8. Collaboration Arrangements

Receptor Collaboration and License Agreement — On January 20, 2016, the Company entered into a Collaboration and License Agreement (the “CLA”) with Receptor Life Sciences, Inc. (“Receptor”) pursuant to which the Company performed initial formulation studies on compounds identified by Receptor. Following successful completion of the studies, Receptor obtained the option to acquire an exclusive license to develop, manufacture and commercialize certain products that use MannKind’s technology to deliver the compounds via oral inhalation.

The Company received $0.4 million in nonrefundable payments in 2016 prior to Receptor exercising the option. On December 30, 2016, Receptor exercised the option and paid the Company a $1.0 million nonrefundable option exercise and license fee. Under the CLA, the Company may receive the following additional payments:

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Nonrefundable milestone payments upon the completion of certain technology transfer activities and the achievement of specified sales targets.

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Royalties upon Receptor’s and its sublicensee’s sale of the product.

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Milestones upon total worldwide sales reaching certain agreed upon levels.

The Company evaluated the accounting for the payments received in 2016 under the multiple element accounting guidance and determined that the $0.4 million in payments received prior to Receptor exercising its option are separable from the other elements of the agreement and represented payments to offset costs incurred. Therefore, those payments reduced the Company’s research and development expense in 2016. The $1.0 million license fee received in 2016 does not have standalone value from the follow-on transfer of technology. Therefore, the license fee was recorded in deferred payments from collaboration at December 31, 2016 and will be recognized in net revenue — collaboration over four years. See Note 2 — Summary of Significant Accounting Policies for additional information on the Company’s accounting for multiple element arrangements.

Sanofi License Agreement and Sanofi Supply Agreement and Loan Facility — On August 11, 2014, the Company executed a license and collaboration agreement (the “Sanofi License Agreement”) with Sanofi-Aventis Deutschland GmbH (which subsequently assigned its rights and obligations under the agreement to Sanofi-Aventis U.S. LLC (Sanofi)), pursuant to which Sanofi was responsible for global commercial, regulatory and development activities for Afrezza. The Company manufactured Afrezza at its manufacturing facility in Danbury, Connecticut to supply Sanofi’s demand for the product pursuant to a supply agreement dated August 11, 2014 (the “Sanofi Supply Agreement”).

During the term of the Sanofi License Agreement, worldwide profits and losses were determined based on the difference between the net sales of Afrezza and the costs and expenses incurred by the Company and Sanofi that were specifically attributable or related to the development, regulatory filings, manufacturing, or commercialization of Afrezza. These profits and losses were shared 65% by Sanofi and 35% by the Company. On January 4, 2016 the Company received a 90-day notification from Sanofi of its election to terminate in its entirety the Sanofi License Agreement. The effective date of termination (the “Termination Date”) was April 4, 2016. On April 5, 2016 the Company assumed responsibility for the worldwide development and commercialization of Afrezza from Sanofi. Under the terms of the transition agreement, Sanofi continued to fulfill orders for Afrezza in the United States until the Company began distributing MannKind-branded Afrezza product to major wholesalers during the week of July 25, 2016.

The Company analyzed the agreements entered into with Sanofi at their inception to determine whether the consideration, paid or payable to the Company, or a portion thereof, could be recognized as revenue. Under the terms of the Sanofi License Agreement, the Sanofi Supply Agreement and the Sanofi Loan Facility, the Company determined that the arrangement contained significant deliverables including (i) licenses to develop and commercialize Afrezza and to use the Company’s trademarks, (ii) development activities, and (iii) manufacture and supply services for Afrezza. Due to the proprietary nature of the manufacturing services to be provided by the Company, the Company determined that all of the significant deliverables should be combined into a single unit of accounting. The Company believed that the manufacturing services are proprietary due to the fact that since the late 1990’s, the Company has developed proprietary knowledge and patented equipment and tools that are used in the manufacturing process of Afrezza. Due to the complexities of particle formulation and the specialized knowledge and equipment needed to handle the Afrezza powder, neither Sanofi nor, to the Company’s knowledge, any third-party contract manufacturing organization currently possesses the capability of manufacturing Afrezza.

In order for revenue to be recognized, the seller’s price to the buyer must be fixed or determinable. Prior to December 31, 2015, because the Company did not have the ability to estimate the amount of costs that would potentially be incurred under the loss share provision related to the Sanofi License Agreement and the Sanofi Supply Agreement, the Company believed this requirement for revenue recognition had not been met. Therefore, the Company had recorded the $150.0 million up-front payment and the two milestone payments of $25.0 million each as deferred payments from collaboration. In addition, as of December 31, 2015 the Company had recorded $17.5 million in Afrezza product shipments to Sanofi as deferred sales from collaboration and recorded $13.5 million as deferred costs from collaboration. Deferred costs from collaboration represented the costs of product manufactured and shipped to Sanofi, as well as certain direct costs associated with a firm purchase commitment entered into in connection with the collaboration with Sanofi.

In the first and second quarters of 2016, after the Company received notice of termination from Sanofi, the Company evaluated whether the revenue recognition criteria had been met. The Company determined that the requirement had not been met because Sanofi had not finalized necessary adjustments to the profit and loss share provision statements and Sanofi had not yet transferred all of the information to enable the Company to commercialize Afrezza on its own. Therefore, the Company was still unable to estimate the costs to be incurred under the agreement with Sanofi. During the three months ended September 30, 2016, Sanofi provided enough information to the Company to enable it to reasonably estimate the remaining costs under the Sanofi License Agreement and the Sanofi Supply Agreement. Accordingly, the fixed or determinable fee requirement for revenue recognition was met and there were no future obligations to Sanofi. Therefore, the Company recognized $172.0 million of net revenue — collaboration for the year ended December 31, 2016. The revenue recognized includes the upfront payment of $150.0 million and the two milestone payments of $25.0 million each, net of $64.9 million of net loss share with Sanofi, as well as $17.5 million in sales of Afrezza and $19.4 million from sales of bulk insulin, both to Sanofi. These payments and sales were made pursuant to the contractual terms of the agreements with Sanofi.

Sanofi Loan Facility — On September 23, 2014, the Company entered into the Sanofi Loan Facility, consisting of a senior secured revolving promissory note and a guaranty and security agreement (the “Security Agreement”) with an affiliate of Sanofi, which provided the Company with a secured loan facility of up to $175.0 million to fund the Company’s share of net losses under the Sanofi License Agreement.

The obligations of the Company under the Sanofi Loan Facility were guaranteed by the Company’s wholly-owned subsidiary, MannKind LLC, and were secured by a first priority security interest in certain insulin inventory located in the United States and any contractual rights and obligations pursuant to which the Company purchases or has purchased such insulin, and a second priority security interest in the Company’s assets that secure the Company’s obligations under the Facility Agreement, as amended. In addition, the Company granted to Sanofi, as additional security for the obligations under the Sanofi Loan Facility, a first priority mortgage on the Company’s facility in Valencia, California, which had a carrying value of $17.9 million as of December 31, 2015.

Advances under the Sanofi Loan Facility bore interest at a rate of 8.5% per annum and were payable in-kind and compounded quarterly and added to the outstanding principal balance under the Sanofi Loan Facility. The Company was required to make mandatory prepayments on the outstanding loans under the Sanofi Loan Facility from its share of any profits (as defined in the Sanofi License Agreement) under the Sanofi License Agreement within 30 days of receipt of its share of any such profits.

The Company’s total portion of the loss sharing was $57.7 million for the year ended December 31, 2015, of which $44.5 million was borrowed under the Sanofi Loan Facility as of December 31, 2015. Subsequent to December 31, 2015, the Company borrowed $17.9 million under the Sanofi Loan Facility to finance the portion of the Company’s loss for the quarter ended December 31, 2015. The total amount owed to Sanofi at December 31, 2015 was $62.4 million, which includes $1.7 million of paid-in-kind interest.

On November 9, 2016, the Company entered into a settlement agreement with Sanofi (the “Settlement Agreement”). Under the terms of the Settlement Agreement, the promissory note between the Company and Aventisub LLC (“Aventisub”), a Sanofi affiliate, was terminated, with Aventisub agreeing to forgive the full outstanding loan balance of $72.0 million. Sanofi also agreed to purchase $10.2 million of insulin from the Company in December 2016 under an existing insulin put option as well as make a cash payment of $30.6 million to the Company in early January 2017 as acceleration and in replacement of all other payments that Sanofi would otherwise have been required to make in the future pursuant to the insulin put option, without the Company being required to deliver any insulin for such payment. The Company was also relieved of its obligation to pay Sanofi $0.5 million in previously uncharged costs pursuant to the Sanofi License Agreement. The Company and Sanofi also agreed to a general release of potential claims against each other.

The forgiveness of the full outstanding loan balance on the Sanofi Loan Facility and the previously uncharged costs related to the collaboration were accounted for in (gain) loss on extinguishment of debt in the accompanying consolidated statements of operations. The $10.2 million sale of insulin was accounted for as net revenue — collaboration, consistent with the Company’ sales of insulin to Sanofi in the third quarter of 2016 (see Note 2 — Summary of Significant Accounting Policies — Revenue Recognition — Net Revenue — Collaboration). The $30.6 million accelerated put option payment was recognized as a receivable from Sanofi at December 31, 2016 and an increase in the recognized loss on purchase commitments as the purchase commitment obligation had previously been reduced to reflect the Company’s expectation that amounts associated with purchases of insulin were recoverable (see Note 2 — Summary of Significant Accounting Policies — Inventories).