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, 2021 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 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. In April 2021, United Therapeutics submitted an NDA to the FDA seeking approval of Tyvaso DPI . 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 in 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. 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 March 31, 2022, we had an accumulated deficit of $3.2 billion and a stockholders’ deficit of $231.4 million. Our net loss was $26.0 million for the three months ended March 31, 2022. 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 from the proceeds of the Sale-Leaseback Transaction. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our critical accounting policies and estimates can be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report. 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. 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. 31 Three months ended March 31, 2022 and 2021 Revenues The following tables provide a comparison of the revenue categories for the three months ended March 31, 2022 and 2021 (dollars in thousands): Three Months Ended March 31, 2022 2021 $ Change % Change Net revenue — commercial product sales: Gross revenue from commercial product sales $ 16,036 $ 13,610 $ 2,426 18 % Wholesaler distribution fees, rebates and chargebacks, product returns and other discounts (6,210 ) (5,511 ) $ 699 13 % Net revenue — commercial product sales 9,826 8,099 $ 1,727 21 % Gross-to-net revenue adjustment percentage -38.7 % -40.5 % Revenue — collaborations and services 2,166 9,337 $ (7,171 ) (77 %) Total revenues $ 11,992 $ 17,436 $ (5,444 ) (31 %) Gross revenue from sales of Afrezza increased by $2.4 million, or 18%, for the three months ended March 31, 2022 compared to the same period in the prior year. The increase reflects wholesaler inventory ordering patterns for the first quarter of 2021, which was adversely impacted as wholesalers decreased inventory levels, and price. The gross-to-net adjustment was 38.7% of gross revenue, or $6.2 million, for the three months ended March 31, 2022, compared to 40.5% of gross revenue, or $5.5 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) due to an increased mix of specialty and retail pharmacy sales, a decrease in anticipated product returns, and lower co-pay assistance. As a result, net revenue from sales of Afrezza increased by $1.7 million, or 21%, for the three months ended March 31, 2022 compared to the same period in the prior year. Net revenue from collaborations and services decreased by $7.2 million, or 77%, for the three months ended March 31, 2022 compared to the same period in the prior year. The decrease in collaborations and services revenue was primarily attributable to the completion of the R&D Services associated with our collaboration with UT. In August 2021, we entered into a commercial supply agreement with UT (the “CSA”). Revenue associated with the CSA is deferred as of March 31, 2022 and will be recognized over the period when commercial product is sold to UT. See Note 8 – Collaboration, Licensing and Other Arrangements . Commercial product gross profit The following tables provide a comparison of the commercial product gross profit categories for the three months ended March 31, 2022 and 2021 (dollars in thousands): Three Months Ended March 31, 2022 2021 $ Change % Change Commercial product gross profit: Net revenue — commercial product sales $ 9,826 $ 8,099 $ 1,727 21 % Less: cost of goods sold 2,284 4,315 $ (2,031 ) (47 %) Commercial product gross profit $ 7,542 $ 3,784 $ 3,758 99 % Gross margin 77 % 47 % Commercial product gross profit for the three months ended March 31, 2022 increased by $3.8 million, or 99%, compared to the same period in the prior year. Gross margin for the three months ended March 31, 2022 was 77% compared to 47% for the same period in the prior year. The increase in gross profit and gross margin was attributable to an increase in Afrezza sales as well as a decrease in cost of goods sold. Cost of goods sold decreased by $2.0 million, or 47%, for the three months ended March 31, 2022 compared to the same period in the prior year. The decrease in cost of goods sold was primarily attributable to a decrease of $2.3 million in manufacturing-related spending on Afrezza as a result of the absorption of manufacturing-related costs due to the manufacturing of a second product. 32 Expenses The following tables provide a comparison of the expense categories for the three months ended March 31, 2022 and 2021 (dollars in thousands): Three Months Ended March 31, 2022 2021 $ Change % Change Expenses: Cost of goods sold $ 2,284 $ 4,315 $ (2,031 ) (47 %) Cost of revenue — collaborations and services 8,714 3,295 $ 5,419 164 % Research and development 3,536 2,442 $ 1,094 45 % Selling 12,728 9,620 $ 3,108 32 % General and administrative 7,969 7,793 $ 176 2 % Gain on foreign currency translation (1,983 ) (3,838 ) $ (1,855 ) (48 %) Total expenses $ 33,248 $ 23,627 $ 9,621 41 % Cost of revenue — collaborations and services increased by $5.4 million, or 164%, for the three months ended March 31, 2022 compared to the same period in the prior year. The increase was attributable to an increase in costs for the UT CSA, specifically an increase in manufacturing activities in preparation for supplying commercial product to UT. Research and development expenses increased by $1.1 million, or 45%, for the three months ended March 31, 2022 compared to the same period in the prior year. The increase was primarily attributable to costs incurred for research and development activities in our product pipeline, including the Phase 1 clinical trial for clofazimine. Selling expenses increased by $3.1 million, or 32%, for the three months ended March 31, 2022 compared to the same period in the prior year. The increase was primarily attributable to an enhanced primary care physician-focused promotional campaign that began in the fourth quarter of 2021, Afrezza territory restructuring costs, as well as promotional expenses and patient support services expenses to support Afrezza sales growth. General and administrative expenses increased by $0.2 million, or 2%, for the three months ended March 31, 2022 compared to the same period in the prior year . The increase was primarily attributable to increased stock-based compensation and headcount. This increase was partially offset by lower legal fees and business development expenses. 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 $2.0 million for the three months ended March 31, 2022 compared to $3.8 million 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 months ended March 31, 2022 and 2021 (dollars in thousands): Three Months Ended March 31, 2022 2021 $ Change % Change Interest income $ 377 $ 3 $ 374 * Interest expense on financing liability (2,371 ) — $ 2,371 * Interest expense on notes (2,748 ) (6,452 ) $ (3,704 ) (57 %) Other income — (276 ) $ (276 ) * Total other expense $ (4,742 ) $ (6,725 ) $ (1,983 ) (29 %) _________________________ * Not meaningful Interest expense on financing liability was $2.4 million for the three months ended March 31, 2022 and represented interest incurred on the Sale Leaseback transaction for our manufacturing facility in Danbury, CT, which closed in the fourth quarter of 2021. 33 Interest expense on notes de creased by $ 3 .7 million, or 57 %, for the three months ended March 31, 2022 compared to the same period in the prior year. The decrease was primarily due to a $3.7 million milestone obligation that was achieved during the first quarter of 2021, partially offset by an increase in interest expense on the Senior convertible notes . See Note 7 — Borrowings . LIQUIDITY AND CAPITAL RESOURCES 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 Leaseback transaction. 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. As of March 31, 2022, 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. 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 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 Original Milestone Purchasers. The Milestone Rights were subsequently assigned 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 13 – Commitments and Contingencies and Note 7 – Borrowings for further information related to the Milestone Rights. During the three months ended March 31, 2022, we used $18.2 million of cash for our operating activities, which primarily consisted of $16.3 million of selling, general and administrative expenses, $9.0 million of cost of goods sold, $5.1 million of costs for research and development and $3.6 million of cash paid for interest, partially offset by $15.7 million of revenue. During the three months ended March 31, 2021, we used $12.7 million of cash for our operating activities as a result of our net loss of $12.9 million. The net change in operating asset and liabilities was primarily a result of the recognition of amortization of deferred revenue of $9.0 million, partially offset by an increase in accrued expenses and other current liabilities of $8.3 million. 34 Cash used in investing activities of $ 39.5 million for the three months ended March 31, 2022 was primarily due to the purchase of $ 56.0 million of debt securities and $ 5.0 million purchase of available-for-sale securities , and $5.1 million purchase of property and equipment , partially offset by the maturity of $ 26.5 million of debt securities . Cash used in investing activities of $31.4 million for the three months ended March 31, 2021 was primarily due to the purchase of debt securities. Cash provided by financing activities of $0.8 million for the three months ended March 31, 2022 was primarily due to proceeds from the market price stock purchase plan of $0.7 million. Cash provided by financing activities of $225.0 million for the three months ended March 31, 2021 was primarily due to net proceeds from the offering of Senior convertible notes of $222.9 million. 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 March 31, 2022, we had capital resources of $67.2 million in cash and cash equivalents, $95.2 million in short-term investments, $70.5 million in long-term investments, and total principal amount of outstanding borrowings of $288.4 million. We believe our resources will be sufficient to fund our operations for beyond the next twelve months from the date of issuance of our condensed consolidated financial statements included in Part I – Financial Statements (Unaudited) . Contractual Obligations See Note 7 – Borrowings and Note 13 – Commitments and Contingencies for a discussion of material changes outside of the ordinary course of business in our contractual obligations from those disclosed within “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as contained in the Annual Report. 35