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Item 7. Management’s Discussion and Analysis

2023-02-23 compared with 2022-02-24 · 109 added, 131 removed, 118 unchanged (67% of the section changed)

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The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto included in this Annual Report on Form 10-K.

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 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 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.

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.

A discussion of changes in our results of operations during the year ended December 31, 2021 compared to the year ended December 31, 2020 has been omitted from this Annual Report on Form 10-K but may be found in “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 24, 2022, which discussion is incorporated herein by reference and which is available free of charge on the SEC’s website at www.sec.gov.

We are a biopharmaceutical company focused on the development and commercialization of innovative therapeutic products and devices to address serious unmet medical needs for those living with endocrine and orphan lung diseases.

Our signature technologies—Technosphere dry-powder formulations and Dreamboat inhalation devices—offer rapid and convenient delivery of medicines to the deep lung where they can exert an effect locally or enter the systemic circulation.

In our endocrine business unit, we currently commercialize two products:

Afrezza (insulin human) Inhalation Powder, an ultra rapid-acting inhaled insulin indicated to improve glycemic control in adults with diabetes, and the V-Go wearable insulin delivery device, which provides continuous subcutaneous infusion of insulin in adults that require insulin.

The first product to come out of our orphan lung disease pipeline, Tyvaso DPI (treprostinil) inhalation powder, received FDA approval in May 2022 for the treatment of PAH and PH-ILD.

Our development and marketing partner, United Therapeutics, began commercializing Tyvaso DPI in June 2022 and is obligated to pay us a royalty on net sales of the product.

We also receive a margin on supplies of Tyvaso DPI that we manufacture for UT.

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

Other significant risks also include the risk that our products may only achieve a limited degree of commercial success and 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.

As of December 31, 2022, we had an accumulated deficit of $3.2 billion and a stockholders’ deficit of $250.5 million.

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 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.

We had net loss of $87.4 million, $80.9 million and $57.2 million in the years ended December 31, 2022, 2021 and 2020, respectively.

To date, we have funded our operations primarily through the sale of our equity and convertible debt securities, from the receipt of upfront and milestone payments from collaborations, from borrowings, from sales of Afrezza and V-Go, from royalties and manufacturing revenue from UT as well as from proceeds of the sale-leaseback of our manufacturing facility in Danbury, CT.

Critical Accounting Policies and Estimates

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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 and retail pharmacies in the U.S.

Revenue Recognition – Net Revenue – Commercial Product Sales — We sell products to a limited number of wholesale distributors and specialty and retail pharmacies, and durable medical suppliers (“DME”) in the U.S.

(collectively, “Customers”).

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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 us and our, payers, and other indirect customers relating to the sale of our products.

We recognize revenue on product sales to a retail pharmac y as the product is dispensed to patient s .

Product revenues are recorded net of applicable reserves i nclud ing discounts , allowances, rebates, returns and other incentives.

See Reserves for Variable Consideration below.

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.

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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.

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 of gross-to-net adjustments as of December 31, 2022 and, therefore, the transaction price was not reduced further during the year ended December 31, 2022.

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.

Significant judgment is required in estimating gross-to-net adjustments, historical experience, payer channel mix unbilled claims, claim submission time lags and inventory levels in the distribution channel.

Our reserves for variable consideration are reflected in our gross-to-net adjustments which were 42% of gross revenue, or $40.8 million, for the year ended December 31, 2022, compared to 39% of gross revenue, or $24.9 million, for the year ended December 31, 2021.

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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.

Revenue Recognition – Collaborations and Services — We enter into licensing or research agreements under which we license certain rights to our product candidates to third parties or conduct research services to third parties.

Revenue Recognition – Collaborations and Services — We enter into licensing, research or other agreements under which we license certain rights to our product candidates to third parties, conduct research or provide other services to third parties.

The terms of these arrangements may include but are not limited to payment to us of one or more of the following:

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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 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”).

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.

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

(1) the license, supply of product to be used in clinical development, and continued development and approval support for Tyvaso DPI (“R&D Services and License”);

(2) development activities for the next generation of the product (“Next-Gen R&D Services”);

and (3) a material right associated with current and future commercial manufacturing and supply of product (“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.

Following the FDA’s approval of Tyvaso DPI, UT began issuing purchase orders for the supply of product, which represent distinct contracts and performance obligations under ASC 606.

Revenue is recognized for the supply of product at a point in time, once control is transferred to UT.

See Note 11 – Collaboration, Licensing and Other Arrangements of the Notes to Consolidated Financial Statements included in Part II, Item 8 — Financial Statements and Supplementary Data.

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

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.

If there is a 10% difference in the estimates used to determine the transaction price for the CSA entered into in December 202 2 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.

4 million for the year ended December 31, 202 2 .

Stock-Based Compensation — Share-based payments to employees, including grants of restricted stock units, performance-based awards, restricted stock units with market conditions (“Market RSUs”), nonqualified stock options (“options”) 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.

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

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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.

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.

The grant date fair value for the Market RSUs was $6.10 per unit for the Market RSUs granted during the year ended December 31, 2022, compared to $9.30 and $3.77 per unit for the Market RSUs granted during the years ended December 31, 2021 and 2020, respectively.

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 $0.6 million for the year ended December 31, 2022.

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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.

We continue to maintain an elevated level of safety stock of certain raw materials due to concerns that supply chain interruptions may interfere with the manufacture of Afrezza, V-Go and Tyvaso DPI.

Manufacturing risks may adversely affect our ability to manufacture our products and could reduce our gross margin.

Our future success is dependent on our, and our current and future collaboration partners’, ability to effectively commercialize our approved products.

Our future success is also dependent on our pipeline of new products.

There is a high rate of failure inherent in the research and development process for new drugs.

As a result, there is a high risk that the funds we invest in research programs will not generate sufficient financial returns.

Products may appear promising in development but fail to reach market within the expected or optimal timeframe, or at all.

Years ended December 31, 2022 and 2021

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Net revenue — commercial product sales

Gross-to-net revenue adjustment percentage

Revenue — collaborations and services

Royalties — collaborations

Total revenues

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

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* Not meaningful

Afrezza — Gross revenue from sales of Afrezza increased by $7.1 million, or 11%, for the year ended December 31, 2022 compared to the prior year.

The increase reflects a combination of higher price (including a more favorable gross-to-net adjustment), higher product demand and a favorable cartridge mix.

The gross-to-net adjustment was 39% of gross revenue, or $27.8 million, for the year ended December 31, 2022, compared to 39% of gross revenue or $24.9 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.

The gross-to-net percentage remained consistent over the prior year and was primarily impacted by an increase in anticipated product returns, offset by a decrease in co-pay assistance and wholesaler distribution fees (as a percentage of gross sales) due to an increased mix of specialty and retail pharmacy sales.

As a result, net revenue from sales of Afrezza increased by $4.1 million, or 11%, for the year ended December 31, 2022 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.

V-Go — The acquisition of V-Go on May 31, 2022 resulted in an increase in gross revenue from commercial product sales of $25.9 million and net revenue of $12.9 million for the year ended December 31, 2022.

The gross-to-net adjustment of 50.2% of gross revenue was mainly attributable to commercial and government rebates and product distribution fees.

Collaborations and Services — Net revenue from collaborations and services decreased by $8.4 million, or 23%, for the year ended December 31, 2022 compared to the prior year.

The decrease in collaborations and services revenue was primarily attributable to the completion of the R&D Services performance obligation associated with our collaboration with UT during 2021.

In August 2021, we entered into a commercial supply agreement with UT (the “CSA”).

Revenue associated with the CSA was deferred until we began manufacturing and subsequently selling Tyvaso DPI in the second quarter of 2022.

During the year ended December 31, 2022, we recognized $24.8 million of revenue under the CSA.

We also recognized royalty revenue from our collaboration with UT of $15.6 million during the year ended December 31, 2022.

See Note 11 – Collaboration, Licensing and Other Arrangements in the consolidated financial statements included in Part II, Item 8 – Financial Statements and Supplementary Data.

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Less cost of goods sold

Commercial product gross profit (loss):

Commercial product gross profit for the year ended December 31, 2021 increased by $5.1 million, or 30%, compared to the prior year.

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 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.

Commercial product gross profit:

Afrezza — Commercial product gross profit for Afrezza increased by $12.3 million, or 55%, for the year ended December 31, 2022, compared to the prior year.

Gross margin for the year ended December 31 2022 increased to 80% compared to 57% for 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 $8.2 million, or 48%, for the year ended December 31, 2022 compared to the prior year.

The decrease in cost of goods sold was primarily attributable to a $4.1 million decrease in excess capacity costs as Tyvaso DPI began commercial production a $1.6 million decrease in inventory write-offs in the current year and a $2.0 million fee incurred for the amendment of the Insulin Supply Agreement with Amphastar in the prior year.

V-Go — The acquisition of V-Go on May 31, 2022 resulted in an increase in commercial product gross profit of $5.6 million with a gross margin of 43% for the year ended December 31, 2022.

The following table provides a comparison of the expense categories for the years ended December 31, 2022 and 2021 (dollars in thousands):

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Cost of revenue — collaborations and services

In-process research and development

Research and development

General and administrative

Impairment of assets

(Gain) loss on foreign currency translation

Asset impairment

Gain on foreign currency translation

Loss on purchase commitments

Total expenses

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Cost of revenue — collaborations and services increased by $19.5 million, or 88%, for the year ended December 31, 2022 compared to the prior year.

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.

The acquisition of QrumPharma was accounted for as an asset acquisition and expensed on the date of acquisition as substantially all of the fair value of the assets acquired was concentrated in a single asset that consisted of in-process research and development in a pre-clinical development state.

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

The increase was attributable to an increase in manufacturing activities for Tyvaso DPI product.

Research and development expenses increased by $ 7.4 million, or 60 %, for the year ended December 31 , 2022 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.

The increase was primarily attributable to development activities for our product pipeline, increased headcount for pipeline development activities and the Afrezza pediatrics clinical study (INHALE-1).

Selling expenses increased by $8.2 million, or 18%, for the year ended December 31, 2022, 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.

The increase was primarily attributable to a pilot promotional effort aimed at primary care physicians that began in the fourth quarter of 2021 and ended in the third quarter of 2022, elimination of a co-promotion for third party product (which permitted some expenses associated with the sales force to be recognized as cost of revenue — collaborations and services in the same period of 2021), V-Go promotional efforts after the acquisition in the second quarter of 2022, partially offset by the net favorable impact of personnel-related costs due to Afrezza sales force restructuring.

General and administrative expenses increased by $5.8 million, or 18%, for the year ended December 31, 2022, 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.

This increase was primarily attributable to higher stock-based compensation, increased headcount, and higher professional and consulting fees.

Gain on foreign currency translation was $4.8 million for the year ended December 31, 2022 compared to $6.6 million for the prior year.

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

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dollar to Euro exchange rate associated with the recognized 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.

dollar to Euro exchange rates.

The decrease in year-over-year gain was due to the translation of Euro to U.S.

dollar exchange rates.

Other Income (Expense)

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Interest expense on notes

Loss on available-for-sale securities

Loss on extinguishment of debt

Other (expense) income

Other expense

Total other expense

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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.

Interest income, consisting of interest on investments net of amortization, increased by $2.4 million compared to the prior year primarily due to higher yields on our marketable securities and money market funds.

Interest expense on financing liability was $9.8 million for the year ended December 31, 2022 and represented interest incurred on the sale lease-back transaction for our manufacturing facility in Danbury, CT which was entered into in the fourth quarter of 2021.

Interest expense on notes for the year ended December 31, 2022 was comparable to the prior year.

See Note 10 — Borrowings .

Loss on available-for-sale securities for the year ended December 31, 2022 was $0.9 million as a result of the change in the fair value of the investment that related to credit risk.

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.

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

Other expense or income for the years ended December 31, 2022 and 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 under the Insulin Supply Agreement with Amphastar.

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 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) :

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

To date, we have funded our operations primarily through the sale of equity and convertible debt securities, from the receipt of upfront and milestone payments from collaborations, from borrowings, from sales of Afrezza and V-Go, from royalties and manufacturing revenue from UT as well as from proceeds from the s ale- l easeback transaction.

We believe we will be able to meet our liquidity needs over the next twelve months, as well as longer-term needs, based on the balance of cash, cash equivalents and investments on hand, projected sales of Afrezza and V-Go, and projected royalties and manufacturing revenue from the production and sale of Tyvaso DPI.

The following table presents our material cash requirements as of December 31, 2022 associated with contractual commitments for future periods (in thousands):

Senior convertible notes (1)

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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.

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$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 maturing 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.

$40.0 million principal amount under the MidCap credit facility, bearing interest at an annual rate equal to one-month SOFR plus 6.25% (cap of 8.25%), subject to a one-month SOFR floor of 1.00%, payable in equal monthly installments beginning in September 2023 through maturity in August 2025.

$8.8 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 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.

On November 8, 2021, we sold a portion of our manufacturing facility located in Danbury, CT to an affiliate of Creative Manufacturing Properties (the “Purchaser”) for a sales price of $102.3 million.

We leased the property from the Purchaser for an initial term of 20 years, with four renewal options of five years each.

The total annual rent under the lease started at approximately $9.5 million per year, subject to a 50% rent abatement during the first year of the lease, and increases annually by (i) 2.5% in the second through fifth year of the lease and (ii) 3% in the sixth and each subsequent year of the lease, including any renewal term.

We are responsible for payment of operating expenses, property taxes and insurance for the leased property.

Pursuant to the terms of the lease, we have four options to repurchase the property, in 2026, 2031, 2036 and 2041, for the greater of (i) $102.3 million or (ii) the fair market value of the leased property.

Interest expense is calculated using an incremental borrowing rate of 9%.

The July 2014 Insulin Supply Agreement with Amphastar to manufacture and supply us certain quantities of recombinant human insulin for use in Afrezza was amended in May 2021 and expires on December 31, 2027.

Unless terminated earlier, the agreement can be renewed for additional, successive two-year terms upon 12 months’ written notice given prior to the end of the initial term or any additional two-year term.

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.

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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.

In July 2013, in connection with our entry into a loan agreement (which has since been repaid) with Deerfield Private Design Fund II, L.P.

and Deerfield Private Design International II, L.P.

we issued certain milestone rights (the “Milestone Rights”) to Deerfield Private Design Fund II, L.P.

and Horizon Santé FLML SÀRL (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, $60.0 million of which remains payable to Barings upon achievement of such milestones.

See Note 16– Commitments and Contingencies and Note 10 – Borrowings for further information related to the Milestone Rights.

In addition to the above, we also expect to have material cash requirements relating to paying our employees and consultants, professional services fees, marketing expenses, manufacturing expenditures, and clinical trial expenses.

In addition, we make substantial and often long-term investments in our supply chain in order to ensure we have enough inventory and drug product to meet current and future revenue forecasts, as well as clinical trial needs.

In February 2018, we entered into a controlled equity offering sales agreement (the “CF Sales Agreement”) with Cantor Fitzgerald & Co.

(“Cantor Fitzgerald”), as sales agent, pursuant to which we may offer and sell, from time to time, through Cantor Fitzgerald, shares of our common stock.

Under the Sales Agreement, Cantor Fitzgerald may sell shares by any method deemed to be an “ at-the-market offering ” as defined in Rule 415 under the Securities Act of 1933, as amended.

In February 2022, we filed a sales agreement prospectus under a registration statement on Form S-3 (File No.

333-262981) covering the sale of up to $50.0 million of our common stock through Cantor Fitzgerald under the CF Sales Agreement.

During the year ended December 31 , 2022, we used $ 80.7 million of cash for our operating activities, which primarily consisted of $ 75.1 million of selling, general and administrative expenses, $ 58.5 million of cost of goods sold, $ 23.8 million of costs for research and development , $ 8.9 million of cash paid for interest on notes and $9.6 million of cash paid for interest on the financing liability , partially offset by $ 108.3 million of revenue.

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 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 provided from investing activities of $4.9 million for the year ended December 31, 2022 was primarily due to the maturity of $107.3 million of debt securities, partially offset by the up-front consideration of $15.3 million for certain assets and assumed liabilities related to V-Go, $5.0 million purchase of available-for-sale securities, the purchase of $74.5 million of debt securities and $7.6 million purchase of property and equipment.

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 provided by financing activities of $21.4 million for the year ended December 31, 2022 was primarily due to net proceeds from at-the-market offering of $19.8 million, partially offset by the milestone payment of $1.1 million.

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.

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

We believe we will be able to meet our liquidity needs based on our cash, cash equivalents and investments on hand, sales of Afrezza and V-Go, royalties and manufacturing revenue from the production and sale of Tyvaso DPI.

As of December 31, 2022, we had capital resources of $69.8 million in cash and cash equivalents, $101.0 million in short-term investments and $2.0 million in long-term investments, and total principal amount of outstanding borrowings of $278.8 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.

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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