What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-25 · 159 added, 149 removed, 90 unchanged (77% of the section changed)

2 unchanged sentences

We have elected the presentation requirements under Rule 12b-2 of the Exchange Act as a smaller reporting company and have herein included a two-year discussion of our financial condition and results of operations.

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, which was approved by the FDA in June 2014.

Afrezza is an ultra rapid-acting inhaled insulin indicated to improve glycemic control in adults with diabetes.

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

We are a biopharmaceutical company focused on the development and commercialization of inhaled therapeutic products for patients with 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.

We collaborate with a number of third parties to formulate their drugs on our Technosphere drug delivery platform.

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

Our partner has disclosed that it intends to submit an NDA for Tyvaso DPI to the FDA in April 2021.

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 and our ability to manufacture sufficient quantities of Afrezza and Tyvaso DPI.

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.

In April 2021, United Therapeutics submitted an NDA to the FDA seeking approval of Tyvaso DPI for the treatment of PAH and PH-ILD.

The NDA was resubmitted in December 2021 following a CRL in October 2021.

The FDA is expected to complete its review of the pending NDA for Tyvaso DPI by May 2022.

Our business is subject to significant risks, including but not limited to our ability to commercialize Afrezza successfully and our ability to manufacture sufficient quantities of Afrezza and Tyvaso DPI.

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 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.

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.

1 unchanged sentence

We had net loss of $80.9 million and $57.2 million in the years ended December 31, 2021 and 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, and from borrowings under certain loan arrangements.

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.

Critical Accounting Policies

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 a sale-leaseback of our manufacturing facility in Danbury, CT.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements is in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

6 unchanged sentences

These critical accounting policies are also considered significant accounting policies and are more fully described in Note 2 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Part II, Item 8 — Financial Statements and Supplementary Data.

Revenue Recognition – Net Revenue – Commercial Product Sales — We sell Afrezza to a limited number of wholesale distributors and specialty pharmacies in the U.S.

(collectively, its “Customers”).

Revenue Recognition – Net Revenue – Commercial Product Sales — We sell Afrezza to a limited number of wholesale distributors and specialty and retail pharmacies in the U.S.

(collectively, “Customers”).

Wholesale distributors subsequently resell our products to retail pharmacies and certain medical centers or hospitals.

2 unchanged sentences

We recognize revenue on product sales when the Customer obtains control of our product, which occurs at delivery for wholesale distributors and generally at delivery for specialty pharmacies.

We recognize revenue on product sales to a retail pharmacy as the product is dispensed to patients.

Product revenues are recorded net of applicable reserves for variable consideration.

Components of variable consideration include trade discounts and allowances, product returns, provider chargebacks and discounts, government rebates, payer rebates, and other incentives, such as voluntary patient assistance, and other allowances that are offered within contracts between the Company and its Customers, payers, and other indirect customers relating to the Company’s sale of its products.

Components of variable consideration include trade discounts and allowances, product returns, provider chargebacks and discounts, government rebates, payer rebates, and other incentives, such as voluntary patient assistance, and other allowances that are offered within contracts between us and our, payers, and other indirect customers relating to the sale of our products.

Reserves for Variable Consideration — Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established.

Components of variable consideration include trade discounts and allowances, product returns, provider chargebacks and discounts, government rebates, payer rebates, and other incentives, such as voluntary patient assistance, and other allowances that are offered within contracts between us and our Customers, payers, and other indirect customers relating to the sale of our products.

These reserves 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 Accounting Standards Codification (“ ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”) for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns.

Overall, these reserves reduce recognized revenue to our best estimates of the amount of consideration to which we are 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.

Our analysis also contemplates application of the constraint in accordance with the guidance, under which we determined a material reversal of revenue would not occur in a future period for the estimates detailed below as of December 31, 2021 and, therefore, the transaction price was not reduced further during the year ended December 31, 2021.

Actual amounts of consideration ultimately received may differ from the Company’s estimates.

If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net revenue — commercial product sales and earnings in the period such variances become known.

Significant judgment is required in estimating gross-to-net adjustments considering legal interpretations of applicable laws and regulations, historical experience, payer channel mix, current contract prices under applicable programs, unbilled claims, processing time lags and inventory levels in the distribution channel.

Our reserves for variable consideration are reflected in our gross-to-net adjustments which were 38.8% of gross revenue, or $24.9 million, for the year ended December 31, 2021, compared to 40.6% of gross revenue, or $22.1 million, for the year ended December 31, 2020.

If there is a 10% difference between the estimates for accruals and the actual liability in the reserves for variable consideration, the impact to our revenue for commercial product sales would be $0.9 million or a 1% change in the gross-to-net adjustment percentage for the year ended December 31, 2021.

These reserves are further detailed under Reserves for Variable Consideration in Note 2 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Part II, Item 8 — Financial Statements and Supplementary Data.

3 unchanged sentences

development, regulatory, and commercial milestone payments;

payments for manufacturing commercial and clinical supply services we provide;

payments for commercial manufacturing and clinical supply services we provide;

and royalties on net sales of licensed products and sublicenses of the rights.

As part of the accounting for these arrangements, we 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.

As part of the accounting for these arrangements, we must develop assumptions that require judgment such as determin ing the performance obligation in the contract and determining the stand-alone selling price for each performance obligation identified in the contract.

With respect to our significant collaboration and service agreement with UT that includes a long-term customer supply agreement (“CSA”), we have identified three distinct performance obligations:

(1) R&D Services and License;

(2) Next-Gen R&D Services;

and (3) a material right for m anufacturing s ervices (“Manufacturing Services”).

Pre-production activities under the CSA, such as facility expansion services and other administrative services , were considered bundled services under the Manufacturing Services performance obligation as required by ASC 606 .

See Note 8 – Collaboration, Licensing and Other Arrangements of the Notes to Consolidated Financial Statements included in Part II, Item 8 — Financial Statements and Supplementary Data.

If an arrangement has multiple performance obligations, the allocation of the transaction price is determined from observable market inputs, and we use 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.

2 unchanged sentences

Amounts that we expect will not be recognized within the next 12 months are classified as long-term deferred revenue.

Inventory Costing and Recoverability — We determine the cost of inventory using the first-in, first-out or FIFO method.

We capitalize inventory costs associated with our products based on judgment that future economic benefits are expected to be realized.

Inventories are stated at the lower of cost or net realizable value.

We analyzed our inventory levels to identify inventory that may expire or has a cost basis in excess of its estimated realizable value.

Recognized Loss on Purchase Commitments — We assess whether losses on long term purchase commitments should be accrued.

Losses that are expected to arise from firm, non-cancellable, commitments for future purchases of inventory items are recognized unless recoverable.

The loss on the purchase commitment balance is reduced as material is received.

The balance of recognized loss on purchase commitments is primarily associated with insulin purchases.

Impairment of Long-Lived Assets — We evaluate long lived assets for impairment at least on a quarterly basis and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

An impairment loss would be indicated when

estimated undiscounted future cash flows from the use and eventual disposition of an asset group, which are identifiable and largely independent of the cash flows of other asset groups, are less than the carrying amount of the asset group.

Milestone Rights Liability — In July 2013, in conjunction with the execution of a loan agreement (the “Deerfield Credit Facility”) with Deerfield Private Design Fund II, L.P.

and Deerfield Private Design International II, L.P.

(collectively, “Deerfield”) that expired following our full satisfaction of our repayment obligations, we issued to Deerfield Private Design Fund II, L.P.

and Horizon Santé FLML SÀRL, (the “Milestone Purchasers”) certain rights to receive payments of 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 (the “Milestone Rights”), pursuant to an agreement (the “Milestone Agreement”) that continues beyond the expiration of the loan agreement.

We evaluated the Milestone Rights and determined that such rights do not meet the definition of a freestanding derivative.

Since we have elected not to apply the fair value option, we recorded the rights at the initial fair value.

Upon the achievement of a milestone event, the milestone payment will be allocated between (i) a reduction of the initial liability and (ii) a return on investment and the gain or loss is recognized at the time the milestone event is achieved.

The estimated fair value 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 discounted to present value using a selected market discount rate (Level 3 in the fair value hierarchy).

Clinical Trial Expenses — Our clinical trial accrual process seeks to account for expenses resulting from our obligations under contract with vendors, consultants, and clinical site agreements in connection with conducting clinical trials.

The financial terms of these contracts are subject to negotiations which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to us under such contracts.

Our objective is to reflect the appropriate trial expenses in our financial statements by matching period expenses with period services and efforts expended.

In the event that we do not identify certain costs that have begun to be incurred or we underestimate or overestimate the level of services performed or the costs of such services, our reported expenses for a period would be too low or too high.

The date on which certain services commence, the level of services performed on or before a given date and the cost of the services are often judgmental.

We make these judgments based upon the facts and circumstances known to us in accordance with GAAP.

Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in our reporting amounts that are too high or too low for any particular period.

Stock-Based Compensation — Share-based payments to employees, including grants of stock options, restricted stock units, performance-based awards and the compensatory elements of employee stock purchase plans, are recognized in the consolidated statements of operations based upon the fair value of the awards at the grant date.

We use 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.

If there is a 10% difference in the estimates used to determine the transaction price for the CSA entered into in August 2021 with UT, the related allocation of the transaction price between performance obligations, the difference between the estimates for accruals and the actual liability for deferred revenue and revenue recognized for collaborations and services would be $0.2 million for the year ended December 31, 2021.

Stock-Based Compensation — Share-based payments to employees, including grants of nonqualified stock options (“options”), restricted stock units, performance-based awards, restricted stock units with market conditions (“Market RSUs”), and the compensatory elements of employee stock purchase plans, are recognized in the consolidated statements of operations based upon the fair value of the awards at the grant date.

We use the Black-Scholes option valuation model to estimate the grant date fair value of employee options and the compensatory elements of employee stock purchase plans.

Restricted stock units are valued based on the market price on the grant date.

We evaluate 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.

Accounting for Income Taxes — Our management must make judgments when determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.

As of December 31, 2020 and 2019, we had established a valuation allowance of $675.5 million and $670.6 million, respectively, against all of our net deferred tax asset balances due to uncertainties related to the realizability of our deferred tax assets as a result of our history of operating losses.

The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable.

In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to change the valuation allowance, which could materially impact our financial position and results of operations.

Legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act of 2017 (“Tax Act”), subjects a U.S.

shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries.

The FASB Staff Q&A, Topic 740, No.

5, Accounting for Global Intangible Low-Taxed Income , states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only.

We have elected to account for GILTI in the year the tax is incurred.

On March 27, 2020, the U.S.

government enacted the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, a $2 trillion relief package comprising a combination of tax provisions and other stimulus measures.

The CARES Act broadly provides entities tax payment relief and significant business incentives and makes certain technical corrections to the Tax Act.

The tax relief measures for entities include a five-year net operating loss carry back, increased interest expense deduction limits, acceleration of alternative minimum tax credit refunds, payroll tax relief, and a technical correction to allow accelerated deductions for qualified improvement property.

The Act also provides other non-income tax benefits, including federal funding for a range of stabilization measures and emergency funding to assist those impacted by the COVID-19 pandemic.

Similar legislation is being enacted in other jurisdictions in which the Company operates.

Accounting Standards Codification Topic 740, Income Taxes , requires the effect of changes in tax rates and laws on deferred tax balances to be recognized in the period in which new legislation is enacted.

The enactment of the CARES Act and similar legislation in other jurisdictions in which the Company operates was not material to the Company’s income tax benefit for the year ended December 31, 2020.

The grant date fair value and the effect of the market conditions for the Market RSUs was estimated using a Monte Carlo valuation.

The grant date fair value for the Market RSUs was $9.30 per unit for the Market RSUs granted during the year ended December 31, 2021, compared to $3.77 per unit for the Market RSUs granted during the year ended December 31, 2020.

If there is a 10% difference in the grant date fair value of the Market RSUs, the impact to our stock-based compensation expense would be $0.4 million for the year ended December 31, 2021.

Results of Operations

Trends and Uncertainties

We continue to experience the impact of the COVID-19 pandemic on our marketing of Afrezza, the accrual rate of our Afrezza pediatrics trial, our Brazil partner’s (Biomm) ability to market Afrezza and delays in the start of our clinical study in India.

COVID-19 has impacted the supply chain for manufacturing Afrezza and Tyvaso DPI where we have increased safety stock of raw materials to mitigate supply chain risk.

Our manufacturing of Tyvaso DPI may not meet the required demand of our partner, UT.

If we fail as an effective manufacturing organization, we may be unable to support commercialization of Tyvaso DPI, if approved.

Years ended December 31, 20 2 1 and 20 20

9 unchanged sentences

Gross revenue from the sales of Afrezza increased by $9.6 million, or 18%, for the year ended December 31, 2021 compared to 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 $22.1 million (or 41% of gross revenue) for the year ended December 31, 2020, compared to $18.2 million (or 42% of gross revenue) for the prior year.

The increase of $3.9 million was primarily driven by an increase in commercial product sales and a decrease in rebates and wholesaler fees, 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 $7.0 million, or 28%, for the year ended December 31, 2020 compared to the prior year.

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 $4.9 million, or 13%, for the year ended December 31, 2020 compared to the prior year.

This was primarily driven by a $5.8 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, we sold clinical supplies to UT.

The increase primarily reflects higher product demand including a more favorable mix of Afrezza cartridges and price.

The gross-to-net adjustment was 38.8% of gross revenue, or $24.9 million, for the year ended December 31, 2021, compared to 40.6% of gross revenue, or $22.1 million, for the prior year.

The decrease in the gross-to-net percentage was primarily driven by a decrease in wholesale distribution fees as a result of the termination of our free goods program on December 31, 2020, and a decrease in product returns including an adjustment related to the start of an agreement with a retail pharmacy, partially offset by an increase in co-pay assistance.

As a result, net revenue from sales of Afrezza increased by $6.8 million, or 21%, for the year ended December 31, 2021 compared to the prior year.

Net revenue from collaborations and services increased by $3.5 million, or 11%, for the year ended December 31, 2021 compared to the prior year.

The increase in collaborations and services revenue was primarily attributed to additional development work associated with our collaboration with UT.

In August 2021, we entered into the CSA with UT.

Revenue associated with the CSA is deferred as of December 31, 2021.

See Note 8 – Collaboration, Licensing and Other Arrangements in the consolidated financial statements included in Part II, Item 8 – Financial Statements and Supplementary Data.

8 unchanged sentences

Gross margin for the year ended December 31, 2021 increased to 57% from 53% for the prior year.

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

Cost of goods sold decreased by $5.0 million, or 25%, for the year ended December 31, 2020 compared to 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 with Amphastar in 2019, $1.7 million in reduced manufacturing-related spending and $1.0 million of increased manufacturing activities, which resulted in a greater amount of costs capitalized to inventory, partially offset by $0.5 million of inventory write-offs.

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 increased by $1.8 million, or 12%, for the year ended December 31, 2021 compared to the prior year, primarily due to a $2.0 million fee for the amendment of the Insulin Supply Agreement, a $1.5 million increase in inventory write-offs and a $1.0 million increase related to decreased manufacturing activities.

The increase in cost of goods sold was partially offset by $2.3 million in reduced manufacturing-related spending, $0.5 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 year ended December 31, 2021 compared to 53% for the prior year.

See the reconciliation to non-GAAP net loss and Earnings per Common Share (“EPS”) under Non-GAAP Measures below.

The following table provides a comparison of the expense categories for the years ended December 31, 2021 and 2020 (dollars in thousands):

5 unchanged sentences

General and administrative

Impairment of commitment asset

Loss (gain) on foreign currency translation

Impairment of assets

(Gain) loss on foreign currency translation

Loss on purchase commitments

Total expenses

* Not meaningful

Cost of revenue – collaborations and services increased by $12.5 million, or 130%, for the year ended December 31, 2021 compared to the prior year.

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

The increase was primarily attributable to an increase in manufacturing activities in preparation for supplying commercial product to UT.

In-process research and development expense of $13.2 million for the year ended December 31, 2020 related to the acquisition of QrumPharma for total consideration of approximately $12.7 million and transaction costs of approximately $0.5 million.

1 unchanged sentence

See Note 3 – Acquisition in the consolidated financial statements included in Part II, Item 8 – Financial Statements and Supplementary Data.

Research and development expenses decreased by $0.7 million, or 9%, for the year ended December 31, 2020 compared to the prior year .

The decrease was mainly attributable to lower clinical trial spending.

Selling expenses decreased by $12.0 million, or 26 %, for the year ended December 31, 2020 compared to 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 in response to the COVID-19 pandemic, partially offset by a $0.8 million increase in personnel-related costs and a $0.5 million increase in costs associated with AfrezzaAssist, our new patient support platform.

General and administrative expenses decreased by $3.6 million, or 13 %, for the year ended December 31, 2020 compared to the prior year .

This decrease was primarily attributable to a $2.5 million decrease in professional fees, $0.6 million decrease in personnel and employee-related costs and a $0.2 million reduction in property taxes.

Research and development expenses increased by $6.1 million, or 97%, for the year ended December 31, 2021 compared to the prior year .

The increase was mainly attributable to costs incurred for development activities on our product pipeline and the Afrezza pediatrics clinical study (INHALE-1) as well as personnel costs primarily associated with additional headcount.

Selling expenses increased by $11.2 million, or 32%, for the year ended December 31, 2021 compared to the prior year .

The increase was primarily attributable to higher promotional expenses, patient support services, and personnel-related expenses driven by increased headcount to support Afrezza growth and our voluntary reduction in compensation expense in the prior year in response to the COVID-19 pandemic.

General and administrative expenses increased by $7.2 million, or 29%, for the year ended December 31, 2021 compared to the prior year .

This increase was primarily attributable to increased personnel costs associated with increased headcount and stock-based compensation in addition to our voluntary reduction in compensation expense in the prior year in response to the COVID-19 pandemic.

Additional increases consisted of professional fees and business development expenses.

During the year ended December 31, 2021, an impairment of $0.1 million was recognized for the write-off of a contract asset related to a co-promotion collaboration arrangement.

During the year ended December 31, 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 Note 7 – Borrowings in the consolidated financial statements included in Part II, Item 8 – Financial Statements and Supplementary Data.

There were no asset impairments for the year ended December 31, 2019.

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 resulted in a loss of $8.0 million for the year ended December 31, 2020 compared to a gain of $1.9 million for the prior year .

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

The foreign currency translation resulted in a gain of $6.6 million for the year ended December 31, 2021 compared to a loss of $8.0 million for the prior year.

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

4 unchanged sentences

Interest income

Interest expense on financing liability

Interest expense on notes

Interest expense on promissory notes

(Loss) gain on extinguishment of debt

Other expense

Loss on extinguishment of debt

Other (expense) income

Total other expense

Interest income decreased by $0.8 million, or 83%, for the year ended December 31, 2020 compared to the prior year primarily due to lower short-term interest rates.

Interest expense on notes decreased $2.0 million, or 32%, for the year ended December 31, 2020 compared to the prior year.

The decrease was primarily due to a $3.4 million milestone obligation that was achieved in the third quarter of 2019 and a decrease of $0.8 million of interest expense related to the Deerfield Credit Facility, which was extinguished in the third quarter of 2019, partially offset by an increase in interest expense from the MidCap Credit Facility of $2.3 million in 2020.

* Not meaningful

Interest expense on financing liability was $1.3 million for the year ended December 31, 2021 and represented interest incurred on the sale lease-back transaction for our manufacturing facility in Danbury, CT.

Interest expense on notes increased by $5.7 million, or 61%, for the year ended December 31, 2021 compared to the same period in the prior year.

The increase was primarily due to interest expense on the Senior convertible notes as well as a $3.7 million milestone obligation that was achieved during the first quarter of 2021, partially offset by a decrease in interest expense on Mann Group promissory notes due to (i) the repayment of $35.1 million of outstanding principal under the Mann Group non-convertible note, (ii) the $10.0 million reduction of principal and interest on the Mann Group convertible note from a conversion to our common stock and (iii) a decrease of the interest rate from 7.00% to 2.50% on the remaining promissory note.

See Note 6 — Borrowings .

Loss on extinguishment of debt of $17.2 million for the year ended December 31, 2021 consisted of a $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 U.S.

Small Business Administration’s (“SBA”) forgiveness of the Paycheck Protection Program loan (the “PPP loan”).

The loss on extinguishment of debt for the year ended December 31, 2020 was primarily due to the third amendment to the MidCap Credit Facility, in addition to the prepayment of the 2020 notes.

The gain on extinguishment of debt for the year ended December 31, 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.

See Note 6 — Borrowings .

Net Loss and EPS

The net loss for the year ended December 31, 2021 was $80.9 million, or $0.32 per share, compared to a $57.2 million net loss in the prior year, or $0.26 per share.

The increase in net loss of $23.7 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 and cost of revenue – collaboration and services, partially offset by an increase in Afrezza net revenues and revenues from collaboration and services, a gain on purchase commitment as well as cost for in-process research and development incurred 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 $61.7 million or $0.25 per share, for the year ended December 31, 2021 compared to $57.2 million, or $0.26 per share, for the prior year.

See the reconciliation to non-GAAP net loss and EPS under Non-GAAP Measures below.

Non-GAAP Measures

To supplement our 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 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 Annual Report on Form 10-K 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 net loss per share as reported in our consolidated statement of operations to a non-GAAP presentation as adjusted for 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 year ended December 31 , 2021, which did not result in a change in our financial position, as well as the $2.0 million Amphastar amendment fee.

Year Ended December 31,

GAAP to Non-GAAP Net Loss and EPS

Net loss per share - basic and diluted

Less non-cash loss on extinguishment of debt, net (1)

Less Amphastar amendment fee (1)

Non-GAAP net loss

Non-GAAP net loss per share - basic and diluted

Shares used to compute non-GAAP net loss per share

— basic and diluted

* Not meaningful

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.

Year Ended December 31,

Net revenue — commercial product sales

Less cost of goods sold

GAAP gross profit — Afrezza

Exclude Amphastar amendment fee

Non-GAAP gross profit — Afrezza

Non-GAAP gross margin

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, and from borrowings under certain loan arrangements.

As of December 31, 2020, we had $122.9 million principal amount of outstanding debt, consisting of:

Our principal sources of liquidity are our cash, cash equivalents, and investments.

Our primary uses of cash include the development of our product pipeline, the manufacturing and marketing of Afrezza, the funding of general and administrative expenses, and interest expense on our financing liability and debt.

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, from sales of Afrezza and the sale lease-back of our manufacturing facility in Danbury, CT.

We believe we will be able to meet our liquidity needs over the next twelve months based on the balance of cash, cash equivalents and investments on hand.

We believe we will meet longer-term expected future cash requirements and obligations, through a combination of cash and investments on hand, operating activities including manufacturing revenue and royalties from the production and sale of Tyvaso DPI, if approved, to UT, and available credit from our Midcap credit facility.

The following table presents our material cash requirements associated with contractual commitments for future periods (in thousands) :

Senior convertible notes (1)

MidCap credit facility (2)

Mann Group convertible note (3)

Financing liability

Insulin purchase agreement

Total material cash requirements

$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.

$5.0 million principal amount of 2024 convertible notes, 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 was convertible into shares of our common stock at the option of the holder at a conversion price of $3.00 per share.

The 2024 convertible notes provided that, under certain circumstances, at our option, we may elect to cause all or any portion of the 2024 convertible notes to be mandatorily converted;

$63.0 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, $28.0 million of which is convertible into shares of our common stock at the option of the 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.

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 a 24 week covered period unless we are is 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.

$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 was 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 MidCap Credit Facility, the Mann Group promissory notes, or unforgiven amounts of the PPP Loan .

The Mann Group convertible note is fully convertible at any time prior to maturity as further disclosed in Note 7 – Borrowings.

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 7 – 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 under the MidCap Credit Facility, or if we fail to repay 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, 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, $70.0 million of which remains payable upon achievement of such milestones.

In July 2013, we issued Milestone Rights to the Original Milestone Purchasers.

The Milestone Rights provided the Original Milestone Purchasers certain rights to receive payments of up to $90.0 million upon the occurrence of specified strategic and sales milestones, $65.0 million of which remains payable to Barings upon achievement of such milestones.

See Note 12 – Commitments and Contingencies and Note 7 – 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 year ended December 31, 2021, we used $61.7 million of cash for our operating activities, which primarily consisted of $65.8 million of selling, general and administrative expenses, $35.5 million of cost of goods sold and cost of revenue, $11.7 million of costs for research and development and $6.5 million of cash paid for interest, partially offset by $47.6 million of revenue.

During the year ended December 31, 2020, we used $28.1 million of cash for our operating activities, which reflects our net loss of $57.2 million, partially offset by non-cash charges of $38.9 million (including $13.2 million for the write-off of in-process research and development related to the acquisition of QrumPharma).

The net change in operating asset and liabilities was primarily a result of the recognition of deferred revenue of $32.8 million, which was partially offset by the receipt of milestone payments from UT of $25.0 million and pass-through payments of $1.9 million.

During the year ended December 31, 2019, we used $88.5 million of cash for our operating activities mainly as a result of our net loss of $51.9 million as well as paid-in-kind interest on the Mann Group promissory notes of $32.8 million and a decrease in deferred revenue of $6.7 million.

The net change in operating assets and liabilities was primarily a result of the recognition of deferred revenue of $32.8 million, which was partially offset by the receipt of milestone payments from UT of $25.0 million and pass-through payments of $1.9 million.

Cash used in investing activities of $151.5 million for the year ended December 31, 2021 was primarily due to the purchase of debt securities of $196.1 million, partially offset by proceeds received from sales of debt securities of $59.1 million.

Cash provided by investing activities of $15.2 million for the year ended December 31, 2020 was primarily due to the proceeds from the sale of treasury bills of $20.0 million, partially offset by $4.0 million of cash consideration paid for the acquisition of QrumPharma, net of $0.2 million of cash acquired, in addition to $0.5 million of related transaction costs.

Cash used in investing activities was $22.8 million for the year ended December 31, 2019, which consisted of a purchase of treasury bills of $45.0 million, partially offset by proceeds from sales of treasury bills of $25.0 million.

Cash provided by financing activities of $49.9 million for the year ended December 31, 2020 was primarily due to the receipt of $23.5 million in gross proceeds from at the market offerings, the exercise of outstanding warrants to purchase shares of our common stock of $11.6 million, proceeds from the MidCap Credit Facility of $10.0 million and proceeds from the PPP Loan of $4.9 million.

Cash provided by financing activities was $ 69.9 million for the year ended December 31, 2019, primarily due to $39.1 million of net proceeds from the Midcap Credit Facility, $31.8 million of net proceeds from the exchange of the Mann Group promissory notes, $9.9 million of net proceeds from the exchange of the senior convertible notes, in addition to proceeds received from the issuance of our common stock associated with the exercise of warrants for $5.9 million and our at-the-market offering for $3.2 million.

These net proceeds were partially offset by net payments of $11.1 million for the 2021 notes and $6.9 million for the Deerfield Credit Facility.

Future Liquidity Needs and Going Concern

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 December 31, 2020, we had an accumulated deficit of $3.0 billion and $122.9 million of total principal amount of outstanding borrowings, with limited capital resources of $67.0 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/or obtain 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.

Our ability to draw the $25.0 million Tranche 3 of the MidCap Credit Facility depends on the satisfaction of certain milestone conditions associated with Tyvaso DPI and other financial covenants.

In the event the milestone conditions are not achieved or our capital resources are not sufficient, we may need to raise additional capital by either 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 it occurs, 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 November 2020, we entered into an amendment to the MidCap Credit Facility, pursuant to which the minimum cash requirement was increased to $30.0 million .

I f 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 MidCap Term Loan, or if we fail to repay or repurchase the 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.

Off-Balance Sheet Arrangements

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

Cash provided by financing activities of $270.3 million for the year ended December 31, 2021 was primarily due to net proceeds from the offering of Senior convertible notes of $222.7 million and net proceeds from the sale-leaseback transaction of $99.1 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 $49.9 million for the year ended December 31, 2020 was primarily due to the receipt of $23.5 million in gross proceeds from at the market offerings, the exercise of outstanding warrants to purchase shares of our common stock of $11.6 million, proceeds from the MidCap Cr edit Facility of $10.0 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 December 31, 2021, we had capital resources of $124.2 million in cash and cash equivalents, $79.9 million in short-term investments and $56.6 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 7 – 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 a sale-leaseback transaction of our manufacturing facility in Danbury, CT for a sales price of $102.3 million.

We believe our resources will be sufficient to fund our operations for the next twelve months from the date of issuance of our consolidated financial statements included in Item 8 – Financial Statements.

Recent Accounting Pronouncements

1 unchanged sentence

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-K

Item 7. Management’s Discussion and Analysis