MNKD 2017 Annual Report

Revenue Recognition and Gross-to-net Adjustments — We invoice our customers upon shipment of Afrezza to them and record an accounts receivable, with a corresponding liability for deferred revenue equal to the gross invoice price net of estimated gross-to-net adjustments. The current accounting guidance requires the Company to reliably estimate returns in a very narrow range in order to recognize revenue upon shipment. While we can currently estimate returns within a range, it is not sufficiently precise to meet the current requirements. Accordingly, we defer recognition of revenue and the related estimated discounts and allowances on Afrezza product shipments until the right of return no longer exists, which occurs at the earlier of the time Afrezza is dispensed through patient prescriptions or expiration of the right of return. Through September 30, 2017, we recognized revenue based on Afrezza prescriptions dispensed, as estimated by syndicated data provided by a third party. We also analyzed additional data points to ensure that such third-party data is reasonable, including data related to inventory movements within the channel and ongoing prescription demand. In addition, the costs of Afrezza associated with the deferred revenue are recorded as deferred costs until such time as the related deferred revenue is recognized. In the fourth quarter of 2017, we obtained new and more comprehensive data regarding the ending inventory in the distribution channel. This data indicated that the quantity of downstream inventory was less than the previously estimated. Because the new data was more comprehensive than the data previously available to us, we adjusted the ending gross deferred revenue balance to the match the new estimate. In addition to adjusting the gross deferred revenue balance, we adjusted the ending balances of deferred discounts and deferred cost of goods sold. The net effect of this change was an increase to net income of $1.2 million or $0.01 per basic and diluted net income (loss) per share. Inventory Costing and Recoverability — Inventories are stated at the lower of cost or net realizable value. We analyzed our inventory levels to identify inventory that may expire or has a cost basis in excess of its estimated realizable value. We performed an assessment of projected sales to evaluate the lower of cost or net realizable value and the potential excess inventory on hand at December 31, 2017, 2016 and 2015. As a result of these assessments, we recorded charges of $3.0 million and $36.1 million in the years ended December 31, 2017 and 2015, respectively. There were no write-offs for the year ended December 31, 2016. In the year ended December 31, 2015 we also recorded a charge of $3.2 million related to the write-off of prepaid deposits related to the purchase of inventory. Recognized Loss on Purchase Commitments — We assess whether losses on long term purchase commitments should be accrued. Losses that are expected to arise from firm, non-cancellable, commitments for future purchases of inventory items are recognized unless recoverable. Impairment of Long-Lived Assets — We evaluate long lived assets for impairment at least on a quarterly basis and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be indicated when estimated undiscounted future cash flows from the use and eventual disposition of an asset group, which are identifiable and largely independent of the cash flows of other asset groups, are less than the carrying amount of the asset group. In connection with our quarterly assessment of impairment indicators, we recorded impairments of $0.2 million, $1.2 million, and $140.4 million for the years ended December 31, 2017, 2016, and 2015, respectively. For further information see Note 4 — Property and Equipment of the Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data”. Milestone Rights Liability — In connection with the execution of the Facility Agreement, we also issued Milestone Rights to the Milestone Purchasers. We evaluated the Milestone Rights and determined that such rights do not meet the definition of a freestanding derivative. Since we have elected not to apply the fair value option, we recorded the rights at the initial fair value. Upon the achievement of a Milestone Event, the Milestone Payment will be allocated between (i) a reduction of the initial liability and (ii) a return on investment and the gain or loss is recognized at the time the Milestone Event is achieved. The estimated fair value of the Milestone 50