MNKD 2017 Annual Report

We began distributing MannKind-branded Afrezza product to wholesalers through ICS Direct in July of 2016. We recognized commercial product revenue based on Afrezza prescriptions dispensed to patients. During the year ended December 31, 2016, we recognized net revenue from commercial product sales of $1.9 million. During the year ended December 31, 2015, we did not recognize any revenues from commercial product sales. At December 31, 2016, year to date total gross-to-net adjustments were approximately 30% of gross revenue from product sales. In the fourth quarter of 2016 we sold $0.9 million of bulk insulin to a third party. During the year ended December 31, 2015, we did not sell any bulk insulin. Expenses The following table provides a comparison of the expense categories for the years ended December 31, 2016 and 2015 (dollars in thousands): Year Ended December 31, 2016 2015 $ Change % Change Expenses: Cost of revenue - collaboration . . . . . . . . . . . $ 32,971 — $ 32,971 100% Cost of goods sold . . . . . . . . . . . . . . . . . . . . . 17,121 64,745 (47,624) (74%) Research and development . . . . . . . . . . . . . . . 14,917 29,674 (14,757) (50%) Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,854 1,587 18,267 1,151% General and administrative . . . . . . . . . . . . . . . 27,074 39,373 (12,299) (31%) Property and equipment impairment . . . . . . . 1,259 140,412 (139,153) (99%) (Gain) loss on foreign currency translation . . (3,433) 2,697 (6,130) (227%) (Gain) loss on purchase commitment . . . . . . . (2,265) 66,167 (68,432) (103%) Total expenses . . . . . . . . . . . . . . . . . . . . $107,498 $344,655 $(237,157) (69%) During the year ended December 31, 2016, we recognized $33.0 million of costs of revenue from collaboration, which consists of $13.5 million in Afrezza manufacturing costs for product sold to Sanofi, and $19.5 million related to the cost of bulk insulin sold to Sanofi. The Afrezza manufacturing costs were previously deferred on the consolidated balance sheet at December 31, 2015. During the year ended December 31, 2015, we did not recognize any costs of revenue from collaboration. The decrease in cost of goods sold of $47.6 million for the year ended December 31, 2016 compared to the prior year is primarily due to $36.1 million of inventory impairment write-offs and $3.2 million in deposit write- offs, which were recorded in other assets, related to impairment in 2015 that did not recur in 2016 and a $8.6 million decrease in under-absorbed labor and overhead due to the reduction in sales force and decreased depreciation following the fixed asset impairment write-down in 2015. These decreases are offset by $0.3 million cost of goods attributable to commercial product sales, which consists of the manufacturing costs for Afrezza dispensed to patients. This $0.3 million attributable to commercial product sales only includes conversion cost as we wrote off the cost of our raw materials held in inventory at the end of 2015. The decrease in research and development expense of $14.8 million for the year ended December 31, 2016 compared to the prior year is due to the expense associated with the 2015 reduction in force exceeding the expense associated with the 2016 reduction in force by $6.2 million, as well as decreases in facility spending of $3.3 million due to the reduction in force and lower depreciation expense following the write-off of property, plant and equipment in 2015; in research and development project costs of $3.1 million due to completion of projects in 2015; in clinical trial expenses of $2.1 million due to completion of Afrezza trials in 2015; in stock- based compensation expense of $1.1 million due to fewer employees as a result of the reduction in force and lower stock price; and the receipt of $0.4 million research and development reimbursement payment from 56