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Item 2. Management’s Discussion and Analysis

2021-05-12 compared with 2020-11-04 · 88 added, 182 removed, 55 unchanged (83% of the section changed)

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We are a biopharmaceutical company focused on the development and commercialization of inhaled therapeutic products for endocrine and orphan lung diseases.

Our only approved product, Afrezza (insulin human) Inhalation Powder, is an ultra rapid-acting inhaled insulin that was approved by the FDA in June 2014 to improve glycemic control in adult patients with diabetes.

Afrezza became available by prescription in United States retail pharmacies in February 2015.

Our business is subject to significant risks, including but not limited to our need to raise additional capital to fund our operations, our ability to commercialize Afrezza successfully, our ability to manufacture sufficient quantities of Afrezza and competition from other products and technologies.

Other significant risks also include the risks inherent in clinical trials and the regulatory approval process for our product candidates, which in some cases depends upon the efforts of our partners.

Our lead product, is Afrezza (insulin human) Inhalation Powder, an ultra rapid-acting inhaled insulin indicated to improve glycemic control in adults with diabetes, which was approved by the FDA in June 2014.

Since September 2018, we have been collaborating with United Therapeutics to develop an inhaled formulation of treprostinil known as Tyvaso DPI.

In April 2021, United Therapeutics submitted an NDA for Tyvaso DPI to the FDA.

United Therapeutics has applied a priority review voucher to the NDA that could provide for an FDA decision by December 2021.

The FDA must first accept the application for review and issue a formal review goal date in accordance with the Prescription Drug User Fee Act.

Our business is subject to significant risks, including but not limited to our ability to commercialize Afrezza successfully, our ability to manufacture sufficient quantities of Afrezza and Tyvaso DPI and our potential need to raise additional capital to fund our operations.

Other significant risks also include the risks inherent in drug development, clinical trials and the regulatory approval process for our product candidates, which in some cases depends upon the efforts of our partners.

We continue to manage the risk to our business posed by the global COVID-19 pandemic.

Our sales representatives have resumed in-person sales calls to the extent permitted by state and local public health authorities and by the policies of individual healthcare providers on their call lists.

Our offices in California and Connecticut have reopened to non-essential personnel, although many employees continue to work from home for a portion of each workweek.

Our offices in California and Connecticut have remained open for essential personnel and, as public health orders allow, have reopened to non-essential personnel, although many employees continue to work from home for a portion of each workweek.

Although our productivity has been impacted by the global pandemic, we have suitably adapted to the changed business environment that now exists.

The COVID-19 pandemic continues to evolve rapidly and its ultimate impact remains highly uncertain.

The impact of the COVID-19 pandemic continues to be uncertain.

We do not yet know the full extent of potential delays or impacts on our business, our collaboration arrangements, commercialization efforts, healthcare systems or to the global economy as a whole.

We expect the COVID-19 pandemic to continue to negatively impact our near-term revenues from Afrezza and believe it has the potential to have additional adverse impacts on our operations.

The COVID-19 pandemic has the potential to have additional adverse impacts on our operations.

We will continue to monitor the COVID-19 situation closely.

As of September 30, 2020, we had an accumulated deficit of $3.0 billion and a stockholders’ deficit of $186.4 million.

We had net loss of $11.3 million and $30.8 million for the three and nine months ended September 30, 2020, respectively.

To date, we have funded our operations through the sale of equity and convertible debt securities, from the receipt of upfront and milestone payments from certain collaborations, from borrowings under certain loan arrangements and from commercial product sales.

As discussed below in “Liquidity and Capital Resources,” if we are unable to obtain additional funding, there will continue to be substantial doubt about our ability to continue as a going concern.

As of March 31, 2021, we had an accumulated deficit of $3.1 billion and a stockholders’ deficit of $173.6 million.

We had net loss of $12.9 million for the three months ended March 31, 2021.

To date, we have funded our operations through the sale of convertible debt securities and equity, from the receipt of upfront and milestone payments from certain collaborations, and from borrowings under certain loan arrangements and also from the sale of Afrezza.

CRITICAL ACCOUNTING POLICIES

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RESULTS OF OPERATIONS

Three and nine months ended September 30, 2020 and 2019

The following tables provide a comparison of the revenue categories for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands):

Three Months Ended September 30,

Net revenue — commercial product sales:

Gross revenue from commercial product sales

Wholesaler distribution fees, rebates and chargebacks,

product returns and other discounts

Net revenue — commercial product sales

Revenue — collaborations and services

Total revenues

Nine Months Ended September 30,

Three months ended March 31, 2021 and 2020

The following tables provide a comparison of the revenue categories for the three months ended March 31, 2021 and 2020 (dollars in thousands):

Three Months Ended

Net revenue — commercial product sales:

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Total revenues

Gross revenue from the sales of Afrezza increased by $1.2 million, or 11%, for the three months ended September 30, 2020 compared to the same period in the prior year.

The increase was primarily driven by higher product demand with a more favorable mix of Afrezza cartridges and a price increase, partially offset by a reduction in sales to Biomm (Brazil).

The gross-to-net adjustment was $5.1 million (or 41% of gross revenue) for the three months ended September 30, 2020, compared to $4.7 million (or 43% of gross revenue) for the same period in the prior year.

The increase of $0.4 million was primarily driven by an increase in commercial product sales and a decrease in accounting estimates for product returns, partially offset by an increase in the utilization of our patient co-pay assistance program.

As a result, net revenue from the sales of Afrezza increased by $0.9 million, or 14%, for the three months ended September 30, 2020 compared to the prior year period.

During the third quarter of 2020, our sales force had varying degrees of access to physicians due to restrictions enacted in response to the COVID-19 pandemic.

This limitation on access continued to have an unfavorable impact on our commercial sales during the three months ended September 30, 2020 and is expected to continue to negatively impact our near-term revenues from Afrezza.

Net revenue from collaborations and services decreased by $0.1 million, or 1%, for the three months ended September 30, 2020 compared to the same period in the prior year.

During the third quarter of 2020, the Company sold clinical supplies to UT for use in their clinical study.

S ee Note 7 – Collaboration and Licensing Agreements in the condensed consolidated financial statements included in Part I – Financial Statements (Unaudited).

Gross revenue from the sales of Afrezza increased by $8.5 million, or 29%, for the nine months ended September 30, 2020 compared to the same period in the prior year.

The increase was primarily driven by higher product demand with a more favorable mix of Afrezza cartridges and a price increase, partially offset by a reduction in sales to Biomm (Brazil).

The gross-to-net adjustment was $16.0 million (or 42% of gross revenue) for the nine months ended September 30, 2020, compared to $12.2 million (or 41% of gross revenue) for the same period in the prior year.

The increase of $3.8 million was primarily driven by an increase in commercial product sales and a decrease in accounting estimates for product returns, partially offset by an increase in the utilization of our patient co-pay assistance program and accounting estimates for rebates.

As a result, net revenue from the sales of Afrezza increased by $4.7 million, or 27%, for the nine months ended September 30, 2020 compared to the prior year period.

The stay-at-home orders implemented around the country in response to the COVID-19 pandemic negatively impacted the sales of Afrezza by limiting the access of our sales force to physicians.

The COVID-19 pandemic is expected to continue to negatively impact our near-term revenues from Afrezza.

Net revenue from collaborations and services decreased by $5.1 million, or 17%, for the nine months ended September 30, 2020 compared to the same period in the prior year.

This was primarily driven by a $5.7 million decrease in revenue recognized from the UT Research Agreement, which was substantially completed in the second quarter of 2019.

During the third quarter of 2020, the Company sold clinical supplies to UT.

S ee Note 7 – Collaboration and Licensing Agreements in the condensed consolidated financial statements included in Part I – Financial Statements (Unaudited).

Commercial product gross profit

The following tables provide a comparison of the commercial product gross profit categories for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands):

Three Months Ended September 30,

Gross revenue from the sales of Afrezza decreased by $0.3 million, or 2%, for the three months ended March 31, 2021 compared to the same period in the prior year.

The decrease reflects the absence of stockpiling of Afrezza during the first quarter of 2021 in contrast to the same period last year when there was a noticeable increase in prescription refills as lockdowns began to be imposed across the country in response to the emerging COVID-19 pandemic.

The gross-to-net adjustment was $5.5 million (or 40% of gross revenue) for the three months ended March 31, 2021, compared to $5.9 million (or 43% of gross revenue) for the same period in the prior year.

The decrease of $0.4 million was primarily driven by a decrease in accounting estimates for wholesaler distribution fees and prompt pay discounts as a result of the termination of our free goods program on December 31, 2020.

As a result, net revenue from the sales of Afrezza increased by $0.1 million, or 1%, for the three months ended March 31, 2021 compared to the prior year period.

Our sales force continues to have varying degrees of access to physicians due to restrictions enacted in response to the COVID-19 pandemic.

This limitation on access continued to have an impact on our commercial sales during the three months ended March 31, 2021 and may continue to negatively impact our near-term revenues from Afrezza.

Net revenue from collaborations and services increased by $1.1 million, or 13%, for the three months ended March 31, 2021 compared to the same period in the prior year.

The increase in collaborations and services revenue was primarily attributed to the UT license agreement and the Vertice Pharma Co-promotion Agreement.

See Note 7 – Collaboration, Licensing and Other Arrangements .

Commercial product gross profit

Net revenue — commercial product sales

cost of goods sold

Commercial product gross profit (loss)

Nine Months Ended September 30,

The following tables provide a comparison of the commercial product gross profit categories for the three months ended March 31, 2021 and 2020 (dollars in thousands):

Three Months Ended

Commercial product gross profit:

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Commercial product gross profit

Not meaningful.

Commercial product gross profit for the three months ended September 30, 2020 increased by $4.4 million compared to the same period in the prior year.

Gross margin for the three months ended September 30, 2020 increased to 51% from a negative 11% for the same period in the prior year.

The increase in gross profit and gross margin was attributable to a reduction in cost of goods sold combined with higher commercial product sales.

Cost of goods sold de creased by $3.5 million, or 49%, for the three months ended September 30, 2020 compared to the same period in the prior year, primarily attributable to a $2.8 million amendment fee associated with our Insulin supply agreement in 2019, $0.5 million in reduced manufacturing-related spending and $0.5 million of costs associated with product sales in Brazil (Biomm) in 2019, partially offset by $0.4 million of decreased manufacturing activities which resulted in a reduced amount of costs capitalized to inventory.

Commercial product gross profit for the nine months ended September 30, 2020 increased by $8.7 million compared to the same period in the prior year.

Gross margin for the nine months ended September 30, 2020 increased to 49% from 12% for the same period in the prior year.

The increase in gross profit and gross margin was attributable to a reduction in cost of goods sold combined with higher commercial product sales.

Cost of goods sold decreased by $4.0 million, or 26%, for the nine months ended September 30, 2020 compared to the same period in the prior year.

The reduction in cost of goods sold was primarily attributable to a $2.8 million amendment fee associated with our Insulin supply agreement in 2019, $0.8 million of increased manufacturing activities which resulted in a greater amount of costs capitalized to inventory and $1.1 million in reduced manufacturing-related spending, partially offset by $0.5 million of inventory write-offs and $0.4 million in costs associated with higher commercial product sales.

The following tables provide a comparison of the expense categories for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands):

Three Months Ended September 30,

Cost of goods sold

Cost of revenue — collaborations and services

Research and development

General and administrative

Loss (gain) on foreign currency translation

Total expenses

Nine Months Ended September 30,

Commercial product gross profit for the three months ended March 31, 2021 decreased by $0.1 million, or 1%, compared to the same period in the prior year.

Gross margin for the three months ended March 31, 2021 was 47% compared to 48% for the same period in the prior year.

The decrease in gross profit and gross margin was attributable to an increase in cost of goods sold.

Cost of goods sold in creased by $0.2 million, or 4%, for the three months ended March 31, 2021 compared to the same period in the prior year, primarily due to $1.2 million of decreased manufacturing activities, which resulted in a reduced amount of costs capitalized to inventory, partially offset by $0.5 million of inventory write-offs and $0.4 million of costs associated with lower product sales, of which $0.2 million is associated with the impact of the termination of the free goods program on December 31, 2020.

The following tables provide a comparison of the expense categories for the three months ended March 31, 2021 and 2020 (dollars in thousands):

Three Months Ended

Cost of goods sold

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Asset impairment

Loss (gain) on foreign currency translation

Gain on foreign currency translation

Total expenses

Cost of revenue — collaborations and services decreased by $0.3 million, or 14%, for the three months ended September 30, 2020 compared to the same period in the prior year.

The decrease was attributable to resource costs related to conducting activities for our collaboration partner, UT, in addition to the cost of clinical supplies.

Cost of revenue — collaborations and services increased by $1.4 million, or 26%, for the nine months ended September 30, 2020 compared to the same period in the prior year.

The increase was attributable to resource costs related to conducting activities for our collaboration partners, UT and Cipla, in addition to the cost of clinical supplies.

Research and development expenses decreased by $ 0.1 million, or 6%, for the three months ended September 30, 2020 compared to the same period in the prior year.

The decrease was attributable to lower clinical trial spending, partially offset by an increase in preventative maintenance efforts in 2020.

Research and development expenses decreased by $ 0.2 million, or 4%, for the nine months ended September 30, 2020 compared to the same period in the prior year.

The decrease was attributable to lower clinical trial spending, partially offset by an increase in preventative maintenance efforts in 2020.

Selling expenses decreased by $1.3 million, or 13%, for the three months ended September 30, 2020 compared to the same period in the prior year .

The decrease was primarily attributable to a $1.2 million reduction in promotional and marketing activities.

Selling expenses decreased by $13.9 million, or 37%, for the nine months ended September 30, 2020 compared to the same period in the prior year .

The decrease was primarily attributable to a $9.3 million decrease in costs for television advertising for Afrezza and a $4.1 million decrease from a reduction in promotional and marketing activities.

General and administrative expenses decreased by $ 1.5 million, or 21%, for the three months ended September 30, 2020 compared to the same period in the prior year .

This decrease was primarily attributable to a $0.8 million decrease in professional costs .

General and administrative expenses decreased by $3.1 million, or 15%, for the nine months ended September 30, 2020 compared to the same period in the prior year .

This decrease was primarily attributable to a $1.3 million decrease in consulting costs, a $1.2 million decrease in personnel and employee related costs and a $0.3 million reduction in property taxes.

During the nine months ended September 30, 2020, an impairment of $1.9 million was recognized for a commitment asset and debt issuance costs related to the future funding commitments of the MidCap Credit Facility (see Note 1 – Description of Business and Significant Accounting Policies and Note 6 – Borrowings in the condensed consolidated financial statements included in Part I – Financial Statements (Unaudited).There were no asset impairments for the three months ended September 30, 2020 or the three or nine months ended September 30, 2019.

Cost of revenue — collaborations and services decreased by $0.1 million, or 2%, for the three months ended March 31, 2021 compared to the same period in the prior year.

The decrease was attributable to costs incurred in the prior year period for the Cipla distribution agreement that were not incurred in the current period, partially offset by an increase in costs for the UT License agreement and the Vertice Pharma Co-promotion Agreement.

Research and development expenses increased by $0.7 million, or 39%, for the three months ended March 31, 2021 compared to the same period in the prior year.

The increase was attributable to personnel costs primarily related to increased headcount for research and development, regulatory and medical affairs.

Selling expenses increased by $1.5 million, or 18%, for the three months ended March 31, 2021 compared to the same period in the prior year .

The increase was primarily attributable to a $0.8 million increase in personnel costs primarily related to increased headcount for our Afrezza commercial team, $0.3 million in patient support services and $0.3 million in promotional and marketing activities.

General and administrative expenses increased by $ 1.6 million, or 26%, for the three months ended March 31, 2021 compared to the same period in the prior year .

This increase was primarily attributable to personnel-related costs .

An impairment of $1.5 million was recognized for the three months ended March 31, 2020 for a commitment asset related to the future funding commitments of the MidCap credit facility.

There were no asset impairments for the three months ended March 31, 2021.

Under the Insulin Supply Agreement with Amphastar, payment obligations are denominated in Euros.

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dollar to Euro exchange rate associated with the recognized gain or loss on purchase commitments.

The foreign currency translation gain decreased $7.7 million for the three months ended September 30, 2020 to a loss of $3.9 million, compared to a gain of $3.8 million for the same period in the prior year.

The foreign currency translation gain decreased $8.5 million for the nine months ended September 30, 2020 to a loss of $4.0 million, compared to a gain of $4.5 million for the same period in the prior year.

This impact was due to the translation of the U.S.

dollar to Euro exchange rates.

Other Income (Expense)

The following tables provide a comparison of the other income (expense) categories for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands):

Three Months Ended September 30,

Interest income

Interest expense on notes

Interest expense on promissory notes

Gain on extinguishment of debt

The foreign currency translation gain increased $2.0 million for the three months ended March 31, 2021 compared to the same period in the prior year.

Other Income (Expense)

Total other expense

Nine Months Ended September 30,

The following tables provide a comparison of the other income (expense) categories for the three months ended March 31, 2021 and 2020 (dollars in thousands):

Three Months Ended

Interest income

Interest expense on notes

Interest expense on promissory notes

Gain on extinguishment of debt

Other income (expense)

Interest expense on Mann Group promissory notes

Other expense

Total other expense

Interest income decreased by $0.2 million and $0.6 million, or 92% and 79%, for the three and nine months ended September 30, 2020, respectively, compared to the same period in the prior year, due to lower short-term interest rates.

Interest expense on notes decreased by $3.1 million and $2.1 million, or 74% and 39%, for the three and nine months ended September 30, 2020, respectively, compared to the same period in the prior year.

The decrease was primarily due to a $3.4 million milestone obligation that was achieved in the third quarter of 2019, partially offset by interest expense from the MidCap Credit Facility.

The gain on extinguishment of debt for the three and nine months ended September 30, 2019 was primarily due to the cancellation of the 2021 notes in exchange for cash, common stock, 2024 convertible notes and non-interest bearing notes in August 2019 pursuant to an exchange agreement.

There was no gain on extinguishments for the three and nine months ended September 30, 2020.

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* Not meaningful

Interest income de creased by $ 0.

1 million , or 9 8 % for the three months ended March 31, 2021 compared to the same period in the prior year, due to lower short-term interest rates .

Interest expense increased by $4.4 million for the three months ended March 31, 2021 compared to the same period in the prior year.

The increase was primarily due to a $3.7 million milestone obligation that was achieved during the quarter and interest expense from the Senior convertible notes and the MidCap credit facility.

Other expense consisted of a loss associated with a foreign currency hedging transaction for the three months ended March 31, 2021 which was entered to mitigate our exposure to foreign currency exchange risks associated with our insulin purchase obligation under the Insulin Supply Agreement.

There was no hedging transaction for the same period in the prior year.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2020, we had $ 122.6 million principal amount of outstanding debt consisting of:

$40.0 million principal amount under the MidCap Credit Facility bearing interest at an annual rate equal to one-month LIBOR plus 6.75%, subject to a one-month LIBOR floor of 2.00%, and payable in equal monthly installments beginning in August 2021 through maturity in August 2024;

$5.0 million principal amount of 2024 convertible notes bearing interest at 5.75% per annum, with interest payable in cash or equity semiannually in arrears on February 15 and August 15 of each year, and maturing in November 2024, all of which is convertible into shares of our common stock at the option of the holder at a conversion price of $3.00 per share;

$2.6 million principal amount of the December 2020 note , which was prepaid in October 2020 with the issuance of 1,377,356 shares of our common stock;

1 million principal amount of indebtedness under the Mann Group promissory notes bearing interest at a fixed rate of 7.00% per annum compounded quarterly and maturing in November 2024, $35.0 million of which is convertible into shares of our common stock at the option of t he Mann Group at a conversion price of $2.50 per share.

To date, we have funded our operations through the sale of equity and convertible debt securities, from the receipt of upfront and milestone payments from certain collaborations, and from borrowings under certain loan arrangements and the sales of Afrezza.

As of March 31, 2021, we had $338.4 million principal amount of outstanding debt, consisting of:

$230.0 million aggregate principal amount of Senior convertible notes bearing interest at 2.50% payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2021 and will mature on March 1, 2026, unless earlier converted, redeemed or repurchased.

The Senior convertible notes are convertible at an initial conversion price of approximately $5.21 per share of Common Stock.

The conversion rate is subject to adjustment under certain circumstances in accordance with the terms of the Indenture.

$50.0 million principal amount under the MidCap credit facility, bearing interest at an annual rate equal to one-month LIBOR plus 6.75%, subject to a one-month LIBOR floor of 2.00%, payable in equal monthly installments beginning in September 2022 through maturity in August 2024.

$53.5 million principal amount of indebtedness under the Mann Group promissory notes bearing interest at a fixed rate of 7.00% per annum compounded quarterly and maturing in November 2024, $18.4 million of which is convertible into shares of our common stock at the option of Mann Group at a conversion price of $2.50 per share.

Interest is paid-in-kind from August 2019 until the end of 2020, after which we have the option to either pay interest in-kind or in shares.

$4.9 million from a loan under the Paycheck Protection Program of the CARES Act, all or a portion of which may be forgiven.

$4.9 million from a loan under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), all or a portion of which may be forgiven.

The PPP loan matures in April 2022 and bears interest at a rate of 0.98% per annum.

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.

There can be no assurance that we will have sufficient resources to make any required repayments of principal under the MidCap Credit Facility, the 2024 convertible notes, the Mann Group promissory notes or unforgiven amounts of the PPP Loan if required.

Further, if we undergo a fundamental change, as that term is defined in the indentures governing the terms of the 2024 convertible notes, the holders of such debt securities will have the option to require us to repurchase all or any portion of such debt securities at a repurchase price of 100% of the principal amount of such debt securities to be repurchased plus accrued and unpaid interest, if any.

The 2024 convertible notes and the Mann Group convertible note are fully convertible at any time prior to maturity as further disclosed in Note 6 – Borrowings .

Principal and interest payments can be deferred up to ten months after the end of a 24-week covered period unless we are notified earlier of our 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 we will then make equal monthly payments as required to fully amortize the remaining principal amount by April 9, 2022.

In February 2021, we elected to convert the $5.0 million principal amount of 2024 convertible notes into 1,666,667 shares of our common stock in accordance with the terms of the 2024 convertible notes.

There can be no assurance that we will have sufficient resources to make any required repayments of principal under the Senior Convertible Notes, the MidCap credit facility, promissory notes or unforgiven amounts of the PPP Loan.

The Senior Convertible Notes and Mann Group convertible notes are fully convertible prior to maturity as further disclosed in Note 6 – Borrowings .

To date, we have been able to timely make our required interest payments, but we cannot guarantee that we will be able to do so in the future.

If we fail to pay interest on the 2024 convertible notes or under the MidCap Credit Facility, or if we fail to repay or repurchase the 2024 convertible notes, the Mann Group promissory notes, borrowings under the MidCap Credit Facility or unforgiven amounts of the PPP Loan, we will be in default under the applicable instrument for such indebtedness, and may also suffer an event of default under the terms of other borrowing arrangements that we may enter into from time to time.

If we fail to repurchase the Mann Group promissory notes or unforgiven amounts of the PPP loan, we will be in default under the applicable instrument for such indebtedness, and may also suffer an event of default under the terms of other borrowing arrangements that we may enter into from time to time.

Any of these events could have a material adverse effect on our business, results of operations and financial condition, up to and including the noteholders initiating bankruptcy proceedings or causing us to cease operations altogether.

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See Note 12 – Commitments and Contingencies and Note 6 – Borrowings for further information related to the Milestone Rights.

These liabilities and other factors raise substantial doubt about our ability to continue as a going concern.

Our financial statements and related notes thereto included elsewhere in this report do not include adjustments that might result from any unfavorable outcome of this uncertainty.

During the nine months ended September 30, 2020, we used $28.4 million of cash for our operating activities as a result of our net loss of $30.8 million, in addition to a net cash outflow from changes in balances of operating assets and liabilities of $14.9 million, partially offset by non-cash charges of $17.4 million.

The change in operating asset and liabilities was primarily a result of deferred revenue amortization of $24.4 million, partially offset by a milestone payment from UT of $12.5 million.

During the nine months ended September 30, 2019, we used $83.4 million of cash for our operating activities as a result of our net loss of $37.6 million.

The net cash outflow was primarily due to result of deferred revenue amortization of $29.5 million and paid-in-kind interest on Promissory note of $32.8 million, partially offset by a milestone payment from UT of $12.5 million.

Cash provided by investing activities of $19.7 million for the nine months ended September 30, 2020 was primarily due to the proceeds from the sale of treasury bills.

Cash used investing activities of $22.6 million for the nine months ended September 30, 2019, was primarily due to a purchase of short-term treasury bills of $44.9 million partially offset by proceeds of from sales of treasury bills of $25.0 million.

Cash provided by financing activities of $31.2 million for the nine months ended September 30, 2020 was primarily due to the receipt of $15.1 million in gross proceeds from at the market offerings for an aggregate of 9,401,827 shares of our common stock under the CF Sales Agreement, the exercise of outstanding warrants to purchase shares of our common stock of $11.6 million, and proceeds from the PPP Loan of $4.9 million.

Cash provided by financing activities of $64.8 million for the nine months ended September 30, 2019 was primarily due to net proceeds from the Midcap Credit Facility of $39.1 million and net proceeds from exchange of Mann Group promissory notes which was offset by payments for financing facility of $6.9 million .

During the three months ended March 31, 2021, we used $12.7 million of cash for our operating activities as a result of our net loss of $12.9 million.

The net change in operating asset and liabilities was primarily a result of the recognition of amortization of deferred revenue of $9.0 million, partially offset by an increase in accrued expenses and other current liabilities of $8.3 million.

During the three months ended March 31, 2020, we used $11.2 million of cash for our operating activities as a result of our net loss of $9.3 million, the increase in operating assets and liabilities of $5.3 million and non-cash charges of $3.4 million.

The increase in operating asset and liabilities was primarily a result of deferred revenue amortization of $8.2 million.

Cash used in investing activities of $31.4 million for the three months ended March 31, 2021 was primarily due to the purchase of debt securities.

Cash provided by investing activities of $19.9 million for the three months ended March 31, 2020 was primarily due to the proceeds from the sale of treasury bills.

Cash provided by financing activities of $225.0 million for the three months ended March 31, 2021 was primarily due to net proceeds from the offering of Senior convertible notes of $222.9 million.

Cash provided by financing activities of $0.3 million for the three months ended March 31, 2020 was primarily due to proceeds from at-the-market offerings of $0.7 million, partially offset by the payment of employment taxes related to vested restricted stock units of $0.3 million.

Future Liquidity Needs

We are not currently profitable and have rarely generated positive net cash flows from operations.

In addition, we expect to continue to incur significant expenditures for the foreseeable future in support of our manufacturing operations, sales and marketing costs for Afrezza, and collaboration and development costs for product candidates in our pipeline.

As of September 30, 2020, we 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 our ability to continue as a going concern.

Our capital resources may not be sufficient to continue to meet our current and anticipated obligations over the next twelve months if we cannot increase our operating cash inflows by growing our prescription and revenue base and by obtaining access to the remaining $25.0 million borrowings that may become available under the MidCap Credit Facility (which, in turn, requires us to grow Afrezza revenue before we can access such funds).

The various stay-at-home orders implemented around the country in response to the COVID-19 pandemic have negatively impacted the sales of Afrezza by limiting the access of our sales force to physicians.

The COVID-19 pandemic is expected to continue to negatively impact our near-term revenues from Afrezza, which potentially shortens our cash runway.

Our ability to draw the $25.0 million Tranche 3 of the MidCap Credit Facility depends on our ability to achieve certain trailing 12-month Afrezza net revenue targets, which we are unlikely to achieve.

The availability of Tranche 3 also depends on TreT achieving certain development milestones, which is likely to be negatively impacted by the COVID-19 pandemic.

In the event our capital resources are not sufficient, we 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, we cannot provide assurances that additional capital will be available on acceptable terms or at all.

In addition, the COVID-19 pandemic continues to have the potential for disruption of global financial markets.

This disruption, if sustained or recurrent, could prevent us or make it more difficult for us to access capital or make it difficult to comply with the covenants contained in the MidCap Credit Facility, which could negatively affect our liquidity.

Issuances of debt or additional equity could impact the rights of our existing stockholders, dilute the ownership percentages of our existing stockholders and may impose restrictions on our operations.

These restrictions could include limitations on additional borrowing, specific restrictions on the use of our assets as well as prohibitions on our ability to create liens, pay dividends, redeem our stock or make investments.

The impact of the COVID-19 pandemic on Afrezza sales also increased the risk of non-compliance with a covenant relating to trailing twelve-month minimum Afrezza net revenue, tested on a monthly basis, which is set forth in the MidCap Credit Facility Agreement, as amended.

In August 2020, we entered into an amendment to the MidCap Credit Facility, pursuant to which the parties agreed that no breach of this covenant between July 31, 2020 and November 30, 2020 will be deemed to occur if we have unrestricted cash of at least $40.0 million.

Thereafter, if we fail to meet the minimum Afrezza net revenue covenant, any outstanding borrowings, together with accrued interest, under the MidCap Credit Facility could be declared immediately due and payable.

If we default under our obligations under the MidCap Credit Facility, the lender could proceed against the collateral granted to them to secure our indebtedness or declare all obligations under the MidCap Credit Facility to be due and payable.

In certain circumstances, procedures by the lender could result in a loss by us of all of our equipment and inventory, which are included in the collateral granted to the lender.

We may not have sufficient resources to make any required repayments of principal under the terms of our indebtedness when required.

While we have been able to timely make our required interest payments to date, we cannot guarantee that we will be able to do so in the future.

If we fail to pay interest on the 2024 convertible notes or the MidCap Term Loan, or if we fail to repay or repurchase the 2024 convertible notes, MidCap Term Loan, PPP Loan or borrowings under the Mann Group promissory notes when required, we will be in default under the instrument for such debt securities or loans, and may also suffer an event of default under the terms of other borrowing arrangements that we may enter into from time to time.

Any of these events could have a material adverse effect on our business, results of operations and financial condition, up to and including the note holders initiating bankruptcy proceedings or causing us to cease operations altogether.

If we are unable to meet our current and anticipated obligations over the next twelve months through our existing capital resources, or obtain new sources of capital when needed, we may have to delay or reduce the scope of our manufacturing operations, reduce or eliminate one or more of our development programs, or make significant changes to our operating plan.

These factors raise substantial doubt about our ability to continue as a going concern.

We are not currently profitable and have rarely generated positive net cash flow from operations.

In addition, we expect to continue to incur significant expenditures for the foreseeable future in support of our manufacturing operations, sales and marketing costs for Afrezza, and development costs for other product candidates in our pipeline.

As of March 31, 2021, we had capital resources of $247.8 million in cash and cash equivalents, $29.0 million in short-term investments, $1.5 million in long-term investments, an accumulated deficit of $3.1 billion and total principal amount of outstanding borrowings of $338.4 million.

In March 2021, we issued $230.0 million of Senior convertible notes before offering expenses.

In April 2021, we made a $10.0 million principal prepayment against outstanding term loans under the MidCap credit facility and repaid the entire principal amount of $35.1 million outstanding under the Mann Group non-convertible note (together with all accrued and unpaid interest thereon) as further disclosed in Note 6 – Borrowings .

As amended, the MidCap credit facility provides a secured term loan facility with an aggregate principal amount of up to $110.0 million, of which $60.0 million remains available for borrowing if the conditions for Tranche 3 are met.

We believe our resources will be sufficient to fund our operations for the next twelve months from the date of issuance of our condensed consolidated financial statements included in Part I – Financial Statements (Unaudited) .

Off-Balance Sheet Arrangements

As of September 30, 2020 and December 31, 2019, we did not have any off-balance sheet arrangements.

As of March 31, 2021 and December 31, 2020, we did not have any off-balance sheet arrangements.

Contractual Obligations

See Note 6 – Borrowings and Note 12 – Commitments and Contingencies for a discussion of material changes outside of the ordinary course of business in our contractual obligations from those disclosed within “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as contained in the Annual Report.

QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Interest on borrowings under the MidCap Credit Facility is determined, for any one-month period, on the basis of one-month LIBOR in effect at the beginning of such period plus 6.75%, subject to a one-month LIBOR floor of 2.00%.

Accordingly, our interest expense under the MidCap Credit Facility is subject to changes in the one-month LIBOR rate.

All other debt has fixed interest rates, so the interest expense associated with such debt is not exposed to changes in market interest rates.

Specifically, the interest rate on amounts borrowed under the Mann Group promissory notes is fixed at 7.00%, the interest rate under the 2024 convertible notes is fixed at 5.75%, and the interest rate under the PPP Loan is fixed at 0.98%.

See Note 6 – Borrowings for information about the principal amount of outstanding debt.

If a change in the one-month LIBOR interest rate equal to 10% of the one-month LIBOR interest rate on September 30, 2020 were to have occurred, this change would not have a material effect on our interest payment obligation.

Foreign Currency Exchange Risk

On July 1, 2019, the Company entered into a 90-day foreign currency hedging transaction to mitigate its exposure to foreign currency exchange risks associated with the then-existing third quarter amount of €1.9 million.

The Company realized a de minimis currency loss during third quarter of 2019.

This amount was recorded in other income and expense.

We incur and will continue to incur significant expenditures for insulin supply obligations under our Insulin Supply Agreement with Amphastar.

Such obligations are denominated in Euros.

At the end of each reporting period, the recognized gain or loss on purchase commitment is converted to U.S.

dollars at the then-applicable foreign exchange rate.

As a result, our business is affected by fluctuations in exchange rates between the U.S.

dollar and the Euro.

For the three months ended September 30, 2020, we realized a $3.9 million currency loss, which was included in loss on foreign currency translation in the accompanying condensed consolidated statements of operations.

Exchange rate fluctuations may adversely affect our expenses, results of operations, financial position and cash flows.

If a change in the U.S.

dollar to Euro exchange rate equal to 10% of the U.S.

dollar to Euro exchange rate on September 30, 2020 were to have occurred, this change would have resulted in a foreign currency impact to our pre-tax loss of approximately $9.5 million.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis