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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

Or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 .

Commission file number: 000-50865

 

MannKind Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

13-3607736

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

1 Casper Street 

Danbury, Connecticut

06810

(Address of principal executive offices)

(Zip Code)

(818) 661-5000

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

MNKD

 

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No   

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  

As of April 29, 2022, there were 252,565,400 shares of the registrant’s common stock, $0.01 par value per share, outstanding.

 

 

 

 


 

MANNKIND CORPORATION

Form 10-Q

For the Quarterly Period Ended March 31, 2022

TABLE OF CONTENTS

 

 

Page

PART I: FINANCIAL INFORMATION

2

 

 

Item 1. Financial Statements (Unaudited)

2

Condensed Consolidated Balance Sheets: March 31, 2022 and December 31, 2021

2

Condensed Consolidated Statements of Operations: Three months ended March 31, 2022 and 2021

3

Condensed Consolidated Statements of Comprehensive Loss: Three months ended March 31, 2022 and 2021

4

Condensed Consolidated Statements of Stockholders’ Deficit: Three months ended March 31, 2022 and 2021

5

Condensed Consolidated Statements of Cash Flows: Three months ended March 31, 2022 and 2021

6

Notes to Condensed Consolidated Financial Statements

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

Item 3. Quantitative and Qualitative Disclosures About Market Risk

36

Item 4. Controls and Procedures

36

 

 

PART II: OTHER INFORMATION

37

 

 

Item 1. Legal Proceedings

37

Item 1A. Risk Factors

37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

65

Item 3. Defaults Upon Senior Securities

65

Item 4. Mine Safety Disclosures

65

Item 5. Other Information

65

Item 6. Exhibits

66

 

 

SIGNATURES

68

 

 

 

1


 

PART 1: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)

 

 

March 31, 2022

 

 

December 31, 2021

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

67,243

 

 

$

124,184

 

Short-term investments

 

95,203

 

 

 

79,932

 

Accounts receivable, net

 

9,823

 

 

 

4,739

 

Inventory

 

8,044

 

 

 

7,152

 

Prepaid expenses and other current assets

 

3,952

 

 

 

3,482

 

Total current assets

 

184,265

 

 

 

219,489

 

Property and equipment, net

 

41,453

 

 

 

36,612

 

Long-term investments

 

70,542

 

 

 

56,619

 

Other assets

 

12,058

 

 

 

8,441

 

Total assets

$

308,318

 

 

$

321,161

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

8,702

 

 

$

6,956

 

Accrued expenses and other current liabilities

 

27,131

 

 

 

27,419

 

Financing liability — current

 

9,410

 

 

 

6,977

 

Deferred revenue — current

 

1,307

 

 

 

827

 

Recognized loss on purchase commitments — current

 

6,944

 

 

 

6,170

 

Total current liabilities

 

53,494

 

 

 

48,349

 

Senior convertible notes

 

224,307

 

 

 

223,944

 

Midcap credit facility

 

38,939

 

 

 

38,833

 

Promissory notes

 

18,425

 

 

 

18,425

 

Accrued interest — promissory notes

 

520

 

 

 

404

 

Financing liability — long term

 

93,463

 

 

 

93,525

 

Recognized loss on purchase commitments — long term

 

72,400

 

 

 

76,659

 

Operating lease liability

 

826

 

 

 

1,040

 

Deferred revenue  — long term

 

26,116

 

 

 

19,543

 

Milestone rights liability

 

4,838

 

 

 

4,838

 

Deposits from customer

 

7,054

 

 

 

4,950

 

Total liabilities

 

540,382

 

 

 

530,510

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

Undesignated preferred stock, $0.01 par value — 10,000,000 shares authorized;

   no shares issued or outstanding as of March 31, 2022 and December 31, 2021

 

 

 

 

 

Common stock, $0.01 par value - 400,000,000 shares authorized,

   252,413,434 and 251,477,562 shares issued and outstanding

   at March 31, 2022 and December 31, 2021, respectively

 

2,524

 

 

 

2,515

 

Additional paid-in capital

 

2,922,555

 

 

 

2,918,205

 

Accumulated other comprehensive loss

 

(1,076

)

 

 

 

Accumulated deficit

 

(3,156,067

)

 

 

(3,130,069

)

Total stockholders' deficit

 

(232,064

)

 

 

(209,349

)

Total liabilities and stockholders' deficit

$

308,318

 

 

$

321,161

 

 

See notes to condensed consolidated financial statements.

2


MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

 

 

Three Months Ended

March 31,

 

 

2022

 

 

2021

 

Revenues:

 

 

 

 

 

 

 

Net revenue — commercial product sales

$

9,826

 

 

$

8,099

 

Revenue — collaborations and services

 

2,166

 

 

 

9,337

 

Total revenues

 

11,992

 

 

 

17,436

 

Expenses:

 

 

 

 

 

 

 

Cost of goods sold

 

2,284

 

 

 

4,315

 

Cost of revenue — collaborations and services

 

8,714

 

 

 

3,295

 

Research and development

 

3,536

 

 

 

2,442

 

Selling, general and administrative

 

20,697

 

 

 

17,413

 

Gain on foreign currency translation

 

(1,983

)

 

 

(3,838

)

Total expenses

 

33,248

 

 

 

23,627

 

Loss from operations

 

(21,256

)

 

 

(6,191

)

Other (expense) income:

 

 

 

 

 

 

 

Interest income, net

 

377

 

 

 

3

 

Interest expense on financing liability

 

(2,371

)

 

 

 

Interest expense on notes

 

(2,748

)

 

 

(6,452

)

Other expense

 

 

 

 

(276

)

Total other expense

 

(4,742

)

 

 

(6,725

)

Loss before provision for income taxes

 

(25,998

)

 

 

(12,916

)

Provision for income taxes

 

 

 

 

 

Net loss

$

(25,998

)

 

$

(12,916

)

Net loss per share - basic and diluted

$

(0.10

)

 

$

(0.05

)

Shares used to compute net loss per share - basic and diluted

 

251,887

 

 

 

246,631

 

 

See notes to condensed consolidated financial statements.

 

 

 

3


 

MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands)

 

 

Three Months Ended

March 31,

 

 

2022

 

 

2021

 

Net loss

$

(25,998

)

 

$

(12,916

)

Other comprehensive loss:

 

 

 

 

 

 

 

Unrealized loss on available-for-sale securities

 

(1,076

)

 

 

 

Comprehensive loss

$

(27,074

)

 

$

(12,916

)

 

 

See notes to condensed consolidated financial statements.  

4


MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited)

(In thousands)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

Other

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Comprehensive

Loss

 

 

Deficit

 

 

Total

 

BALANCE, JANUARY 1, 2021

 

 

242,118

 

 

$

2,421

 

 

$

2,866,303

 

 

$

 

 

$

(3,049,143

)

 

$

(180,419

)

Net issuance of common stock associated

   with stock options and restricted stock

   units

 

 

390

 

 

 

4

 

 

 

393

 

 

 

 

 

 

 

 

 

397

 

Issuance of common stock under Employee

   Stock Purchase Plan

 

 

293

 

 

 

3

 

 

 

387

 

 

 

 

 

 

 

 

 

390

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,935

 

 

 

 

 

 

 

 

 

1,935

 

Issuance of common stock pursuant to

   conversion of the Mann Group

   convertible note

 

 

3,830

 

 

 

38

 

 

 

9,535

 

 

 

 

 

 

 

 

 

9,573

 

Issuance of common stock pursuant to

   conversion of the Mann Group

   convertible note interest

 

 

170

 

 

 

2

 

 

 

425

 

 

 

 

 

 

 

 

 

427

 

Issuance of common stock pursuant to

   conversion of the 2024 convertible notes

 

 

1,667

 

 

 

17

 

 

 

4,983

 

 

 

 

 

 

 

 

 

5,000

 

Issuance of common stock pursuant to

   payoff of the 2024 convertible note

   interest

 

 

27

 

 

 

 

 

 

143

 

 

 

 

 

 

 

 

 

143

 

Issuance of at-the-market placement

 

 

578

 

 

 

6

 

 

 

1,880

 

 

 

 

 

 

 

 

 

1,886

 

Issuance costs associated with at-the-

   market placement

 

 

 

 

 

 

 

 

(38

)

 

 

 

 

 

 

 

 

(38

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,916

)

 

 

(12,916

)

BALANCE, MARCH 31, 2021

 

 

249,073

 

 

$

2,491

 

 

$

2,885,946

 

 

$

 

 

$

(3,062,059

)

 

$

(173,622

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

Other

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Comprehensive

Loss

 

 

Deficit

 

 

Total

 

BALANCE, JANUARY 1, 2022

 

 

251,478

 

 

$

2,515

 

 

$

2,918,205

 

 

$

 

 

$

(3,130,069

)

 

$

(209,349

)

Net issuance of common stock associated

   with stock options and restricted stock

   units

 

 

450

 

 

 

4

 

 

 

125

 

 

 

 

 

 

 

 

 

129

 

Issuance of common stock under Employee

   Stock Purchase Plan

 

 

233

 

 

 

2

 

 

 

738

 

 

 

 

 

 

 

 

 

740

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,806

 

 

 

 

 

 

 

 

 

2,806

 

Issuance of common stock from market

   price stock purchase plan

 

 

252

 

 

 

3

 

 

 

681

 

 

 

 

 

 

 

 

 

684

 

Cumulative loss on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

(1,076

)

 

 

 

 

 

(1,076

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,998

)

 

 

(25,998

)

BALANCE, MARCH 31, 2022

 

 

252,413

 

 

$

2,524

 

 

$

2,922,555

 

 

$

(1,076

)

 

$

(3,156,067

)

 

$

(232,064

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.  

5


MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(25,998

)

 

$

(12,916

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

2,806

 

 

 

1,935

 

Interest expense on financing liability

 

 

2,371

 

 

 

 

Depreciation and amortization

 

 

1,324

 

 

 

655

 

Amortization of right-of-use assets

 

 

289

 

 

 

309

 

Interest expense on promissory notes

 

 

116

 

 

 

1,028

 

Gain on foreign currency translation

 

 

(1,983

)

 

 

(3,838

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(4,829

)

 

 

645

 

Inventory

 

 

(892

)

 

 

(77

)

Prepaid expenses and other current assets

 

 

(470

)

 

 

356

 

Other assets

 

 

(320

)

 

 

(97

)

Accounts payable

 

 

1,745

 

 

 

1,124

 

Accrued expenses and other current liabilities

 

 

510

 

 

 

8,288

 

Deferred revenue

 

 

7,053

 

 

 

(7,431

)

Operating lease liabilities

 

 

(572

)

 

 

(333

)

Recognized loss on purchase commitments

 

 

(1,502

)

 

 

(2,379

)

Customer deposits

 

 

2,104

 

 

 

 

Net cash used in operating activities

 

 

(18,248

)

 

 

(12,731

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of debt securities

 

 

(55,988

)

 

 

(30,442

)

Proceeds from maturity of debt securities

 

 

26,538

 

 

 

 

Purchase of property and equipment

 

 

(5,056

)

 

 

(976

)

Purchase of available-for-sale securities

 

 

(5,000

)

 

 

 

Net cash used in investing activities

 

 

(39,506

)

 

 

(31,418

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from the Senior convertible notes

 

 

 

 

 

230,000

 

Issuance costs associated with Senior convertible notes

 

 

 

 

 

(7,268

)

Proceeds from at-the-market offering

 

 

 

 

 

1,886

 

Issuance costs associated with at-the-market offering

 

 

 

 

 

(38

)

Payment of employment taxes related to vested restricted stock units

   and exercise of stock options

 

 

129

 

 

 

397

 

Proceeds from market price stock purchase plan

 

 

684

 

 

 

 

Net cash provided by financing activities

 

 

813

 

 

 

224,977

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

 

 

(56,941

)

 

 

180,828

 

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD

 

 

124,184

 

 

 

67,163

 

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD

 

$

67,243

 

 

$

247,991

 

SUPPLEMENTAL CASH FLOWS DISCLOSURES:

 

 

 

 

 

 

 

 

Interest paid in cash

 

$

3,600

 

 

$

1,094

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Reclassification of investments from long-term to current

 

 

14,813

 

 

 

 

Common stock issuance to settle employee stock purchase plan liability

 

 

740

 

 

 

390

 

Non-cash construction in progress and property and equipment

 

 

383

 

 

 

124

 

Payment on Mann Group convertible note through issuance of common stock

 

 

 

 

 

9,573

 

Payment of 2024 convertible notes through common stock issuance

 

 

 

 

 

5,000

 

Reclassification of the PPP Loan from current to long-term

 

 

 

 

 

609

 

Payment of Mann Group convertible note interest through issuance of common stock

 

 

 

 

 

427

 

Payment of interest on 2024 convertible notes through common stock issuance

 

 

 

 

 

143

 

 

 

See notes to condensed consolidated financial statements.

 

6


 

MANNKIND CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of Business and Significant Accounting Policies

The unaudited condensed consolidated financial statements of MannKind Corporation and its subsidiaries (“MannKind,” the “Company,” “we” or “us”), have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information included in this quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 24, 2022 (the “Annual Report”).

In the opinion of management, all adjustments, consisting only of normal, recurring adjustments, considered necessary for a fair presentation of the results of these interim periods have been included. The results of operations for the three months ended March 31, 2022 may not be indicative of the results that may be expected for the full year.

Financial Statement Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates or assumptions. Management considers many factors in selecting appropriate financial accounting policies, and in developing the estimates and assumptions that are used in the preparation of the financial statements. Management must apply significant judgment in this process and the COVID-19 pandemic has increased the level of judgment used by management in developing these estimates and assumptions. The COVID-19 pandemic continues to evolve and the ultimate impact of the COVID-19 pandemic is uncertain and subject to change. These effects could have a material impact on the estimates and assumptions used in the preparation of the condensed consolidated financial statements. The more significant estimates include revenue recognition, including gross-to-net adjustments, stand-alone selling price considerations for recognition of collaboration revenue, assessing long-lived assets for impairment, clinical trial expenses, inventory costing and recoverability, recognized loss on purchase commitment, milestone rights liability, stock-based compensation and the determination of the provision for income taxes and corresponding deferred tax assets and liabilities, and the valuation allowance recorded against net deferred tax assets.

Business — MannKind is a biopharmaceutical company focused on the development and commercialization of inhaled therapeutic products for patients with endocrine and orphan lung diseases. The Company’s 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 U.S. Food and Drug Administration (“FDA”) in June 2014. The Company collaborates with a number of third parties to formulate their drugs on the Company’s Technosphere drug delivery platform. Since September 2018, the Company has been collaborating with United Therapeutics Corporation (“United Therapeutics” or “UT”) to develop an inhaled formulation of treprostinil, known as Tyvaso DPI. In April 2021, United Therapeutics submitted a new drug application (“NDA”) to the FDA seeking approval of Tyvaso DPI for the treatment of pulmonary arterial hypertension (PAH) and pulmonary hypertension associated with interstitial lung disease (PH-ILD). The NDA was resubmitted in December 2021 following a complete response letter in October 2021. The FDA is expected to complete its review of the NDA for Tyvaso DPI in May 2022.

Basis of Presentation — The condensed consolidated financial statements have been prepared in accordance with GAAP.

The Company is not currently profitable and has rarely generated positive net cash flow from operations. In addition, the Company expects to continue to incur significant expenditures for the foreseeable future in support of its manufacturing operations, sales and marketing costs for Afrezza, and development of other product candidates in the Company’s pipeline. As of March 31, 2022, the Company 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, an accumulated deficit of $3.2 billion and $288.4 million of total principal amount of outstanding borrowings.

In August 2019, MannKind and its wholly owned subsidiary, MannKind LLC, entered into a credit and security agreement with MidCap Financial Trust (as amended, the “MidCap Credit Facility”). The MidCap Credit Facility currently provides a secured term loan facility with a potential aggregate principal amount of up to $100.0 million, with a balance of $40.0 million outstanding as of March 31, 2022. See Note 7 – Borrowings. In March 2021, the Company issued $230.0 million of 2.50% convertible senior notes due 2026 (the “Senior convertible notes”) to provide additional operating capital and pay down higher cost debt.

The Company believes its resources will be sufficient to fund its operations for the next twelve months from the date of issuance of these condensed consolidated financial statements.

7


Principles of Consolidation — The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated. Certain prior year amounts have been reclassified for consistency with the current year presentation. Changes were made to the condensed consolidated statement of operations to disclose a single caption for interest expense on all outstanding notes. Changes were made to the condensed consolidated balance sheets to reclassify interest receivable from investments from accounts receivable, net to other assets.

Segment Information — Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed its operations and manages its business as one segment operating in the United States of America.

Revenue RecognitionThe Company recognizes revenue when its customers obtain control of promised goods or services, in an amount that reflects the consideration which the Company expects to be entitled in exchange for those goods or services. The Company recognizes revenue on product sales to a retail pharmacy as the product is dispensed to patients.

To determine revenue recognition for arrangements that are within the scope of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to arrangements that meet the definition of a contract under ASC 606, including when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.

At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company has two types of contracts with customers: (i) contracts for commercial product sales with wholesale distributors, specialty and retail pharmacies and (ii) collaboration arrangements.

Revenue Recognition – Net Revenue – Commercial Product Sales – The Company sells Afrezza to a limited number of wholesale distributors and specialty and retail pharmacies in the U.S. (collectively, its “Customers”). Wholesale distributors subsequently resell the Company’s products to retail pharmacies and certain medical centers or hospitals. Specialty and retail pharmacies sell directly to patients. In addition to distribution agreements with Customers, the Company enters into arrangements with payers that provide for government mandated and/or privately negotiated rebates, chargebacks, and discounts with respect to the purchase of the Company’s products.

The Company recognizes revenue on product sales when the Customer obtains control of the Company's product, which occurs at delivery for wholesale distributors and generally at delivery for specialty pharmacies. The Company recognizes revenue on product sales to a retail pharmacy as the product is dispensed to patients. Product revenues are recorded net of applicable reserves, including discounts, allowances, rebates, returns and other incentives. See Reserves for Variable Consideration below.

Free Goods Program From time to time, the Company offers programs to potential new patients that allow them to obtain free goods (prescription fills) from a pharmacy. The Company excludes such amounts related to these programs from both gross and net revenue. The cost of product associated with the free goods program is recognized as cost of goods sold in the condensed consolidated statements of operations.

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 the Company and its Customers, payers, and other indirect customers relating to the Company’s sale of its products. These reserves, as further detailed below, 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 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 the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts.