MANNKIND CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements in this report that are not strictly historical in nature are “forward-looking statements” within the meaning of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements, though not all forward-looking statements contain these identifying words. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below in Part II, Item 1A Risk Factors and elsewhere in this Quarterly Report on Form 10-Q. The preceding interim condensed consolidated financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and related notes for the year ended December 31, 2020 and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report. Readers are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made. OVERVIEW We are a biopharmaceutical company focused on the development and commercialization of inhaled therapeutic products for endocrine and orphan lung diseases. 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 to the FDA seeking approval of Tyvaso DPI for the treatment of pulmonary arterial hypertension (PAH) and pulmonary hypertension associated with interstitial lung disease (PH-ILD). In October 2021, the FDA issued a complete response letter to United Therapeutics pursuant to which the FDA declined to approve the NDA at this time, noting one deficiency related to an open inspection issue at a third-party analytical testing center for treprostinil. The complete response letter did not pertain to us, and no issues were cited by the FDA as it relates to our facility in Connecticut for manufacturing, testing and packaging of finished Tyvaso DPI, including its associated device. On October 18, 2021, UT stated that it believes that the single deficiency identified in the complete response will be resolved quickly and that Tyvaso DPI can receive approval by the summer of 2022, if not earlier. 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 are conducting in-person sales calls to the extent permitted by state and local public health authorities and by the policies of individual healthcare providers that they interact with. Employees in California and Connecticut are mostly working in-person at our facilities in these states, although some remote work arrangements are still in place. Although our productivity has been impacted by the global pandemic and we may face challenges or disruptions as employees return back to the workplace, including re-integration challenges by our employees and distractions to management related to such transition, we have suitably adapted to the changed business environment that now exists. 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. 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, 2021, we had an accumulated deficit of $3.1 billion and a stockholders’ deficit of $184.7 million. Our net loss was $4.4 million and $52.9 million for the three and nine months ended September 30, 2021, respectively. 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, from borrowings, from sales of Afrezza and, most recently, from the proceeds of the Sale-Leaseback Transaction. See Note 14 — Subsequent Event. CRITICAL ACCOUNTING POLICIES Our critical accounting policies can be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2020. See Note 1 – Description of Business and Significant Accounting Policies in the condensed consolidated financial statements included in Part I – Financial Statements (Unaudited) for descriptions of the new accounting policies and impact of adoption. 33 RESULTS OF OPERATIONS Three and nine months ended September 30, 2021 and 2020 Revenues The following tables provide a comparison of the revenue categories for the three and nine months ended September 30, 2021 and 2020 (dollars in thousands): Three Months Ended September 30, 2021 2020 $ Change % Change Net revenue — commercial product sales: Gross revenue from commercial product sales $ 16,335 $ 12,393 $ 3,942 32 % Wholesaler distribution fees, rebates and chargebacks, product returns and other discounts (6,582 ) (5,118 ) $ 1,464 29 % Net revenue — commercial product sales 9,753 7,275 $ 2,478 34 % Revenue — collaborations and services 12,458 8,077 $ 4,381 54 % Total revenues $ 22,211 $ 15,352 $ 6,859 45 % Nine Months Ended September 30, 2021 2020 $ Change % Change Net revenue — commercial product sales: Gross revenue from commercial product sales $ 46,520 $ 38,225 $ 8,295 22 % Wholesaler distribution fees, rebates and chargebacks, product returns and other discounts (18,692 ) (15,965 ) $ 2,727 17 % Net revenue — commercial product sales 27,828 22,260 $ 5,568 25 % Revenue — collaborations and services 35,099 24,441 $ 10,658 44 % Total revenues $ 62,927 $ 46,701 $ 16,226 35 % Gross revenue from sales of Afrezza increased by $3.9 million, or 32%, for the three months ended September 30, 2021 compared to the same period in the prior year. The increase reflects higher product demand and price. The gross-to-net adjustment was 40.3% of gross revenue, or $6.6 million, for the three months ended September 30, 2021, compared to 41.3% of gross revenue, or $5.1 million, for the same period in the prior year. The decrease in the gross-to-net percentage was primarily driven by a decrease in wholesaler distribution fees (as a percentage of gross sales) as a result of the termination of our free goods program on December 31, 2020 and a decrease in product returns, partially offset by an increase in co-pay assistance. As a result, net revenue from sales of Afrezza increased by $2.5 million, or 34%, for the three months ended September 30, 2021 compared to the prior year period. Net revenue from collaborations and services increased by $4.4 million, or 54%, for the three months ended September 30, 2021 compared to the same period in the prior year. The increase in collaborations and services revenue was primarily attributed to additional development work associated with our collaboration with UT and the change in the estimated completion date related to the amortization of deferred revenue for R&D Services. In August 2021, we entered into a commercial supply agreement with UT (the “CSA”). Revenue associated with the CSA is deferred until Tyvaso DPI is approved by the FDA for commercialization. See Note 7 – Collaboration, Licensing and Other Arrangements . Gross revenue from sales of Afrezza increased by $8.3 million, or 22%, for the nine months ended September 30, 2021 compared to the same period in the prior year. The increase reflects higher product demand as a result of increased promotional activity in addition to the negative impact the COVID-19 pandemic had on the demand of Afrezza prescriptions in 2020, a more favorable mix of Afrezza cartridges and price. The gross-to-net adjustment was 40.2% of gross revenue, or $18.7 million, for the nine months ended September 30, 2021, compared to 41.8% of gross revenue, or $16.0 million, for the same period in the prior year. The decrease in the gross-to-net percentage was primarily driven by a decrease in wholesaler distribution fees and rebates as a result of the termination of our free goods program on December 31, 2020, partially offset by an increase in co-pay assistance. As a result, net revenue from sales of Afrezza increased by $5.6 million, or 25%, for the nine months ended September 30, 2021 compared to the prior year period. Net revenue from collaborations and services increased by $10.7 million, or 44%, for the nine months ended September 30, 2021 compared to the same period in the prior year. The increase in collaborations and services revenue was primarily attributed to additional development work associated with our collaboration with UT and the change in the estimated completion date related to the amortization of deferred revenue for R&D Services. In August 2021, we entered into the CSA with UT. Revenue associated with the CSA is deferred until Tyvaso DPI is approved by the FDA for commercialization. See Note 7 – Collaboration, Licensing and Other Arrangements . 34 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, 2021 and 2020 (dollars in thousands): Three Months Ended September 30, 2021 2020 $ Change % Change Commercial product gross profit: Net revenue — commercial product sales $ 9,753 $ 7,275 $ 2,478 34 % Less: cost of goods sold 3,812 3,591 $ 221 6 % Commercial product gross profit $ 5,941 $ 3,684 $ 2,257 61 % Gross margin 61 % 51 % Nine Months Ended September 30, 2021 2020 $ Change % Change Commercial product gross profit: Net revenue — commercial product sales $ 27,828 $ 22,260 $ 5,568 25 % Less: cost of goods sold 12,538 11,432 $ 1,106 10 % Commercial product gross profit $ 15,290 $ 10,828 $ 4,462 41 % Gross margin 55 % 49 % Non-GAAP gross margin (1) 62 % 49 % ____________________ (1) See the reconciliation of gross margin to non-GAAP gross margin under Non-GAAP Measures below. Commercial product gross profit for the three months ended September 30, 2021 increased by $2.3 million, or 61%, compared to the same period in the prior year. Gross margin for the three months ended September 30, 2021 was 61% compared to 51% for the same period in the prior year. The increase in gross profit and gross margin was attributable to an increase in Afrezza sales partially offset by an increase in cost of goods sold. Cost of goods sold in creased by $0.2 million, or 6%, for the three months ended September 30, 2021 compared to the same period in the prior year. The increase in cost of goods sold was primarily attributable to a decrease in manufacturing activities, which resulted in a lower amount of costs capitalized to inventory, partially offset by a decrease in manufacturing-related spending. Commercial product gross profit for the nine months ended September 30, 2021 increased by $4.5 million, or 41%, compared to the same period in the prior year. Gross margin for the nine months ended September 30, 2021 was 55% compared to 49% for the same period in the prior year. The increase in gross profit and gross margin was attributable to an increase in Afrezza sales, partially offset by an increase in cost of goods sold. Cost of goods sold in creased by $1.1 million, or 10%, for the nine months ended September 30, 2021 compared to the same period in the prior year, primarily due to a $2.0 million fee for the amendment of the Insulin Supply Agreement and a $1.1 million decrease in manufacturing activities, which resulted in a lower amount of costs capitalized to inventory, partially offset by $0.9 million of costs associated with lower cost per unit and the termination of the free goods program in December 31, 2020 . On a non-GAAP basis, which excludes the $2.0 million insulin supply amendment fee, gross margin was 62% for the nine months ended September 30, 2021 compared to 49% for the same period in 2020. See the reconciliation to non-GAAP net loss and EPS under Non-GAAP Measures below. Expenses The following tables provide a comparison of the expense categories for the three and nine months ended September 30, 2021 and 2020 (dollars in thousands): Three Months Ended September 30, 2021 2020 $ Change % Change Expenses: Cost of goods sold $ 3,812 $ 3,591 $ 221 6 % Cost of revenue — collaborations and services 6,075 1,581 $ 4,494 284 % Research and development 3,655 1,484 $ 2,171 146 % Selling 10,839 8,270 $ 2,569 31 % General and administrative 6,382 5,629 $ 753 13 % Asset impairment 106 — $ 106 * (Gain) loss on foreign currency translation (2,068 ) 3,927 $ (5,995 ) * Total expenses $ 28,801 $ 24,482 $ 4,319 18 % 35 Nine Months Ended September 30, 2021 2020 $ Change % Change Expenses: Cost of goods sold $ 12,538 $ 11,432 $ 1,106 10 % Cost of revenue — collaborations and services 14,885 6,926 $ 7,959 115 % Research and development 8,426 4,703 $ 3,723 79 % Selling 31,992 23,687 $ 8,305 35 % General and administrative 22,698 18,232 $ 4,466 24 % Asset impairment 106 1,889 $ (1,783 ) (94 %) (Gain) loss on foreign currency translation (5,003 ) 3,998 $ (9,001 ) * Loss on purchase commitments 339 — $ 339 * Total expenses $ 85,981 $ 70,867 $ 15,114 21 % ____________________ * Not meaningful Cost of revenue — collaborations and services increased by $4.5 million, or 284%, for the three months ended September 30, 2021 and $8.0 million, or 115%, for the nine months ended September 30, 2021 compared to the respective periods in the prior year. The increases were attributable to an increase in costs for the UT License agreement, specifically an increase in manufacturing activities in preparation for supplying commercial product to UT, and the allocation of selling expenses related to the Vertice Pharma Co-Promotion Agreement. Research and development expenses increased by $2.2 million, or 146%, for the three months ended September 30, 2021 compared to the same period in the prior year. The increase was primarily attributable to costs incurred for research activities in our product pipeline and to the initiation of the Afrezza pediatrics clinical study (INHALE-1). Research and development expenses increased by $3.7 million, or 79%, for the nine months ended September 30, 2021 compared to the same period in the prior year. The increase was primarily attributable to costs incurred for the research activities in our product pipeline and to the initiation of the INHALE-1 study, as well as personnel costs associated with additional headcount. Selling expenses increased by $2.6 million, or 31%, for the three months ended September 30, 2021 compared to the same period in the prior year. The increase was primarily attributable to promotional expenses and patient support services of $2.0 million as well as personnel-related expenses of $1.5 million, which was driven by increased stock-based compensation and additional headcount to support Afrezza growth. The increases in selling expenses were partially offset by a reduction related to the co-promotional cost for Thyquidity which was recognized as cost of revenue — collaboration and services. Selling expenses increased by $8.3 million, or 35%, for the nine months ended September 30, 2021 compared to the same period in the prior year. The increase was primarily attributable to promotional expenses and patient support services of $5.8 million and personnel-related expenses of $4.8 million, which reflected increased stock-based compensation, additional headcount to support Afrezza growth and our voluntary reduction in compensation in response to the COVID-19 pandemic in the prior year. The increases in selling expenses were partially offset by a reduction related to the co-promotional cost for Thyquidity which was recognized as cost of revenue — collaboration and services. General and administrative expenses increased by $0.8 million, or 13%, for the three months ended September 30, 2021 compared to the same period in the prior year . This increase was primarily attributable to increased stock-based compensation. General and administrative expenses increased by $4.5 million, or 24%, for the nine months ended September 30, 2021 compared to the same period in the prior year . This increase was primarily attributable to increased stock-based compensation and our voluntary reduction in compensation expense in response to the COVID-19 pandemic in the prior year. Additional increases consisted of professional fees and business development expenses . An impairment of $0.1 million was recognized for the three and nine months ended September 30, 2021 for the contract asset associated with variable consideration for gross profits for sales of Thyquidity under Vertice Pharma’s co-promotion agreement. See Note 7 – Collaboration, Licensing and Other Arrangements. An impairment of $1.9 million was recognized for the nine months ended September 30, 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 September 30, 2020. 36 Under the Insulin Supply Agreement with Amphastar, payment obligations are denominated in Euros. We are required to record the foreign currency translation impact of the U.S. dollar to Euro exchange rate associated with the recognized gain or loss on purchase commitments. The foreign currency translation gain was $2.1 million for the three months ended September 30, 2021 compared to a $3.9 million loss for the same period in the prior year. The foreign currency translation gain was $5.0 million for the nine months ended September 30, 2021 compared to a $4.0 million loss for the same period in the prior year. Other Income (Expense) The following tables provide a comparison of the other income (expense) categories for the three and nine months ended September 30, 2021 and 2020 (dollars in thousands): Three Months Ended September 30, 2021 2020 $ Change % Change Interest income $ 36 $ 18 $ 18 100 % Interest expense on notes (2,709 ) (1,057 ) $ 1,652 156 % Interest expense on Mann Group promissory notes (94 ) (1,318 ) $ (1,224 ) (93 %) Gain on extinguishment of debt 4,930 — $ 4,930 * Other income 1 14 $ (13 ) (93 %) Total other expense $ 2,164 $ (2,343 ) $ (4,507 ) * Nine Months Ended September 30, 2021 2020 $ Change % Change Interest income $ 64 $ 165 $ (101 ) (61 %) Interest expense on notes (10,943 ) (3,212 ) $ 7,731 241 % Interest expense on Mann Group promissory notes (1,492 ) (3,858 ) $ (2,366 ) (61 %) Loss on extinguishment of debt, net (17,200 ) — $ 17,200 * Other (expense) income (240 ) 24 $ (264 ) * Total other expense $ (29,811 ) $ (6,881 ) $ 22,930 333 % ____________________ * Not meaningful Interest expense on notes increased by $1.7 million, or 156%, for the three months ended September 30, 2021 compared to the same period in the prior year. The increase was primarily due to the interest expense from the Senior convertible notes issued in the first quarter of 2021. Interest expense on notes increased by $7.7 million, or 241%, for the nine months ended September 30, 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 first quarter of 2021 and interest expense on the Senior convertible notes. Interest expense on Mann Group promissory notes decreased by $1.2 million, or 93%, for the three months ended September 30, 2021 and $2.4 million, or 61%, for the nine months ended September 30, 2021 compared to the same periods in the prior year. The decrease was primarily due to the repayment of $35.1 million of outstanding principal under the Mann Group non-convertible note, the $10.0 million repayment of principal and interest on the Mann Group convertible note and the reduction of the interest rate from 7.00% to 2.50% pursuant to the first amendment on the remaining promissory note. See Note 6 — Borrowings . Gain on extinguishment of debt of $4.9 million for the three months ended September 30, 2021 consisted of the principal amount and related accrued and unpaid interest for our PPP loan, which was forgiven by the SBA in July 2021. Loss on extinguishment of debt, net of $17.2 million for the nine months ended September 30, 2021 consisted of $22.1 million loss on extinguishment of debt for the amendment to the Mann Group convertible note, which did not result in a change in our financial position, partially offset by a $4.9 million gain on extinguishment of debt as a result of the SBA’s forgiveness of the PPP loan. See Note 6 — Borrowings . Other expense or income for the nine months ended September 30, 2021 consisted primarily of the loss associated with a foreign currency hedging transaction which was entered into to mitigate our exposure to foreign currency exchange risks associated with our insulin purchase obligation in 2021 under the Insulin Supply Agreement. There were no hedging transaction for the three months ended September 30, 2021 and 2020 or the nine months ended September 30, 2020. Net Loss and Earnings Per Share (“EPS”) The net loss for the three months ended September 30, 2021 was $4.4 million, or $0.02 per share, compared to a $11.3 million net loss in the same period in the prior year, or $0.05 per share. The decreased net loss of $6.8 million was primarily due to an increase in 37 Afrezza net revenues and revenues from collaboration and services as well as a non-cash gain on extinguishment of the PPP loan of $4.9 million , partially offset by an in crease of cost of revenue from collaboration and services and SG&A expenses . The net loss for the nine months ended September 30, 2021 was $52.9 million, or $0.21 per share, compared to a $30.8 million net loss in the nine months ended September 30, 2020, or $0.14 per share. The increased net loss of $22.0 million was primarily due to the non-cash loss on extinguishment of the Mann Group convertible note of $22.1 million net of a non-cash gain on extinguishment of the PPP loan of $4.9 million, as well as an increase in SG&A expenses, cost of revenue – collaboration and services, partially offset by an increase in Afrezza net revenues and revenues from collaboration and services. Non-GAAP net loss, adjusted to exclude the $4.9 million non-cash gain on extinguishment of the PPP loan was $9.4 million, or $0.04 per share, for the three months ended September 30, 2021 compared to $11.3 million, or $0.05 per share, for the same period in the prior year. Non-GAAP net loss, adjusted to exclude $17.2 million net loss on extinguishment of debt, net, which consisted of the $22.1 million non-cash loss on extinguishment of the Mann Group convertible note partially offset by the $4.9 million gain on extinguishment of the PPP loan, in addition to the Amphastar amendment fee of $2.0 million was $33.7 million or $0.14 per share, for the nine months ended September 30, 2021 compared to $30.8 million, or $0.14 per share, for the same period in the prior year. See the reconciliation to non-GAAP net loss and EPS under Non-GAAP Measures below. Non-GAAP Measures To supplement our unaudited condensed consolidated financial statements presented under GAAP, we are presenting certain non-GAAP financial measures. We are providing these non-GAAP financial measures to disclose additional information to facilitate the comparison of past and present operations, and they are among the indicators management uses as a basis for evaluating our financial performance. We believe that these non-GAAP financial measures, when considered together with our GAAP financial results, provide management and investors with an additional understanding of our business operating results, including underlying trends. These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures; should be read in conjunction with our unaudited condensed consolidated financial statements prepared in accordance with GAAP; have no standardized meaning prescribed by GAAP; and are not prepared under any comprehensive set of accounting rules or principles. In addition, from time to time in the future there may be other items that we may exclude for purposes of our non-GAAP financial measures; and we may in the future cease to exclude items that we have historically excluded for purposes of our non-GAAP financial measures. Likewise, we may determine to modify the nature of its adjustments to arrive at our non-GAAP financial measures. Because of the non-standardized definitions of non-GAAP financial measures, the non-GAAP financial measures as used by us in this Quarterly Report on Form 10-Q have limits in their usefulness to investors and may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies. The following tables reconcile our financial measure for net loss and EPS as reported in our condensed consolidated statement of operations to a non-GAAP presentation as adjusted for the $4.9 million non-cash gain on extinguishment of the PPP loan for the three months ended September 30, 2021 and the $22.1 million non-cash loss on extinguishment of the Mann Group convertible note net of the $4.9 million gain on extinguishment of the PPP loan for the nine months ended September 30, 2021, which did not result in a change in our financial position, as well as the $2.0 million Amphastar amendment fee. Three Months Ended September 30, (In thousands, except per share data) 2021 2020 $ Change % Change GAAP to Non-GAAP Net Loss and EPS Net loss $ (4,426 ) $ (11,255 ) $ (6,829 ) (61 %) Net loss per share - basic and diluted $ (0.02 ) $ (0.05 ) $ (0.03 ) (60 %) Less non-cash gain on extinguishment of debt (1) (4,930 ) — $ (4,930 ) * Non-GAAP net loss $ (9,356 ) $ (11,255 ) $ (1,899 ) (17 %) Non-GAAP net loss per share - basic and diluted $ (0.04 ) $ (0.05 ) $ (0.01 ) (20 %) Shares used to compute non-GAAP net loss per share - basic and diluted 249,910 229,668 20,242 9 % 38 Nine Months Ended September 30, 2021 2020 $ Change % Change GAAP to Non-GAAP Net Loss and EPS Net loss $ (52,865 ) $ (30,829 ) $ 22,036 71 % Net loss per share - basic and diluted $ (0.21 ) $ (0.14 ) $ 0.07 50 % Less non-cash loss on extinguishment of debt, net (1) 17,200 — $ 17,200 * Less Amphastar amendment fee (1) 2,000 — $ 2,000 * Non-GAAP net loss $ (33,665 ) $ (30,829 ) $ 2,836 9 % Non-GAAP net loss per share - basic and diluted $ (0.14 ) $ (0.14 ) $ — 0 % Shares used to compute non-GAAP net loss per share - basic and diluted 248,624 218,559 30,065 14 % ____________________ * Not meaningful (1) There is no impact for income taxes associated with the non-cash loss on extinguishment of debt, net or the Amphastar amendment fee as a result of our full valuation allowance. The following table reconciles our gross margin financial measure as reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations to a non-GAAP presentation as adjusted for the nonrecurring amendment fee related to an amendment to our Insulin Supply Agreement in May 2021. Nine Months Ended September 30, 2021 2020 $ Change % Change Net revenue — Afrezza $ 27,828 $ 22,260 $ 5,568 25 % Less cost of goods sold (12,538 ) (11,432 ) $ 1,106 10 % GAAP gross profit — Afrezza 15,290 10,828 $ 4,462 41 % Exclude Amphastar amendment fee 2,000 — $ 2,000 * Non-GAAP gross profit — Afrezza $ 17,290 $ 10,828 $ 6,462 60 % Non-GAAP gross margin 62 % 49 % ____________________ * Not meaningful LIQUIDITY AND CAPITAL RESOURCES 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 and from sales of Afrezza. As of September 30, 2021, we had $288.4 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. • $40.0 million principal amount under the MidCap credit facility, bearing interest at an annual rate equal to one-month LIBOR plus 6.25%, subject to a one-month LIBOR floor of 1.00%, payable in equal monthly installments beginning in September 2023 through maturity in August 2025. • $18.4 million principal amount of indebtedness under the Mann Group convertible note bearing interest at a fixed rate of 2.50% per annum compounded quarterly and maturing in December 2025, 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 pay interest in-kind or in shares. 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 or the Mann Group convertible note. The Senior convertible notes and Mann Group convertible note are fully convertible prior to maturity as further disclosed in Note 6 – Borrowings . 39 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 repurchase the Mann Group promissory notes , 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. In July 2013, we issued Milestone Rights to the Milestone Purchasers. The Milestone Rights provide the Milestone Purchasers certain rights to receive payments of up to $90.0 million upon the occurrence of specified strategic and sales milestones, $65.0 million of which remains payable upon achievement of such milestones. See Note 12 – Commitments and Contingencies and Note 6 – Borrowings for further information related to the Milestone Rights. During the nine months ended September 30, 2021, we used $49.4 million of cash for our operating activities, which primarily consisted of $47.7 million of selling, general and administrative expenses, $25.5 million of cost of goods sold, $7.7 million of costs for research and development and $5.6 million of cash paid for interest, partially offset by $37.6 million of revenue. 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. Cash used in investing activities of $139.0 million for the nine months ended September 30, 2021 was primarily due to the purchase of $238.4 million of debt securities and $6.3 million purchase of property and equipment, partially offset by the sale of $105.7 million of debt securities. 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 provided by financing activities of $172.9 million for the nine months ended September 30, 2021 was primarily due to net proceeds from the offering of Senior convertible notes of $222.7 million, partially offset by the repayment of $35.1 million of Mann Group non-convertible notes and related unpaid accrued interest and the repayment of $10.0 million of principal and $1.0 million prepayment penalty for the MidCap credit facility. 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. Future Liquidity Needs 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 September 30, 2021, we had capital resources of $51.7 million in cash and cash equivalents, $87.3 million in short-term investments and $42.1 million in long-term investments, and total principal amount of outstanding borrowings of $288.4 million. In March 2021, we issued $230.0 million of Senior convertible notes. 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 $100.0 million, of which $60.0 million remains available for borrowing if the conditions for Tranche 3 are met. In November 2021, we closed the Sale-Leaseback Transaction for a sales price of $102.3 million. See Note 14 — Subsequent Event . 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) . 40 Off-Balance Sheet Arrangements As of September 30, 2021 and December 31, 2020, we did not have any off-balance sheet arrangements. Contractual Obligations See Note 6 – Borrowings, Note 12 – Commitments and Contingencies and Note 14 – Subsequent Event 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. 41