining maturities of 90 days or less at the time of purchase, that are readily convertible into cash to be cash equivalents. As of September 30, 2020 and December 31, 2019, cash equivalents were comprised of money market accounts with maturities less than 90 days from the date of purchase. 12 The Company records restricted cash when cash and cash equivalents are restricted as to withdrawal or usage. The Company presents amounts of restricted cash that will be available for use within 12 months of the reporting date as restricted cash in current assets. Restricted cash amounts that will not be available for use in the Company’s operations within 12 months of the reporting date are presented as restricted cash in long - term assets. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the consolidated balance sheets that sum to amounts reported on the consolidated statement of cash flows (in thousands): September 30, 2020 December 31, 2019 Cash and cash equivalents $ 52,398 $ 29,906 Restricted cash 316 316 Total cash, cash equivalents, and restricted cash $ 52,714 $ 30,222 Short-term Investments —The Company’s short-term investments consist of U.S. Treasury securities stated at amortized cost that the Company intends to hold until maturity. Those with maturities less than 12 months are included in short-term investments and any investments with maturities in excess of twelve months are included in long-term investments in our condensed consolidated balance sheets. As of September 30, 2020, the Company did no t hold any short-term or long-term investments nor did it record any material gains or losses on investment securities during the three and nine months ended September 30, 2020. Concentration of Credit Risk — Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and short-term investments. Cash and cash equivalents are held in high credit quality institutions. Cash equivalents consist of interest-bearing money market accounts and U.S. Treasury securities, which are regularly monitored by management. Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable are recorded at the invoiced amount and are not interest bearing. Accounts receivable are presented net of an allowance for doubtful accounts if there are estimated losses resulting from the inability of its customers to make required payments. The Company makes ongoing assumptions relating to the collectability of its accounts receivable in its calculation of the allowance for doubtful accounts. Accounts receivable are also presented net of an allowance for product returns and trade discounts and allowances because the Company’s customers have the right of setoff for these amounts against the related accounts receivable. Pre-Launch Inventory — An improvement to the manufacturing process for the Company’s primary excipient FDKP was demonstrated to be viable and management expects to realize an economic benefit in the future as a result of such process improvement. Accordingly, the Company is required to assess whether to capitalize inventory costs related to such excipient prior to regulatory approval of the new supplier and the improved manufacturing process. In doing so, management must consider a number of factors in order to determine the amount of inventory to be capitalized, including the historical experience of achieving regulatory approvals for the Company’s manufacturing process, feedback from regulatory agencies on the changes being effected and the amount of inventory that is likely to be used in commercial production. The shelf life of the excipient will be determined as part of the regulatory approval process; in the interim, the Company must assess the available stability data to determine whether there is likely to be adequate shelf life to support anticipated future sales occurring beyond the expected approval date of the new raw material. If management is aware of any specific material risks or contingencies other than the normal regulatory review and approval process, or if the criteria for capitalizing inventory produced prior to regulatory approval are otherwise not met, the Company would not capitalize such inventory costs, choosing instead to recognize such costs as a research and development expense in the period incurred. Inventories — Inventories are stated at the lower of cost or net realizable value. The Company determines the cost of inventory using the first-in, first-out, or FIFO, method. The Company capitalizes inventory costs associated with the Company’s products based on management’s judgment that future economic benefits are expected to be realized; otherwise, such costs are expensed as incurred as cost of goods sold. The Company periodically analyzes its inventory levels to identify inventory that may expire or has a cost basis in excess of its estimated realizable value and writes down such inventories, as appropriate. In addition, the Company’s products are subject to strict quality control and monitoring which the Company performs throughout the manufacturing process. If certain batches or units of product no longer meet quality specifications or may become obsolete or are forecasted to become obsolete due to expiration, the Company will record a charge to write down such unmarketable inventory to its estimated net realizable value. The Company analyzes its inventory levels to identify inventory that may expire or has a cost basis in excess of its estimated realizable value. The Company performs an assessment of projected sales and evaluates the lower of cost or net realizable value and the potential excess inventory on hand at the end of each reporting period. 13 Impairment of Long-Lived Assets — The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Assets are considered to be impaired if the carrying value 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 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 condensed consolidated statement of operations . See Note 6 – Borrowings for further information on the MidCap Credit Facility. 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 condensed consolidated statement of operations. The liability balance of the recognized loss on insulin purchase commitments was $ 94.8 million and $ 92.0 million as of September 30, 2020 and December 31, 2019, respectively. No new contracts were identified in the first nine months of 2020 that required a new loss on purchase commitment accrual. Milestone Rights Liability — On July 1, 2013, in conjunction with the execution of a financing facility with Deerfield Private Design Fund II L.P. and Deerfield Private Design International I L.P. , the Company issued to Deerfield Private Design Fund II, L.P. and Horizon Santé FLML SÁRL (the “Milestone Purchasers”) certain rights to receive payments of up to $ 90.0 million, of which $ 70.0 million remains payable as of September 30, 2020 upon the occurrence of specified strategic and sales milestones, including the achievement of specified net sales figures (the “Milestone Rights”). The Company analyzed the Milestone Rights and determined that they did not meet the definition of a freestanding derivative. Since the Company has not elected to apply the fair value option to the Milestone Rights, the Company recorded them at their estimated initial fair value and accounted for the Milestone Rights as a liability. The initial fair value estimate of the Milestone Rights was calculated using the income approach in which the cash flows associated with the specified contractual payments were adjusted for both the expected timing and the probability of achieving the milestones and discounted to present value using a selected market discount rate. The expected timing and probability of achieving the milestones was developed with consideration given to both internal data, such as progress made to date and assessment of criteria required for achievement, and external data, such as market research studies. The discount rate was selected based on an estimation of required rate of returns for similar investment opportunities using available market data. The Milestone Rights liability will be remeasured as the specified milestone events are achieved. Specifically, as each milestone event is achieved, the portion of the initially recorded Milestone Rights liability that pertains to the milestone event being achieved, will be remeasured to the amount of the specified related milestone payment. The resulting change in the balance of the Milestone Rights liability due to remeasurement will be recorded in the Company’s consolidated statements of operations as interest expense. Furthermore, the Milestone Rights liability will be reduced upon the settlement of each milestone payment. As a result, each milestone payment would be effectively allocated between a reduction of the recorded Milestone Rights liability and an expense representing a return on a portion of the Milestone Rights liability paid to the investor for the achievement of the related milestone event (see Note 6 – Borrowings ). As of September 30, 2020 and December 31, 2019, the remaining liability balance was $ 7.3 million. Fair Value of Financial Instruments — The Company applies various valuation approaches in determining the fair value of its financial assets and liabilities within a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy is broken down into three levels based on the source of inputs as follows: Level 1 — Quoted prices for identical instruments in active markets. Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. 14 Level 3 — Significant inputs to the valuation model are unobservable. Income Taxes — The provisions for federal, foreign, state and local income taxes are calculated on pre-tax income based on current tax law and include the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be recovered or settled. A valuation allowance is recorded to reduce net deferred income tax assets to amounts that are more likely than not to be realized. Income tax positions are considered for uncertainty. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no liabilities for uncertain income tax positions have been recorded. If a tax position does not meet the minimum statutory threshold to avoid payment of penalties, the Company recognizes an expense for the amount of the penalty in the period the tax position is claimed in the tax return of the Company. The Company recognizes interest accrued related to unrecognized tax benefits in income tax expense, if any. Penalties, if probable and reasonably estimable, are recognized as a component of income tax expense. Contingencies — The Company records a loss contingency for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These accruals represent management’s best estimate of probable loss. Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. On a quarterly basis, the Company reviews the status of each significant matter and assesses its potential financial exposure. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to pending claims and litigation and may revise its estimates. Stock-Based Compensation — Share-based payments to employees, including grants of stock options, RSUs, performance-based non-qualified stock option awards (“PNQ”), restricted stock units with market conditions (“Market RSUs”) and the compensatory elements of employee stock purchase plans, are recognized in the condensed consolidated statements of operations based upon the fair value of the awards at the grant date. The Company uses the Black-Scholes option valuation model to estimate the grant date fair value of employee stock options and the compensatory elements of employee stock purchase plans. RSUs are valued based on the market price on the grant date. The Company evaluates stock awards with performance conditions as to the probability that the performance conditions will be met and estimates the date at which the performance conditions will be met in order to properly recognize stock-based compensation expense over the requisite service period. Clinical Trial Expenses — Clinical trial expenses, which are primarily reflected in research and development expenses in the accompanying condensed consolidated statements of operations, result from obligations under contracts with vendors, consultants and clinical site agreements in connection with conducting clinical trials. Net Income (Loss) Per Share of Common Stock — Basic net income or loss per share excludes dilution for potentially dilutive securities and is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted net income or loss per share reflects the potential dilution under the treasury method that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For periods where the Company has presented a net loss, potentially dilutive securities are excluded from the computation of diluted net loss per share as they would be anti-dilutive. 15 The computation of basic and diluted net loss per share for the three and nine months ended September 30, 2020 and 2019 excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive while the Company is in a net loss position: Nine Months Ended September 30, 2020 2019 RSUs and Market RSUs (1) 8,897,020 1,122,283 Employee stock purchase plan 107,003 147,675 Common stock options and PNQs 12,689,522 15,361,337 2024 convertible notes 1,666,667 1,666,667 Mann Group convertible note 14,000,000 14,000,000 Common stock warrants 31,856 31,856 Warrants associated with Midcap Credit Facility 1,171,614 1,171,614 Warrants associated with public offering — 23,333,333 Total shares 38,563,682 56,834,765 (1) Market RSUs are included at the maximum share delivery percentage (see Note 10 — Stock-Based Compensation Expense). Recently Adopted Accounting Standards — In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), The Company adopted this standard as of January 1, 2020 . This update introduces the current expected credit loss (CECL) model, which requires an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables. Under this update, on initial recognition and at each reporting period, an entity is required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements. In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808) to clarify when transactions between participants in a collaborative arrangement under ASC 808 are within the scope of the new revenue guidance when the collaborative arrangement participant is a customer. ASU 2018-18 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2021. The Company adopted this pronouncement in 2020 with no impact on the consolidated financial statements. Recently Issued Accounting Standards — From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s condensed consolidated financial position or results of operations upon adoption. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) to simplify and reduce the cost of accounting for income taxes. The pronouncement calls for removing exceptions to the incremental approach for intraperiod tax allocations, exceptions to the requirement to recognize a deferred tax liability for equity method investment when a foreign subsidiary becomes an equity method investment, exception to the ability to not recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary and exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. We are currently assessing the effect the adoption of this standard will have on the Company’s consolidated financial statements. 2. Accounts Receivable Accounts receivable, net consists of the following (in thousands): September 30, 2020 December 31, 2019 Accounts receivable, gross $ 7,424 $ 6,925 Wholesaler distribution fees and prompt pay discounts ( 1,231 ) ( 1,767 ) Reserve for returns ( 2,058 ) ( 1,645 ) Accounts receivable, net $ 4,135 $ 3,513 16 As of September 30, 2020 and December 31, 2019, the allowance for doubtful accounts was de minimis . The Company had three wholesale distributors representing approximately 87 % of accounts receivable as of September 30, 2020 and approximately 83 % and 87 % of gross sales for the three and nine months ended September 30, 2020, respectively. 3. Inventories Inventories consist of the following (in thousands): September 30, 2020 December 31, 2019 Raw materials $ 1,458 $ 1,751 Work-in-process 1,827 1,432 Finished goods 1,596 972 Total inventory $ 4,881 $ 4,155 Work-in-process and finished goods as of September 30, 2020 and December 31, 2019 include conversion costs and exclude the cost of insulin. All insulin inventory on hand was written off and the projected loss on the purchase commitment contract to purchase future insulin was accrued as of the end of 2015. Raw materials inventory included $ 0.8 million of pre-launch inventory as of September 30, 2020 and December 31, 2019, which consisted of FDKP received in November 2019 that will be used to manufacture Afrezza under an enhanced manufacturing process for FDKP. The Company expects to receive FDA approval of the new source of FDKP in 2022, after which the pre-launch raw materials inventory will be reclassified as raw materials inventory for use in the manufacturing of Afrezza. The Company analyzed its inventory levels to identify inventory that may expire or has a cost basis in excess of its estimated realizable value. The Company also performed an assessment of projected sales and evaluated the lower of cost or net realizable value and the potential excess inventory on hand. Inventory that was forecasted to become obsolete due to expiration is recorded in costs of goods sold in the accompanying condensed consolidated statements of operations. For the nine months ended September 30, 2020 there was an inventory write-off of $ 0.5 million as a result of this assessment. There were no inventory write-offs for the three months ended September 30, 2020 or the three and nine months ended September 30, 2019. 4. Property and Equipment Property and equipment consists of the following (in thousands): Estimated Useful Life (Years) September 30, 2020 December 31, 2019 Land — $ 875 $ 875 Buildings 39-40 17,389 17,389 Building improvements 5-40 37,543 37,543 Machinery and equipment 3-15 55,165 54,982 Furniture, fixtures and office equipment 5-10 3,005 3,005 Computer equipment and software 3 8,319 8,234 Construction in progress — 63 114 122,359 122,142 Less accumulated depreciation ( 96,623 ) ( 95,364 ) Total property and equipment, net $ 25,736 $ 26,778 Depreciation expense related to property and equipment for the three and nine months ended September 30, 2020 and 2019 was as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Depreciation Expense $ 455 $ 396 $ 1,346 $ 1,135 17 5. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities were comprised of the following (in thousands): September 30, 2020 December 31, 2019 Salary and related expenses $ 7,745 $ 8,835 Discounts and allowances for commercial product sales 3,491 3,162 Deferred lease liability 1,421 1,433 Milestone Rights liability — current 1,337 — Professional fees 329 620 Sales and marketing services 345 147 Accrued interest 350 409 Other 796 1,298 Total accrued expenses and other current liabilities $ 15,814 $ 15,904 Included in salary and related expenses is $ 0.6 million of deferred social security taxes as permitted under the CARES Act. The Company is permitted to defer the employer share of social security taxes otherwise owed on dates beginning March 27, 2020 and ending December 31, 2020. Half of the total deferred payments are payable on December 31, 2021 and the remaining half are payable on December 31, 2022. The amount of the deferral is based on wages paid from April through December 2020. This deferral option is no longer available if the Company receives forgiveness for its PPP Loan as discussed in Note 6 — Borrowings. 6 . Borrowings Carrying amount of principal borrowings consist of the following (in thousands): September 30, 2020 December 31, 2019 Mann Group promissory notes $ 70,025 $ 70,020 Midcap Credit Facility 39,346 38,851 Senior notes (December 2020 note and 2024 convertible notes) 7,581 10,028 PPP Loan 4,873 — Total debt — net carrying amount 121,825 118,899 Less current portion of long-term debt ( 45,379 ) ( 5,028 ) Long-term debt $ 76,446 $ 113,871 The following table provides a summary of the Company’s debt and key terms: Amount Due Terms September 30, 2020 December 31, 2019 Annual Interest Rate Maturity Date Conversion Price Mann Group convertible note $ 35.0 million (plus $ 2.9 million accrued interest paid-in-kind) $ 35.0 million (plus $ 1.0 million accrued interest paid-in-kind) 7.00 % November 2024 $ 2.50 per share Mann Group non- convertible note $ 35.1 million (plus $ 2.9 million accrued interest paid-in-kind) $ 35.1 million (plus $ 1.0 million accrued interest paid-in-kind) 7.00 % November 2024 N/A MidCap Credit Facility $ 40.0 million $ 40.0 million one-month LIBOR ( 2 % floor) plus 6.75 % August 2024 N/A 2024 convertible notes $ 5.0 million $ 5.0 million 5.75 % November 2024 $ 3.00 per share June 2020 note — $ 2.6 million — June 2020 N/A December 2020 note $ 2.6 million $ 2.6 million — December 2020 N/A PPP Loan $ 4.9 million — 0.98 % April 2022 N/A 18 The maturities of our borrowings as of September 30, 2020 are as follows (in thousands): Amounts 2020 $ 4,254 2021 6,881 2022 14,146 2023 13,333 2024 83,940 Thereafter — Total principal payments 122,554 Unamortized discount ( 306 ) Unamortized debt issuance costs ( 423 ) Total debt — net carrying amount $ 121,825 Current Portion of Long-Term Debt — As of September 30, 2020, the current portion of long-term debt was $ 45.4 million and consisted of $ 40.0 million of the MidCap Credit Facility, $ 3.5 million of the PPP Loan and $ 2.6 million of the December 2020 note. MidCap Credit Facility — In August 2019, the Company closed the MidCap Credit Facility, which provides a secured term loan facility with an aggregate principal amount of up to $ 75.0 million. The Company borrowed the first advance of $ 40.0 million (“Tranche 1”) on August 6, 2019. Under the terms of the MidCap Credit Facility, the second advance of $ 10.0 million (“Tranche 2”) was available to the Company until April 15, 2020, provided that the Company had achieved Afrezza net revenue of at least $ 30.0 million on a trailing twelve month basis by that date (which was not achieved). The third advance of $ 25.0 million (“Tranche 3”) will be available to the Company until June 30, 2021, subject to the satisfaction of certain milestone conditions associated with Afrezza trailing net revenue and certain milestone conditions related to the Company’s collaboration with United Therapeutics (see Note 7 – Collaboration and Licensing Arrangements ). In August 2019, the Company recognized 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. The Company determined that such milestone conditions related to Afrezza trailing net revenue were unlikely to be achieved. As a result, the Company recognized an asset impairment of $ 1.9 million during the second quarter of 2020. In December 2019, the Company entered into an amendment to the MidCap Credit Facility, pursuant to which the parties agreed to (i) amend the financial covenant relating to trailing twelve month minimum Afrezza Net Revenue (as defined in the MidCap Credit Facility) requirements, (ii) add a condition to the third advance of $ 25.0 million that requires the Company achieve certain amounts of Afrezza Net Revenue, and (iii) increase the exit fee from 6.00 % to 7.00 % of the principal amount of all term loans advanced to the Company under the MidCap Credit Facility. In August 2020, the Company entered into an amendment to the MidCap Credit Facility, pursuant to which the parties agreed that no breach of the minimum Afrezza net revenue covenant for any trailing twelve-month reporting period between July 31, 2020 and November 30, 2020 will be deemed to occur if the Company delivers satisfactory evidence that it had unrestricted cash of at least $ 40.0 million. Without this amendment, the Company would have been in violation of the minimum Afrezza net revenue covenant as of September 30, 2020. After the November 30, 2020 reporting period, the amendment will expire and a breach of the minimum Afrezza net revenue covenant is probable. The Company intends to amend the MidCap Credit Facility to address this probable covenant violation; however, such amendment, if completed, would occur after the date of this report. Accordingly, the $ 40.0 million outstanding principal under the MidCap Credit Facility was classified as current debt in the September 30, 2020 balance sheet, even though the 36 equal monthly principal payments remain payable over the period of September 1, 2021 through August 1, 2024 . This debt will continue to be classified as current unless the MidCap Credit Facility is further amended or the debt is repaid. 19 Tranche 1 and, if borrowed, Tranche 3, each accrue interest at an annual rate equal to one-month LIBOR plus 6.75 %, subject to a one-month LIBOR floor of 2.00 %. Interest on each term loan advance is due and payable monthly in arrears. Principal on the term loan advance under Tranche 1 is payable in 36 equal monthly installments beginning September 1, 2021, until paid in full on August 1, 2024, and principal on any term loan advance under Tranche 3 is payable beginning on the later of (i) September 1, 2021, and (ii) the first day of the first full calendar month immediately following such term loan advance, in an amount equal to the outstanding term loan advance in respect of Tranche 3 divided by the number of full calendar months remaining before August 1, 2024. The Company has the option to prepay the term loans, in whole or in part, subject to early termination fees in an amount equal to 3.00 % of principal prepaid if prepayment occurs on or prior to the first anniversary of the closing date, 2.00 % of principal prepaid if prepayment occurs after the first anniversary of the closing date but on or prior to the second anniversary of the closing date, and 1.00 % of principal prepaid if prepayment occurs after the second anniversary of the closing date and prior to or on the third anniversary of the closing date. In connection with execution of the MidCap Credit Facility, the Company paid MidCap a $ 0.4 million origination fee. The Company’s obligations under the MidCap Credit Facility are secured by a security interest on substantially all of its assets, including intellectual property. The MidCap Credit Facility contains customary affirmative covenants and customary negative covenants limiting the Company’s ability and the ability of the Company’s subsidiary to, among other things, dispose of assets, undergo a change in control, merge or consolidate, make acquisitions, incur debt, incur liens, pay dividends, repurchase stock and make investments, in each case subject to certain exceptions. The Company must also comply with a financial covenant relating to trailing twelve month minimum Afrezza net revenue, tested on a monthly basis, and a minimum cash covenant of $ 15.0 million at all times, and $ 20.0 million at all times following the funding of Tranche 3. For any trailing twelve-month reporting period between July 31, 2020 and November 30, 2020, the minimum Afrezza net revenue test will be deemed to occur if the Company delivers satisfactory evidence that it had unrestricted cash of at least $ 40.0 million. As of September 30, 2020, the Company was in compliance with the financial and minimum cash covenants. The MidCap Credit Facility also contains customary events of default relating to, among other things, payment defaults, breaches of covenants, a material adverse change, listing of the Company’s common stock, bankruptcy and insolvency, cross defaults with certain material indebtedness and certain material contracts, judgments, and inaccuracies of representations and warranties. Upon an event of default, the agent and the lenders may declare all or a portion of the Company’s outstanding obligations to be immediately due and payable and exercise other rights and remedies provided for under the MidCap Credit Facility. During the existence of an event of default, interest on the term loans could be increased by 2.00 %. The Company also agreed to issue warrants to purchase shares of the Company’s common stock (the “MidCap warrants”) upon the drawdown of each term loan advance under the MidCap Credit Facility in an aggregate amount equal to 3.25 % of the amount drawn, divided by the exercise price per share for that tranche. The exercise price per share is equal to the volume-weighted average closing price of the Company’s common stock for the ten business days immediately preceding the second business day before the issue date. As a result of Tranche 1, the Company issued warrants to purchase an aggregate of 1,171,614 shares of the Company’s common stock, at an exercise price equal to $ 1.11 per share. The MidCap warrants are immediately exercisable and expire on the earlier to occur of the seventh anniversary of the respective issue date or, in certain circumstances, the closing of a merger, sale or other consolidation transactions in which the consideration is cash, stock of a publicly traded acquirer, or a combination thereof. The Company determined that these warrants met the criteria for equity classification and accounted for such warrants in additional paid-in capital. Senior Notes — As of September 30, 2020 and December 31, 2019, there was $ 7.6 million and $ 10.2 million, respectively, of principal amount of senior notes outstanding. In August 2019, the Company entered into a privately-negotiated exchange agreement with the holder of the 5.75 % Convertible Senior Subordinated Exchange Notes due 2021 (the “2021 notes”), pursuant to which , among other things, the Company (i) repaid $ 1.5 million in cash to such holder, (ii) issued 4,017,857 shares of the Company’s common stock to such holder (at a conversion price of $ 1.12 per share), (iii) issued 5.75 % Convertible Senior Subordinated Exchange Notes due November 2024 (the “2024 convertible notes”) to such holder in the principal amount of $ 5.0 million and (iv) issued a $ 2.6 million note due June 2020 (the “June 2020 note”), a $ 2.6 million note due December 2020 (the “December 2020 note”, and together with the June 2020 note, the “2020 notes”) , all in exchange for the cancellation of the $ 18.7 million in principal amount of the 2021 notes. The 2020 notes may be prepaid at any time on or prior to their respective maturity dates of June 30, 2020 and December 31, 2020 at the option of the Company. On June 24, 2020, the Company prepaid the June 2020 note with the issuance of 1,235,094 shares of the Company’s common stock, pursuant to the Company’s election and in accordance with the terms of the June 2020 note. On October 9, 2020, the Company prepaid the December 2020 note with the issuance of 1,377,356 shares of the Company’s common stock, pursuant to the Company’s election and in accordance with the terms of the December 2020 note . The number of shares issued for the prepayments on June 24, 2020 and October 9, 2020 were determined based on the Company’s closing stock price on the settlement date. As a result of the prepayment of the December 2020 note on October 9, 2020, the Company recognized a de minimis amount of loss on extinguishment related to unamortized debt discount. 20 The 2024 convertible notes were issued pursuant to an indenture, dated as of August 6, 2019, between the Company and U.S. Bank National Association, as trustee (the “Indenture”). The 2024 convertible notes are the Company’s general, unsecured obligations, and are subordinated in right of payment to the indebtedness incurred pursuant to the MidCap Credit Facility. The 2024 convertible notes rank equally in right of payment with the Company’s other unsecured senior debt. The 2024 convertible notes accrue interest at the rate of 5.75 % per year on the principal amount, payable semiannually in arrears on February 15 and August 15 of each year, beginning February 15, 2020, with interest accruing from August 6, 2019. Interest on the 2024 convertible notes will be payable in cash or, at the option of the Company if certain conditions are met, in shares of the Company’s common stock at a price per share equal to the last reported sale price on the trading day immediately prior to the interest payment date. The 2024 convertible notes will mature on the earlier of (i) November 4, 2024 or (ii) the 91 st day after the payment in full of, and termination and discharge of all obligations (other than contingent indemnity obligations) under the MidCap Credit Facility. The 2024 convertible notes are convertible, at the option of the holder, at any time on or prior to the close of business on the business day immediately preceding the stated maturity date, into shares of the Company’s common stock at a conversion rate of 333.3333 shares per $ 1,000 principal amount of 2024 convertible notes, which is equal to a conversion price of approximately $ 3.00 per share. If certain bankruptcy and insolvency-related events of default occur, the principal of, and accrued and unpaid interest on, all of the then outstanding 2024 convertible notes shall automatically become due and payable. If an event of default other than certain bankruptcy and insolvency-related events of defaults occurs and is continuing, the Trustee or the holders of at least 25% in aggregate principal amount of the then-outstanding 2024 convertible notes, by written notice to the Trustee, may declare the 2024 convertible notes due and payable at their principal amount plus any accrued and unpaid interest, and thereupon the Trustee may, at its discretion, proceed to protect and enforce the rights of the holders by the appropriate judicial proceedings. Notwithstanding the foregoing, the Indenture provides that, to the extent the Company elects, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture will, for the first 180 days after such event of default, consist exclusively of the right to receive additional interest on the 2024 convertible notes. The 2024 convertible notes also contain certain cross default provisions related to other debt obligations. If the Company undergoes certain fundamental changes, except in certain circumstances, each holder of 2024 convertible notes will have the option to require the Company to repurchase all or any portion of that holder’s 2024 convertible notes. The fundamental change repurchase price will be 100 % of the principal amount of the 2024 convertible notes to be repurchased plus accrued and unpaid interest, if any. The Company may elect at its option to cause all or any portion of the 2024 convertible notes to be mandatorily converted in whole or in part at any time prior to the close of business on the business day immediately preceding the maturity date, if the last reported sale price of its common stock equals or exceeds 120 % of the conversion price then in effect for at least 10 trading days in any 20 trading day period, ending within five business days prior to the date of the mandatory conversion notice. Mann Group promissory notes — In August 2019, the Company entered into a privately-negotiated exchange agreement with The Mann Group LLC (the “Mann Group”), pursuant to which, among other things, the Company (i) repaid $ 3.0 million in cash to the Mann Group, (ii) issued 7,142,857 shares of the Company’s common stock to the Mann Group (at a conversion price of $ 1.12 per share), (iii) issued a $ 35.0 million note that is convertible into shares of the Company’s common stock at $ 2.50 per share (the “Mann Group convertible note”) and (iv) issued a non-convertible note to the Mann Group in an aggregate principal amount of $ 35.1 million (the “Mann Group non-convertible note” and , together with the Mann Group convertible note, the “Mann Group promissory notes”) , all in exchange for the cancellation of the $ 71.5 million in principal and approximately $ 9.5 million in accrued interest paid-in-kind under the existing Mann Group loan arrangement. The Mann Group promissory notes each accrue interest at the rate of 7.00 % per year on the principal amount, payable quarterly in arrears on the first day of each calendar quarter beginning October 1, 2019 . The Mann Group convertible note will mature on November 3, 2024 . The principal and any accrued and unpaid interest under the Mann Group convertible note may be converted, at the option of the Mann Group, at any time on or prior to the close of business on the business day immediately preceding the stated maturity date, into shares of the Company’s common stock at a conversion rate of 400 shares per $ 1,000 of principal and/or accrued and unpaid interest, which is equal to a conversion price of $ 2.50 per share. The conversion rate will be subject to adjustment under certain circumstances described in the Mann Group convertible note. Interest on the Mann Group convertible note will be payable in kind by adding the amount thereof to the principal amount; provided that with respect to interest accruing from and after January 1, 2021, the Company may, at its option, elect to pay any such interest on any interest payment date, if certain conditions are met, in shares of the 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. 21 The Mann Group non-convertible note will mature on the earlier of (i) November 3, 2024 or (ii) the 90th day after the repayment in full, and termination and discharge of all obligations (other than contingent indemnity obligations) under the MidCap Credit Facility. Interest on the Mann Group non-convertible note will be payable in kind by adding the amount thereof to the principal amount; provided that MannKind may, at its option, elect to pay any such interest on any interest payment date, if certain conditions are met, in shares of MannKind’s common stock at a price per shall equal to the last reported sale price on the trading day immediately prior to the interest payment date. PPP Loan – On April 10, 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. The PPP Loan matures on April 9, 2022 and bears interest at a rate of 0.98 % per annum. The PPP Loan is evidenced by a promissory note dated April 9, 2020, which contains customary events of default relating to, among other things, payment defaults and breaches of representations and warranties. The PPP Loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties. All or a portion of the PPP Loan may be forgiven by the U.S. Small Business Administration (“SBA”) upon application to the lender by the Company beginning 60 days after loan approval, but not later than ten months after the end of the Company’s covered period, and upon documentation of expenditures in accordance with the SBA requirements. Principal and interest payments can be deferred up to ten months after the end of the Company’s covered period unless the Company is notified earlier of its loan forgiveness status. In the event the SBA does not authorize loan forgiveness, the deferred principal and interest will be payable to the lender and the Company will then make equal monthly payments as required to fully amortize the remaining principal amount by April 9, 2022 . Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered interest and covered utilities during the 24-week period (or eight-week period at the Company’s option) beginning on the date of loan approval. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess of $ 100,000 , prorated annually. Not more than 40 % of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with salaries of $ 100,000 or less annually are reduced by more than 25 %. In the event the PPP Loan, or any portion thereof, is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal. Any unforgiven portion of the PPP Loan will be payable in accordance with the terms of the promissory note as described above. 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 three and nine months ended September 30, 2020 and 2019 are as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Accretion of debt discount $ 53 $ 8 $ 232 $ 149 Amortization of debt issuance cost ( 27 ) ( 34 ) ( 82 ) ( 84 ) Amortization of debt premium — ( 858 ) — ( 1,049 ) Milestone Rights — As of September 30, 2020 and December 31, 2019, the remaining Milestone Rights liability balance was $ 7.3 million, which was based on initial fair value estimates calculated using the income approach and reduced by milestone achievement payments made. During the third quarter of 2019, the Company achieved the first Afrezza net sales milestone specified by the Milestone Rights. The Company currently estimates that it will reach the next milestone in the first quarter of 2021, at which point the Company will be required to make a $ 5.0 million payment in the following quarter. The carrying value of the Milestone Rights liability related to this $5.0 million payment is approximately $ 1.3 million, which represents the fair value related to this payment that was determined in 2013 (the most recent measurement date). Accordingly, approximately $1.3 million in value related to the next milestone payment was recorded in accrued expenses and other current liabilities and the remaining long-term portion of $ 5.9 million is included as Milestone Rights liability in the accompanying condensed consolidated balance sheets as of September 30, 2020. The agreement with the Milestone Purchasers that provides for the Milestone Rights 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. The Company has initially recorded the Milestone Rights at their estimated fair value. 22 7. Collaboration and Licensing Arrangements Revenue from collaborations and services for the three and nine months ended September 30, 2020 and 2019 are as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 UT License Agreement $ 7,978 $ 7,861 $ 23,934 $ 23,255 UT Research Agreement — 158 211 5,874 Receptor CLA 63 62 188 187 Cipla License and Distribution Agreement 36 37 108 111 Biomm Distribution Agreement — 75 — 75 Total revenue from collaborations and services $ 8,077 $ 8,193 $ 24,441 $ 29,502 United Therapeutics License Agreement — In September 2018, the Company and United Therapeutics Corporation (“United Therapeutics” or “UT”) entered into an exclusive global license and collaboration agreement (the “UT License Agreement”) for the rights to the Company’s dry powder formulation of treprostinil (“TreT”) and associated inhalation delivery devices. Under the UT License Agreement, UT is responsible for global development, regulatory and commercial activities with respect to TreT. The Company is responsible for manufacturing clinical supplies and commercial supplies of TreT. Under the terms of the UT License Agreement, the Company received an upfront payment of $ 45.0 million in October 2018 and three $ 12.5 million milestone payments through the third quarter of 2020. The Company expects to receive an additional milestone payment of $ 12.5 million upon the achievement of specified development targets. The Company will also be entitled to receive low double-digit royalties on net sales of TreT. 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. During the third quarter of 2020, the Company sold $ 0.4 million of clinical supplies to UT for use in their clinical study, which was recognized as deferred revenue in the accompanying condensed consolidated balance sheet. The Company recognizes revenue on a ratable basis from October 2018 through December 2021; the estimated date when its performance obligations for development activities under UT License Agreement will be substantially completed. 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. 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 expects to complete the activities specified in the development plan and to achieve the remaining milestone event for total consideration of approximately $ 102.6 million, which includes an upfront payment, four milestone payments, various pass-through costs and payments for clinical supplies. Future commercial supply remains at UT’s option and is valued at a stand-alone selling price and, therefore, is not accounted for under the current arrangement. The Company believes that this method best reflects the measure of progress toward complete satisfaction of the performance obligation. Deferred revenue related to the UT License Agreement is being recognized in net revenue — collaborations over a 13-quarter period ending December 31, 2021, which represents the estimated period to satisfy the performance obligation. As of September 30, 2020, the deferred revenue for the UT License Agreement consisted of $ 28.7 million, which was classified as current. Deferred revenue is classified as part of current or long-term liability in the accompanying condensed consolidated balance sheets based on the Company’s estimate of the portion of the performance obligation that will be completed within the next 12 months, and includes payments received as well as payments receivable. The total consideration for the UT License Agreement, includes $ 1.2 million related to the manufacturing of clinical supplies, which was included in the current portion of deferred revenue on our condensed consolidated balance sheet as of September 30, 2020. Also associated with the clinical supplies was a contract asset of $ 0.8 million and an account receivable of $ 0.4 million which are included in prepaid expenses and other current assets and accounts receivable, net, respectively, on our condensed consolidated balance sheet as of September 30, 2020. United Therapeutics Research Agreement — In September 2018, the Company and UT also entered into a research agreement (“UT Research Agreement”) for the conduct of research and consulting services in connection with multiple potential products, including evaluating the feasibility of preparing a dry powder formulation of a compound for the treatment of pulmonary hypertension outside 23 the scope of the UT License Agreement. In addition, UT, at its option, may obtain a license to develop, manufacture and commercialize products based on specified compounds within the drug classes covered by the UT Research Agreement. Each specified compound advanced into development and commercialization under such a license would be subject to the payment to the Company of additional milestone payments of up to $ 30.0 million and a low double-digit royalty on net sales of such products. In connection with the UT Research Agreement, t he Company received an upfront payment of $ 10.0 million in September 2018. At the inception of the UT Research Agreement, the Company identified two distinct performance obligations. The Company determined that the key deliverables of each performance obligation include (i) the development of a product prototype (including a technical feasibility report) and; (ii) engineering consulting services. Due to the separately identifiable nature of these obligations, the Company has determined that these deliverables represent two distinct performance obligations. The Company also determined that UT’s option to expand the scope to include specific drug classes covered by the agreement 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 allocated the total $ 10.0 million transaction price to its two distinct performance obligations based on available observable market inputs. A transaction price of $ 9.0 million was allocated to the product prototype and a transaction price of $ 1.0 million was allocated to engineering consulting services. The revenue for the product prototype was recognized using an output method (based on project milestones achieved and surveys of performance completed to date). The Company believed that this method best reflected the measure of progress toward complete satisfaction of the performance obligation. The revenue for the engineering consulting services was recognized using a ratable method until the obligation was satisfied. The Company believed that this method best reflected the measure of progress toward complete satisfaction of the performance obligation. The performance obligations for engineering consulting services and the product prototype were completed in April 2020 and June 2019, respectively. Receptor Collaboration and License Agreement — In 2016, the Company entered into a collaboration and license agreement (the “CLA”) with Receptor Life Sciences, Inc. (“Receptor”) pursuant to which Receptor subsequently acquired an exclusive license to develop, manufacture and commercialize products that use the Company’s technology to deliver certain compounds via oral inhalation in exchange for upfront license fees, milestone payments upon the completion of certain technology transfer activities and the achievement of specified sales targets as well as royalties upon Receptor’s and its sublicensees’ sale of products. A $ 1.0 million license fee received in 2016 was recorded in deferred revenue from collaborations as of December 31, 2016 and is being recognized in net revenue — collaborations over four years , the estimated period over which the Company is required to satisfy the remaining performance obligations. The remaining performance obligations are to provide certain technology transfer activities. As of September 30, 2020, the deferred revenue balance was $ 0.1 million, which was classified as a current liability in the accompanying condensed consolidated balance sheets. The additional payments referred to above represent variable consideration for which the Company has not recognized any revenue because it is uncertain that Receptor will be able to successfully develop, manufacture or sell product related to this license. There was no change to the accounting for this contract as a result of the initial application of the new revenue guidance since (i) the receipt of such payments is highly susceptible to factors outside of the Company’s influence, (ii) the uncertainty regarding the receipt of these payments is not expected to be resolved for years, and (iii) the Company has limited experience with similar contracts. See Note 1 – Description of Business and Significant Accounting Policies for additional information on the Company’s revenue recognition accounting policy. In 2017, the Company entered into a manufacturing and supply agreement with Receptor pursuant to which the Company agreed to provide certain raw materials and certain additional research and formulation consulting services to Receptor. For the three and nine months ended September 30, 2020 and 2019, the additional research and formulation services provided to Receptor were de minimis . Biomm Supply and Distribution Agreement — In May 2017, the Company and 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 Agência Nacional de Vigilância Sanitária (“ANVISA”) and, with respect to pricing matters, from the Camara de Regulação de Mercado de Medicamentos (“CMED”), both of which have now been received. Biomm commenced product sales in January 2020. In September 2019, the Company delivered its first shipment of Afrezza to Biomm and recorded it as net revenue — commercial product sales for $ 0.7 million, in advance of the planned launch of the product in Brazil by Biomm. During the second quarter of 2020, the Company sold $ 0.2 million of product to Biomm. There were no sales to Biomm in the third quarter of 2020. 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 will be 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 24 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 September 30, 2020, the deferred revenue balance was $ 1.8 million, of which $ 0.1 million is classified as current and $ 1.7 million is classified as long term in the accompanying condensed consolidated balance sheets. The Company also recognized $ 0.2 million as income tax expense for a payment made to the India tax authority in 2018. The Company received a tax refund from the India tax authority in October 2020 and recognized an income tax benefit and receivable for $ 0.2 million in the accompanying condensed consolidated financial statements as of September 30, 2020. AMSL Distribution Agreement — In May 2019, the Company entered into an exclusive marketing and distribution agreement with the AMSL Diabetes division of Australasian Medical & Scientific Ltd. (“AMSL Diabetes”) for the commercialization of Afrezza in Australia. Under the terms of this agreement, AMSL Diabetes is responsible for obtaining regulatory and reimbursement approvals to distribute Afrezza in Australia. Upon regulatory approval, AMSL Diabetes will conduct sales, marketing, and customer support and distribution activities whereas the Company will be responsible for the supply and manufacturing of Afrezza. 8. 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 value of loans for disclosure purposes. The carrying amounts reported in the accompanying condensed 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, MidCap Credit Facility, Mann Group promissory notes, 2024 convertible notes, June 2020 note, December 2020 note and Milestone Rights liabilities are disclosed below. Cash Equivalents and Restricted Cash — 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 September 30, 2020 and December 31, 2019, the Company held $ 52.4 million and $ 29.9 million, respectively, of cash and cash equivalents. The Company held $ 0.3 million in restricted cash as of September 30, 2020 and December 31, 2019, which was comprised of money market funds. Restricted cash is used to collateralize a letter of credit. The fair value of these money market funds was determined by using quoted prices for identical investments in an active market (Level 1 in the fair value hierarchy). Short-term investments — Short-term investments consist of highly liquid investments that are intended to facilitate liquidity and capital preservation. The fair value of short-term investments approximate their carrying value. The measurement of which is based on a market approach using quoted market values (Level 1 in the fair value hierarchy). As of September 30, 2020, the Company did no t hold any short-term investments. The fair value measurement of debt instruments is based on a discounted cash flow model and is sensitive to the change in yield (Level 3 in the fair value hierarchy ): 25 Hypothetical Change in Yield Hypothetical Change in Notes Payable Yield % Change Hypothetical Yield FV of Notes FV $ Change % Change (in millions) Mann Group promissory notes: (with conversion feature) 25.5 % 1 % 26.5 % $ 63.7 $ 62.4 $ ( 1.3 ) - 2.0 % 25.5 % - 1 % 24.5 % $ 63.7 $ 65.0 $ 1.3 2.0 % 25.5 % 2 % 27.5 % $ 63.7 $ 61.2 $ ( 2.5 ) - 3.9 % 25.5 % - 2 % 23.5 % $ 63.7 $ 66.4 $ 2.7 4.2 % Senior notes: (with conversion feature) 25.5 % 1 % 26.5 % $ 7.1 $ 7.0 $ ( 0.1 ) - 1.4 % 25.5 % - 1 % 24.5 % $ 7.1 $ 7.2 $ 0.1 1.4 % 25.5 % 2 % 27.5 % $ 7.1 $ 7.0 $ ( 0.1 ) - 1.4 % 25.5 % - 2 % 23.5 % $ 7.1 $ 7.3 $ 0.2 2.8 % MidCap Credit Facility 11.0 % 1 % 12.0 % $ 41.2 $ 40.4 $ ( 0.8 ) - 1.9 % 11.0 % - 1 % 10.0 % $ 41.2 $ 42.0 $ 0.8 1.9 % 11.0 % 2 % 13.0 % $ 41.2 $ 39.6 $ ( 1.6 ) - 3.9 % 11.0 % - 2 % 9.0 % $ 41.2 $ 42.9 $ 1.7 4.1 % PPP Loan 11.0 % 1 % 12.0 % $ 4.6 $ 4.6 $ — 0.0 % 11.0 % - 1 % 10.0 % $ 4.6 $ 4.6 $ — 0.0 % 11.0 % 2 % 13.0 % $ 4.6 $ 4.6 $ — 0.0 % 11.0 % - 2 % 9.0 % $ 4.6 $ 4.7 $ 0.1 2.2 % Financial Liabilities — The following tables set forth the fair value of the Company’s financial instruments (in millions): September 30, 2020 Carrying Value Significant Unobservable Inputs (Level 3) Fair Value Financial liabilities: MidCap Credit Facility $ 39.3 $ 41.2 $ 41.2 2024 convertible notes 5.0 4.6 4.6 December 2020 note 2.6 2.5 2.5 Mann Group promissory notes 70.0 63.7 63.7 PPP Loan 4.9 4.6 4.6 Milestone rights 7.3 16.0 16.0 Total financial liabilities $ 129.1 $ 132.6 $ 132.6 December 31, 2019 Carrying Value Significant Unobservable Inputs (Level 3) Fair Value Financial liabilities: MidCap Credit Facility $ 38.9 $ 40.0 $ 40.0 2024 convertible notes 5.0 3.7 3.7 June 2020 note 2.5 2.3 2.3 December 2020 note 2.5 2.0 2.0 Mann Group promissory notes 70.0 46.2 46.2 Milestone rights 7.3 16.4 16.4 Total financial liabilities $ 126.2 $ 110.6 $ 110.6 26 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 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. 9. Common and Preferred Stock On May 21, 2020, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment of its Amended and Restated Certificate of Incorporation to increase the authorized number of shares of the Company’s common stock from 280,000,000 to 400,000,000 shares. As of September 30, 2020 and December 31, 2019, 230,922,513 and 211,787,573 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 having an aggregate offering price of up to $ 50.0 million or such other amount as may be permitted by the CF Sales Agreement. Under the CF 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. For the nine months ended September 30, 2020, the Company sold an aggregate of 9,401,827 shares of the Company’s common stock at a weighted average purchase price of $ 1.66 per share for an aggregate gross proceeds of approximately $ 15.6 million pursuant to the CF Sales Agreement. In December 2018, the Company entered into an underwriting agreement with Leerink Partners LLC relating to the issuance and sale in 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 (the “December warrants”) at a combined purchase price of $ 1.50 per share and accompanying warrant. The shares of common stock and the December warrants were immediately separable. The December warrants were immediately exercisable at issuance at a price of $ 1.60 per share and had an expiry date of December 26, 2019 . On December 26, 2019, 11,583,333 December warrants expired unexercised and 7,250,000 remained available for purchase at a price of $ 1.60 per share, which were subsequently exercised in June 2020 . On June 24, 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. On October 9, 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 on June 24, 2020 and October 9, 2020 were determined based on the Company’s closing stock price on the settlement date. See Note 6 – Borrowings . 10. Stock-Based Compensation Expense On May 16, 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. 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’ 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 27 the service period for recognition of the associated expense. Restricted stock units with time-based vesting generally vest at a rate of 25 % per year over four years with consideration satisfied by service to the Company. The Company also issues restricted stock units with market conditions. The grant date fair value and the effect of the market conditions was estimated using a Monte Carlo valuation. 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 rendered . Total stock-based compensation expense recognized in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019 was as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 RSUs and options $ 1,225 $ 1,534 $ 4,413 $ 4,931 Employee stock purchase plan 69 106 194 381 Total stock compensation expense $ 1,294 $ 1,640 $ 4,607 $ 5,312 During 2020, the Company granted the following awards: Three Months Ended Three Months Ended Three Months Ended Nine Months Ended March 31, 2020 June 30, 2020 September 30, 2020 September 30, 2020 Employee awards: Market RSUs — — 1,571,000 (7) 1,571,000 RSUs 230,000 (1) 2,109,228 (2) 1,776,250 (8) 4,115,478 Options 78,500 (3) 117,900 (4) — 196,400 Non-employee director awards: RSUs 42,067 (5) 772,685 (6) — 814,752 Total awards: Market RSUs — — 1,571,000 1,571,000 RSUs 272,067 2,881,913 1,776,250 4,930,230 Options 78,500 117,900 — 196,400 (1) RSUs had a weighted average grant date fair value of $ 1.25 per share and a primary vesting period of four years . (2) RSUs had a weighted average grant date fair value of $ 1.34 per share and a primary vesting period of four years . (3) Options had a weighted average exercise price of $ 1.25 per share and vest over a four year period. The weighted average grant date fair value was $ 0.93 per share, as determined using a Black-Scholes option pricing model, with the following key assumptions: risk-free interest rate of 0.79 %; expected life of approximately 5.67 years ; volatility of 93.83 %, and dividend yield of zero . (4) Options had a weighted average exercise price of $ 1.34 per share and vest over a four year period. The weighted average grant date fair value was $ 0.99 per share, as determined using a Black-Scholes option pricing model, with the following key assumptions: risk-free interest rate of 0.39 %; expected life of approximately 5.67 years ; volatility of 93.83 %, and dividend yield of zero . (5) RSUs had a weighted average grant date fair value of $ 1.17 per share and vested 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. (6) RSUs had a weighted average grant date fair value of $ 1.34 per share and vested 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. (7) Market RSUs had a grant date fair value of $ 3.77 per share and will vest on May 22, 2023 provided that the closing price of the Company’s common stock on such vesting date is not less than the closing price on August 27, 2020. 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 August 27, 2020 until May 22, 2023 related 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 % percent of target, 90th percentile or higher= 300 % maximum. Payout values will be interpolated between the percentile rankings above. (8) RSUs had a weighted average grant date fair value of $ 1.70 per share and a primary vesting period of four years . As of September 30, 2020, there was $ 5.6 million of unrecognized stock-based compensation expense related to options and PNQs, which is expected to be recognized over a weighted average period of approximately 2.2 years, and $ 5.8 million and $ 5.7 million of unrecognized stock-based compensation expense related to RSUs and Market RSUs, respectively, which is expected to be recognized over a weighted average period of approximately 3.7 and 2.6 years, respectively. 28 11. 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 condensed 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 September 30, 2020, 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. Following the public announcement in January 2016 of the election by sanofi-aventis U.S. LLC (“Sanofi”) to terminate a license and collaboration agreement (the “Sanofi License Agreement”) between the Company and Sanofi and the subsequent decline in the Company’s stock price, two motions were submitted to the district court at Tel Aviv, Economic Department for the certification of a class action against the Company and certain of its officers and directors. In general, the complaints allege that the Company and certain of its officers and directors violated Israeli and U.S. securities laws by making materially false and misleading statements regarding the prospects for Afrezza, thereby artificially inflating the price of its common stock. The plaintiffs are seeking monetary damages. In November 2016, the district court dismissed one of the actions without prejudice. In the remaining action, the district court ruled in October 2017 that U.S. law will apply to this case. The plaintiff appealed this ruling, and following an oral hearing before the Supreme Court of Israel, decided to withdraw his appeal. Subsequently, in November 2018, the Company filed a motion to dismiss the certification motion. In September 2019, the plaintiff brought a motion to amend his claim, which the court denied in January 2020. The plaintiff has appealed this denial to the Supreme Court of Israel. The Company will continue to vigorously defend against the claims advanced. Contingencies — In July 2013, the Company entered into an agreement with the 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, $ 70.0 million of which remains payable upon achievement of such milestones (see Note 6 – Borrowings ). The fair value of the Milestone Rights is recorded in the condensed consolidated balance sheet, including $ 1.3 million in accrued expenses and other current liabilities and $ 5.9 million in milestone rights and other liabilities. Commitments — In July 2014, the Company entered into an Insulin Supply Agreement (the “Insulin Supply Agreement”) with Amphastar Pharmaceuticals, Inc. (“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 August 2019, the Company and Amphastar amended the Insulin Supply Agreement to extend the term to 2026 and to restructure the annual purchase commitments. As of September 30, 2020, the annual purchase requirements under the amended contract are as follows: Minimum Commitment 2020 € 5.5 million 2021 € 6.6 million 2022 € 8.5 million 2023 € 10.9 million 2024 € 14.6 million 2025 € 15.5 million 2026 € 19.4 million Unless terminated earlier, the term of the Insulin Supply Agreement expires on December 31, 2026 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 29 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 . Warrants – In August 2019, in connection with the MidCap Credit Facility, 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, to the lenders. Additional MidCap warrants will be issued if the Company accesses additional tranches under the MidCap Credit Facility (see Note 6 – Borrowings ). Vehicle Leases – During the second quarter of 2018, the Company entered into a lease agreement with Enterprise Fleet Management Inc. for the lease of 119 vehicles. The lease requires monthly payments of approximately $ 83,000 per month including the cost of maintaining the vehicles, taxes and insurance. The lease commenced when the Company took possession of the majority of the vehicles in the second quarter of 2018 and expires 48 months after the delivery date. During 2019, 29 vehicles were removed from the fleet, resulting in a fleet size of 90 vehicles. An additional vehicle was removed from the fleet in 2020. The revised monthly payment inclusive of maintenance fees, insurance and taxes is $ 65,000 . The lease expense is included in selling, general and administrative expenses in the accompanying condensed consolidated statement of operations. Upon adoption of ASC 842, the agreement was classified as an operating lease which resulted in recording right-of-use assets and lease liabilities of approximately $ 1.6 million and $ 1.9 million, respectively, as of January 1, 2019. These amounts included approximately $ 1.6 million of non-current other assets and approximately $ 0.6 million and $ 1.3 million of other current liabilities and operating lease liabilities, respectively. Office Lease — In May 2017, the Company executed an office lease with Russell Ranch Road II LLC for the Company’s corporate headquarters 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 October 2017 through February 2018. The lease also provides for allowances for tenant alterations and maintenance. The lease expires in January 2023 and provides the Company with a five year renewal option. The lease expense is included in selling, general and administrative expenses in the accompanying condensed 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 headquarters in Westlake Village, California. The office lease commenced in October 2018. The Company agreed to pay initial monthly lease payments of $ 35,969 , subject to a 3 % annual increase, plus the estimated operating cost of maintaining the property by the landlord, which are allocable based an annual assessment made by the landlord. In addition, the Company received reimbursement from the landlord of $ 56,325 for tenant improvements and was not required to pay a first-year common area maintenance fee. The lease expires in January 2023 and provides the Company with a five year renewal option. Upon adoption of ASC 842, this lease was classified as an operating lease, which resulted in recording right-of-use assets and lease liabilities of approximately $ 3.2 million and $ 3.5 million, respectively, as of January 1, 2019. These amounts included approximately $ 0.9 million and $ 2.6 million of other current liabilities and operating lease liabilities, respectively. For the three and nine months ended September 30, 2020, operating lease costs under all operating leases, including office space and equipment, was approximately $ 0.4 million and $ 1.1 million, respectively. Cash paid for all operating leases for the three and nine months ended September 30, 2020 was $ 0.5 million and $ 1.3 million, respectively. Variable lease costs were approximately $ 0.1 million and $ 0.3 million for the three and nine months ended September 30, 2020, respectively. For the three and nine months ended September 30, 2019, operating lease costs under all operating leases, including office space and equipment, was approximately $ 0.4 million and $ 1.1 million, respectively. Cash paid for all operating leases for the three and nine months ended September 30, 2019 was $ 0.5 million and $ 1.3 million, respectively. Variable lease costs were approximately $ 0.1 million and $ 0.3 million for the three and nine months ended September 30, 2019, respectively. September 30, 2020 December 31, 2019 Weighted average remaining lease term (in years) 2.2 3.0 Weighted average discount rate 7.5 % 7.5 % 30 Future minimum office and vehicle lease payments as of September 30, 2020 and December 31, 2019, are as follows (in thousands): September 30, 2020 December 31, 2019 2020 $ 371 $ 1,470 2021 1,494 1,499 2022 1,239 1,241 2023 88 88 Total $ 3,192 $ 4,298 12. Income Taxes Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets and concluded, in accordance with the applicable accounting standards, that net deferred tax assets should be fully reserved. The Company has assessed its position with regards to uncertainty in tax positions and believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to this guidance. The Company’s tax years since 2016 and 2015 remain subject to examination by federal and state tax authorities, respectively. The Company has recorded an income tax benefit of $ 0.2 million for the three and nine months ended September 30, 2020 for an effective tax rate of 1.90 % and 0.70 % respectively, compared to zero effective tax rate and tax benefit for the same periods in the prior year. The income tax rates for the three and nine months ended September 30, 2020 diverge from the federal statutory rate due to the full valuation allowance offsetting the Company’s net deferred tax assets and a discrete benefit of $ 0.2 million related to refunded foreign withholding taxes paid in 2018. 31