Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ☐ No ☒
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T
during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K
is
not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K
or any
amendment to this
Form 10-K. ☒
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and
smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Act). Yes ☐ No ☒
As of March 10, 2017, there were 95,776,246 shares of the registrants Common Stock outstanding.
Portions of the registrants definitive Proxy Statement (the Proxy Statement) for the 2017 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than May 1, 2017 are incorporated by reference in Part III of this Annual Report on Form
10-K.
Statements in this report that are not strictly historical in nature are forward-looking statements within the meaning of the
federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terms such as anticipate, believe,
could, estimate, expect, goal, intend, may, plan, potential, predict, project, should, will,
would, and similar expressions intended to identify forward-looking statements, though not all forward-looking statements contain these identifying words. These statements may include, but are not limited to, statements regarding: our
ability to successfully market, commercialize and achieve market acceptance for Afrezza or any other product candidates or therapies that we may develop; our ability to manufacture sufficient quantities of Afrezza and obtain insulin supply as
needed; our ability to successfully commercialize our Technosphere drug delivery platform; our estimates for future performance; our estimates regarding anticipated operating losses, future revenues, capital requirements and our needs for additional
financing; the timing and amount of our future recognition of deferred product sales from collaboration, costs of revenue from collaboration and income from collaboration; the progress or success of our research, development and clinical programs,
including the application for and receipt of regulatory clearances and approvals; our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; and scientific studies
and the conclusions we draw from them. These statements are only predictions or conclusions based on current information and expectations and involve a number of risks and uncertainties. The underlying information and expectations are likely to
change over time. Actual events or results may differ materially from those projected in the forward-looking statements due to various factors, including, but not limited to, those set forth under the caption Risk Factors and elsewhere
in this report. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
PART I
Item 1.
Business
Unless the context requires otherwise, the words MannKind, we, Company, us and our
refer to MannKind Corporation and its subsidiaries.
MannKind Corporation is a biopharmaceutical company focused primarily on the
discovery and development of therapeutic products for diseases such as diabetes. Our only approved product, Afrezza, is a rapid-acting inhaled insulin that was approved by the U.S. Food and Drug Administration (the FDA) on June 27,
2014 to improve glycemic control in adult patients with diabetes. Afrezza became available by prescription in United States retail pharmacies in February 2015. According to the Centers for Disease Control and Prevention, approximately
29.1 million people in the United States had diabetes in 2012. Globally, the International Diabetes Federation has estimated that approximately 415.0 million people had diabetes in 2015 and approximately 642.0 million people will have
diabetes by 2040.
Afrezza is a rapid-acting, inhaled insulin used to control high blood sugar in adults with type 1 and type 2 diabetes.
The product consists of a dry powder formulation of human insulin delivered from a small and portable inhaler. Administered at the beginning of a meal, Afrezza dissolves rapidly upon inhalation to the lung and delivers insulin quickly to the
bloodstream. Peak insulin levels are achieved within 12 to 15 minutes of administration.
On August 11, 2014, we entered into a
license and collaboration agreement (the Sanofi License Agreement) with Sanofi-Aventis Deutschland GmbH (which subsequently assigned its rights and obligations
1
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.
On January 4, 2016, we received written notification from Sanofi of its election to terminate in its entirety the Sanofi License
Agreement. The effective date of termination was April 4, 2016, which was when we assumed responsibility for worldwide development and commercialization of Afrezza. Under the terms of a transition agreement, Sanofi continued to fulfill orders
for Afrezza in the United States until we began distributing MannKind-branded Afrezza product to major wholesalers in late July 2016. We began recognizing commercial product sales revenue when MannKind-branded Afrezza was dispensed from pharmacies
to patients in August 2016.
On November 9, 2016, we entered into a settlement agreement with Sanofi (the Settlement
Agreement). Under the terms of the Settlement Agreement, the promissory note (the Sanofi Loan Facility) between us and Aventisub LLC (Aventisub), a Sanofi affiliate, was terminated, with Aventisub agreeing to forgive
the full outstanding loan balance of $72.0 million, which includes $0.5 million in the previously uncharged costs. Sanofi also agreed to purchase $10.2 million of insulin from us in December 2016 under an existing insulin put option
as well as make a cash payment of $30.6 million to us 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 us being required to deliver any insulin for such payment. We were also relieved of our obligation to pay Sanofi $0.5 million in previously uncharged costs pursuant to the Sanofi License Agreement. We and Sanofi also agreed to a general
release of potential claims against each other. As of the date of this filing, we have received $30.6 million and $10.2 million related to this agreement.
During our initial transition of the commercial responsibilities from Sanofi, we utilized a contract sales organization to promote Afrezza
while we focused our internal resources on establishing a channel strategy, entering into distribution agreements and developing
co-pay
assistance programs, a voucher program, data agreements and payor
relationships. In early 2017, we recruited our own sales force, which included some of the sales representatives that previously were employed by the contract sales organization. We intend to continue the commercialization of Afrezza in the United
States through our internal commercial organization. Our current strategy for the future commercialization of Afrezza outside of the United States, subject to receipt of the necessary foreign regulatory approvals, is to seek and establish regional
partnerships in foreign jurisdictions where there are appropriate commercial opportunities.
As part of the approval of Afrezza, the FDA
required us to conduct certain post-marketing studies, including:
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An open-label PK and multiple-dose safety and tolerability dose-titration trial of Afrezza in pediatric patients ages 4 to 17 years with type 1 diabetes followed by a prospective, open-label, randomized, controlled
trial comparing the efficacy and safety of prandial Afrezza to prandial subcutaneous insulin as part used in combination with subcutaneous basal insulin in pediatric patients 4 to 17 years old with type 1 or type 2 diabetes; and
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A five-year, randomized, controlled trial in
8,000-10,000
patients with type 2 diabetes to assess the potential serious risk of pulmonary malignancy with Afrezza use.
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The obligation to complete the pediatric study and to conduct the five-year pulmonary safety study reverted to us when the
NDA for Afrezza was transferred back to us in connection with the termination of the Sanofi License Agreement. In addition, we plan to conduct other clinical studies of Afrezza, including dose optimization studies in type 1 and type 2 patients and a
study of the time that Afrezza patients remain within a desirable glycemic range as determined by continuous glucose monitoring.
Manufacturing and
Supply
We manufacture Afrezza in our Danbury, Connecticut facility, where we formulate the Afrezza inhalation powder, fill it into
plastic cartridges and then blister package the cartridges and seal the blister cards inside a foil
2
overwrap. These overwraps are then packaged into cartons along with inhalers and printed material by a third-party packager. The cartridges and inhalers are manufactured for us by a third-party
plastic-molding company; the cartridges are delivered to our Connecticut facility whereas the inhalers are shipped directly to the packaging contractor.
The quality management systems of our Connecticut facility were certified to be in conformance with the ISO 13485 and ISO 9001 standards. Our
facility has been inspected twice by the FDA, once for a
pre-approval
inspection in the fall of 2009 and once for a regular inspection in May 2013. The FDA is expected to conduct additional inspections of our
facility.
We believe that our Connecticut facility has enough capacity to satisfy the current commercial demand for Afrezza. In addition,
the facility includes expansion space to accommodate additional filling lines and other equipment, allowing production capacity to be increased based on the demand for Afrezza over the next several years.
Currently, the only approved source of insulin for Afrezza is manufactured by Amphastar France Pharmaceuticals S.A.S. (Amphastar).
In April 2014, Amphastar acquired a manufacturing facility from N.V. Organon, a subsidiary of Merck & Co., Inc., where we had previously obtained the insulin that we use to make Afrezza. On July 31, 2014, we entered into a supply
agreement with Amphastar (the Insulin Supply Agreement), pursuant to which we agreed to purchase certain annual minimum quantities of insulin for calendar years 2015 through 2019 for an aggregate total purchase price of approximately
120.1 million, of which 93.0 million remained unpurchased as of December 31, 2016. On November 9, 2016, we amended the contract with Amphastar to extend the term over which we are required to purchase insulin, by four
additional years, without reducing the total amount of insulin we will purchase. Unless earlier terminated, the term of the Insulin Supply Agreement now expires on December 31, 2023 and 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. We and Amphastar each have normal and customary termination rights, including termination for material breach that is not cured within a
specific time frame or in the event of liquidation, bankruptcy or insolvency of the other party. In addition, we may terminate the Insulin Supply Agreement upon two years prior written notice to Amphastar without cause or upon 30 days prior
written notice to Amphastar if a controlling regulatory authority withdraws approval for Afrezza, provided, however, in the event of a termination pursuant to either of the latter two scenarios, the provisions of the Insulin Supply Agreement require
us to pay the full amount of all unpaid purchase commitments due over the initial term within 60 calendar days of the effective date of such termination.
Currently, we purchase the raw material for our proprietary excipient, FDKP (fumaryl diketopiperazine), which is the primary component of our
Technosphere technology platform, from a major chemical manufacturer with facilities in Europe and North America. However, we also have the capability to manufacture FDKP in our Connecticut facility.
We have a supply agreement with the contract manufacturer that produces our inhaler and the corresponding cartridges. We expect to be able to
qualify an additional vendor of plastic-molding contract manufacturing services, if warranted by demand.
We also have an agreement with
the contractor that performs the final packaging of Afrezza overwraps, inhalers and printed material into patient kits. We expect to be able to qualify an additional vendor of packaging services, if warranted by demand.
Our third-party suppliers are subject to extensive governmental regulation. We rely on our suppliers to comply with relevant regulatory
requirements, including compliance with Current Good Manufacturing Practices (CGMPs).
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Technosphere Formulation Technology
Afrezza utilizes our proprietary Technosphere formulation technology; however, the application of this technology is not limited to insulin
delivery. We believe it represents a versatile drug delivery platform that may allow the oral inhalation of a wide range of therapeutics. We have successfully prepared Technosphere formulations of anionic and cationic drugs, hydrophobic and
hydrophilic drugs, proteins, peptides and small molecules. Technosphere powders are based on our proprietary excipient, FDKP, which is a
pH-sensitive
organic molecule that self-assembles into small particles
under acidic conditions. Certain drugs, such as insulin, can be loaded onto these particles by combining a solution of the drug with a suspension of Technosphere material, which is then dried to powder form. The resulting powder has a consistent and
narrow range of particle sizes with good aerodynamic properties that enable efficient delivery deep into the lungs. Technosphere powders dissolve extremely fast after inhalation when the particles contact the moist lung surface with its neutral pH,
releasing the drug molecules to diffuse across a thin layer of cells into the arterial circulation, bypassing the liver to provide excellent systemic exposure.
We have also created an innovative line of breath-powered, dry powder inhalers. Our inhalers are easy to use, cost-effective and can be
produced in both a reusable (chronic treatment) and a
single-use
(acute treatment) format. Both the reusable and single use inhaler formats use the same internal
air-flow
design. Being breath-powered, our inhalers require only the patients inhalation effort to deliver the powder. To administer the inhalation powder, a patient loads a cartridge into our inhaler
and inhales through the mouthpiece. Upon inhalation, the dry powder is lifted out of the cartridge and broken (or
de-agglomerated)
into small particles. The inhalers are engineered to produce an aggressive
airstream to
de-agglomerate
the powder while keeping the powder moving slowly. This slow-moving powder effectively navigates the patients airways for delivery into the lung with minimal deposition at the
back of the throat. Our inhalers show very little change in performance over a wide range of inhalation efforts and produce high bioavailability. In a handling study, pediatric subjects as young as four years old were readily able to effectively use
the inhaler.
To aid in the development of our oral inhalation products, we have created a number of innovative development tools and
techniques. For example, our BluHale technology is a novel inhalation profiling tool that uses miniature sensors to assess the drug delivery process at the level of an individual inhaler. This tool provides real-time insight into patient usage,
device system performance and pharmacokinetic effects. We can combine this tool with other development tools, such as patient inhalation simulators and anatomically correct airway models, in order to integrate inhaler performance with formulation
development right from the beginning of the development program. The result is a powder/inhaler combination product customized to the target patient population from the first clinical study.
As one example of an additional application of our formulation and delivery technologies, we entered into a collaboration and license
agreement with Receptor Life Sciences (Receptor) in January 2016, pursuant to which we performed initial formulation studies on compounds identified by Receptor that treat conditions such as chronic pain, neurologic diseases and
inflammatory disorders. Following the successful completion of these formulation studies, Receptor exercised its option to acquire an exclusive license to develop, manufacture and commercialize inhaled formulations of these compounds utilizing our
technology.
Our Strategy
The
following are the key elements of our strategy:
Commercialization and development of Afrezza.
Our primary focus is the commercial
success of Afrezza. Over the course of the last year, we have transformed from a manufacturing-based company into an integrated company with new capabilities in marketing, sales, managed care and market access. During the second half of 2016, we
undertook a number of initiatives, such as launching a new marketing campaign, expanding the patient assistance program, creating a robust speakers program, introducing new product packages that enhance dosing
4
flexibility and securing improved insurance coverage, all of which are expected to increase the promotional responsiveness of Afrezza. Our current priority is the commercial opportunity for
Afrezza in the United States; however, in the future we also intend to seek regional partnerships for the development and commercialization of Afrezza in foreign jurisdictions where there are appropriate commercial opportunities.
Capitalize on our proprietary Technosphere and inhaler technology for the delivery of active pharmaceutical ingredients.
We believe
that Technosphere formulations of active pharmaceutical ingredients have the potential to demonstrate clinical advantages over existing therapeutic options in a variety of therapeutic areas. In addition to our collaboration with Receptor, we are
actively exploring other opportunities to
out-license
our proprietary Technosphere formulation and device technologies. We are also evaluating several product opportunities that we would consider developing as
internally and/or externally funded efforts.
Intellectual Property
Our success will depend in large measure on our ability to continue enforcing our intellectual property rights, effectively maintain our trade
secrets and avoid infringing the proprietary rights of third parties. Our policy is to file patent applications on what we deem to be important technological developments that might relate to our product candidates or methods of using our product
candidates and to seek intellectual property protection in the United States, Europe, Japan and selected other jurisdictions for all significant inventions. We have obtained, are seeking, and will continue to seek patent protection on the
compositions of matter, methods and devices flowing from our research and development efforts.
Our Technosphere drug delivery platform,
including Afrezza, enjoys patent protection relating to the particles, their manufacture, and their use for pulmonary delivery of drugs. We have additional patent coverage relating to dry powder formulations and the treatment of diabetes using
Afrezza. We have been granted patent coverage for the commercial version of our inhaler and cartridges. We have additional pending patent applications, and expect to file further applications, relating to the drug delivery platform, methods of
manufacture, the Afrezza product and its use, and other Technosphere-based products, inhalers and inhaler cartridges. Overall, Afrezza is protected by over 425 issued patents in the United States and selected jurisdictions around the world and we
also have over 250 applications pending that may provide additional protection if and when they are allowed. These include composition and inhaler and cartridge patents providing protection for Afrezza with various expiration dates, the longer-lived
of which will not expire until 2032. In addition, we have certain method of treatment claims that have terms extending into 2031.
The
field of pulmonary drug delivery is crowded and a substantial number of patents have been issued in these fields. In addition, because patent positions can be highly uncertain and frequently involve complex legal and factual questions, the breadth
of claims obtained in any application or the enforceability of issued patents cannot be confidently predicted. Further, there can be substantial delays in commercializing pharmaceutical products, which can partially consume the statutory period of
exclusivity through patents.
In addition, the coverage claimed in a patent application can be significantly reduced before a patent is
issued, either in the United States or abroad. Statutory differences in patentable subject matter may limit the protection we can obtain on some of our inventions outside of the United States. For example, methods of treating humans are not
patentable in many countries outside of the United States. These and other issues may limit the patent protection we are able to secure internationally. Consequently, we do not know whether any of our pending or future patent applications will
result in the issuance of patents or, to the extent patents have been issued or will be issued, whether these patents will be subjected to further proceedings limiting their scope, will provide significant proprietary protection or competitive
advantage, or will be circumvented or invalidated. Furthermore, patents already issued to us or our pending applications may become subject to disputes that could be resolved against us. In addition, in certain countries, including the United
States, applications are generally published 18 months after the applications priority date. In any event, because publication of discoveries in scientific or patent literature often trails behind actual discoveries, we cannot be certain that
we were the first
5
inventor of the subject matter covered by our pending patent applications or that we were the first to file patent applications on such inventions.
Although we own a number of domestic and foreign patents and patent applications relating to Afrezza and our oral inhalation technologies, we
have identified certain third-party patents having claims that may trigger an allegation of infringement by virtue of the commercial manufacture and sale of Afrezza. We do not believe that Afrezza infringes on any patents owned by third parties.
However, if a court were to determine that the manufacture or sale of Afrezza were infringing any of these patent rights, we would have to establish with the court that these patents were invalid in order to avoid legal liability for infringement of
these patents. Proving patent invalidity can be difficult because issued patents are presumed valid. Therefore, in the event that we are unable to prevail in an infringement or invalidity action we will either have to acquire the third-party patents
outright or seek a royalty-bearing license. Royalty-bearing licenses effectively increase costs and therefore may materially affect product profitability. Furthermore, if the patent holder refuses to either assign or license us the infringed
patents, it may be necessary to cease manufacturing the product entirely and/or design around the patents. In either event, our business would be harmed and our profitability could be materially adversely impacted. If third parties file patent
applications, or are issued patents claiming technology also claimed by us in pending applications, we may be required to participate in interference proceedings in the United States Patent and Trademark Office (USPTO) to determine
priority of invention. We may also be required to participate in interference proceedings involving our issued patents. We also rely on trade secrets and
know-how,
which are not protected by patents, to
maintain our competitive position. We require our officers, employees, consultants and advisors to execute proprietary information and invention and assignment agreements upon commencement of their relationships with us. These agreements provide
that all confidential information developed or made known to the individual during the course of our relationship must be kept confidential, except in specified circumstances. These agreements also provide that all inventions developed by the
individual on behalf of us must be assigned to us and that the individual will cooperate with us in connection with securing patent protection on the invention if we wish to pursue such protection. There can be no assurance, however, that these
agreements will provide meaningful protection for our inventions, trade secrets or other proprietary information in the event of unauthorized use or disclosure of such information.
We also execute confidentiality agreements with outside collaborators. However, disputes may arise as to the ownership of proprietary rights
to the extent that outside collaborators apply technological information to our projects that are developed independently by them or others, or apply our technology to outside projects, and there can be no assurance that any such disputes would be
resolved in our favor. In addition, any of these parties may breach the agreements and disclose our confidential information or our competitors might learn of the information in some other way. If any trade secret,
know-how
or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business, results of operations and financial condition could be adversely
affected.
Competition
The
pharmaceutical and biotechnology industries are highly competitive and characterized by rapidly evolving technology and intense research and development efforts. We compete with companies, including major global pharmaceutical companies, and other
institutions that have substantially greater financial, research and development, marketing and sales capabilities and have substantially greater experience in undertaking preclinical and clinical testing of products, obtaining regulatory approvals
and marketing and selling biopharmaceutical products. We face competition based on, among other things, product efficacy and safety, the timing and scope of regulatory approvals, product ease of use and price.
Diabetes Treatments
We believe
that Afrezza has important competitive advantages in the delivery of insulin when compared with currently known alternatives. However, new drugs or further developments in alternative drug delivery
6
methods may provide greater therapeutic benefits, or comparable benefits at lower cost, than Afrezza. There can be no assurance that existing or new competitors will not introduce products or
processes competitive with or superior to our product candidates.
We have set forth below more detailed information about certain of our
competitors. The following is based on information currently available to us.
Rapid-acting (Injected) Insulin
Currently, there is no approved insulin product that is absorbed into the bloodstream as rapidly as Afrezza, i.e., reaching peak levels within
12 to 15 minutes after administration. There are several formulations of rapid-acting insulin analogs that reach peak insulin levels within 45 to 90 minutes after injection. The principal products in this category are insulin lispro,
which is marketed by Eli Lilly & Company, or Lilly; insulin aspart, which is marketed by Novo Nordisk A/S, or Novo Nordisk; and insulin glulisine, which is marketed by Sanofi.
In January 2017, Novo Nordisk announced that Fiasp
®
, a faster formulation of insulin
aspart, was approved in Europe and Canada. It is currently undergoing regulatory review in the United States.
Inhaled Insulin Delivery Systems
In January 2006, Exubera
®
, developed by Pfizer in collaboration with
Nektar Therapeutics, Inc., was approved for the treatment of adults with type 1 and type 2 diabetes. Exubera
®
was slow to gain market acceptance and, in October 2007, Pfizer announced that it
was discontinuing the product. Pfizer subsequently withdrew the NDA for Exubera from the FDA.
In January 2008, Novo Nordisk announced
that it was halting development of its inhaled insulin product, having reached the conclusion that the product did not have adequate commercial potential.
In March 2008, Lilly announced that it was terminating the development of its AIR
®
inhaled insulin system. Lilly stated that this decision resulted from increasing uncertainties in the regulatory environment and after a thorough evaluation of the evolving commercial and clinical potential of its product compared to existing
medical therapies.
Dance Biopharm, Inc. has completed Phase 2 clinical studies of an inhaled insulin product that utilizes a liquid
formulation of human insulin, dispensed through a handheld electronic aerosol device.
Non-insulin
Medications
Afrezza also competes with currently available
non-insulin
medication products
for type 2 diabetes. These products include the following:
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GLP-1
agonists, such as exenatide or liraglutide, which mimic a naturally occurring hormone that stimulates the pancreas to secrete insulin when blood glucose levels are high.
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Inhibitors of dipeptidyl peptidase IV, such as sitagliptin or saxagliptin, are a class of drugs that work by blocking the enzyme that normally degrades
GLP-1.
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Sulfonylureas and meglitinides, which are classes of drugs that act on the pancreatic cells to stimulate the secretion of insulin.
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Thiazolidinediones, such as pioglitizone and biguanides, such as metformin, which lower blood glucose by improving the sensitivity of cells to insulin, or diminishing insulin resistance.
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Alpha-glucosidase inhibitors, which lower the amount of glucose absorbed from the intestines, thereby reducing the rise in blood glucose that occurs after a meal.
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SGLT-2
inhibitors, such as dapagliflozin and canagliflozin, are a class of medications that lower blood glucose by increasing glucose excretion in urine.
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Government Regulation and Product Approval
The FDA and comparable regulatory agencies in state, local and foreign jurisdictions impose substantial requirements upon the clinical
development, manufacture and marketing of medical devices and new drug and biologic products. These agencies, through regulations that implement the Federal Food, Drug and Cosmetic Act, as amended (FDCA), and other regulations, regulate
research and development activities and the development, testing, manufacture, labeling, storage, shipping, approval, recordkeeping, advertising, promotion, sale and distribution of such products. In addition, if any of our products are marketed
abroad, they will also be subject to export requirements and to regulation by foreign governments. The regulatory approval process is generally lengthy, expensive and uncertain. Failure to comply with applicable FDA and other regulatory requirements
can result in sanctions being imposed on us or the manufacturers of our products, including hold letters on clinical research, civil or criminal fines or other penalties, product recalls, or seizures, or total or partial suspension of production or
injunctions, refusals to permit products to be imported into or exported out of the United States, refusals of the FDA to grant approval of drugs or to allow us to enter into government supply contracts, withdrawals of previously approved marketing
applications and criminal prosecutions.
The steps typically required before an unapproved new drug or biologic product for use in humans
may be marketed in the United States include:
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Preclinical studies that include laboratory evaluation of product chemistry and formulation, as well as animal studies to assess the potential safety and efficacy of the product. Certain preclinical tests must be
conducted in compliance with good laboratory practice regulations. Violations of these regulations can, in some cases, lead to invalidation of the studies, or requiring such studies to be repeated. In some cases, long-term preclinical studies are
conducted while clinical studies are ongoing.
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Submission to the FDA of an investigational new drug application (IND), which must become effective before human clinical trials may commence. The results of the preclinical studies are submitted to the FDA
as part of the IND. Unless the FDA objects and places a clinical hold, the IND becomes effective 30 days following receipt by the FDA.
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Approval of clinical protocols by independent institutional review boards (IRBs) at each of the participating clinical centers conducting a study. The IRBs consider, among other things, ethical factors, the
potential risks to individuals participating in the trials and the potential liability of the institution. The IRB also approves the consent form signed by the trial participants. The IRB of FDA may place a trial on hold at any time if it believes
the risks to subjects outweigh the potential benefits.
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Adequate and well-controlled human clinical trials to establish the safety and efficacy of the product. Clinical trials involve the administration of the drug to healthy volunteers or to patients under the supervision
of a qualified medical investigator according to an approved protocol. The clinical trials are conducted in accordance with protocols that detail the objectives of the study, the parameters to be used to monitor participant safety and efficacy or
other criteria to be evaluated. Each protocol is submitted to the FDA as part of the IND. Human clinical trials are typically conducted in the following four sequential phases that may overlap or be combined:
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In Phase 1, the drug is initially introduced into a small number of individuals and tested for safety, dosage
tolerance, absorption, metabolism, distribution and excretion. Phase 1 clinical trials are often conducted in healthy human volunteers and such cases do not provide evidence of efficacy. In the case of severe or life-threatening diseases, the
initial human testing is often conducted in patients rather than healthy volunteers. Because these patients already have the target disease, these studies may provide initial evidence of efficacy that would traditionally be obtained in Phase 2
clinical trials. Consequently, these types of trials are frequently referred to as Phase 1/2 clinical
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trials. The FDA receives reports on the progress of each phase of clinical testing and it may require the modification, suspension or termination of clinical trials if it concludes that an
unwarranted risk is presented to patients or healthy volunteers.
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Phase 2 involves clinical trials in a limited patient population to further identify any possible adverse effects and safety risks, to determine the efficacy of the product for specific targeted diseases and to
determine dosage tolerance and optimal dosage.
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Phase 3 clinical trials are undertaken to further evaluate dosage, clinical efficacy and to further test for safety in an expanded patient population at geographically dispersed clinical study sites. Phase 3 clinical
trials usually include a broader patient population so that safety and efficacy can be substantially established. Phase 3 clinical trials cannot begin until Phase 2 evaluation demonstrates that a dosage range of the product may be effective and has
an acceptable safety profile.
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Phase 4 clinical trials are performed if the FDA requires, or a company pursues, additional clinical trials after a product is approved. These clinical trials may be made a condition to be satisfied after a drug
receives approval. The results of Phase 4 clinical trials can confirm the effectiveness of a product and can provide important safety information to augment the FDAs voluntary adverse event reporting system.
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Concurrent with clinical trials and preclinical studies, companies also must develop information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing the product in
accordance with the FDAs current good manufacturing practices (cGMPs), requirements for drug products. The manufacturing process must be capable of consistently producing quality batches of the product and the manufacturer must
develop methods for testing the quality, purity and potency of the final products. Additionally, appropriate packaging must be selected and tested and chemistry stability studies must be conducted to demonstrate that the product does not undergo
unacceptable deterioration over its shelf-life.
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Submission to the FDA of an NDA based on the clinical trials. The results of product development, preclinical studies and clinical trials are submitted to the FDA in the form of an NDA for approval of the marketing and
commercial shipment of the product. Under the Pediatric Research Equity Act, NDAs are required to include an assessment, generally based on clinical study data, of the safety and efficacy of drugs for all relevant pediatric populations. The statute
provides for waivers or deferrals in certain situations.
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In its review of an NDA, the FDA may also convene an advisory
committee of external experts to provide input on certain review issues relating to risk, benefit and interpretation of clinical trial data. The FDA may delay approval of an NDA if applicable regulatory criteria are not satisfied and/or the FDA
requires additional testing or information. Before approving an NDA, the FDA may inspect the facilities at which the product is manufactured and will not approve the product unless the manufacturing facility complies with cGMPs and will also inspect
clinical trial sites for integrity of data supporting safety and efficacy. The FDA will issue either an approval of the NDA or a Complete Response Letter, detailing the deficiencies and information required in order for reconsideration of the NDA.
Medical products containing a combination of new drugs, biological products, or medical devices are regulated as combination
products in the United States. A combination product generally is defined as a product comprised of components from two or more regulatory categories (e.g., drug/device, device/biologic, drug/biologic). Each component of a combination product
is subject to the requirements established by the FDA for that type of component, whether a new drug, biologic, or device.
The testing
and approval process requires substantial time, effort and financial resources. Data that we submit are subject to varying interpretations, and the FDA and comparable regulatory authorities in foreign
9
jurisdictions may not agree that our product candidates have been shown to be safe and effective. We cannot be certain that any approval of our investigational products will be granted on a
timely basis, if at all. For an approved product such as Afrezza, we are subject to continuing regulation by the FDA, including post marketing study commitments or requirements, risk evaluation and mitigation strategies, record-keeping requirements,
reporting of adverse experiences with the product, submitting other periodic reports, drug sampling and distribution requirements, notifying the FDA and gaining its approval of certain manufacturing or labeling changes, and complying with certain
electronic records and signature requirements. Prior to and following approval, if granted, all manufacturing sites are subject to inspection by the FDA and other national regulatory bodies and must comply with cGMP, QSR and other requirements
enforced by the FDA and other national regulatory bodies through their facilities inspection program. Foreign manufacturing establishments must comply with similar regulations. In addition, our drug-manufacturing facilities located in Danbury and
the facilities of our insulin supplier, the supplier(s) of FDKP and the supplier(s) of our inhaler and cartridges are subject to federal registration and listing requirements and, if applicable, to state licensing requirements. Failure, including
those of our suppliers, to obtain and maintain applicable federal registrations or state licenses, or to meet the inspection criteria of the FDA or the other national regulatory bodies, would disrupt our manufacturing processes and would harm our
business. In complying with standards set forth in these regulations, manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full compliance. Numerous device regulatory requirements apply
to the device part of a drug-device combination. These include:
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product labeling regulations;
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general prohibition against promoting products for unapproved or
off-label
uses;
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corrections and removals (
e.g
., recalls);
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establishment registration and device listing;
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general prohibitions against the manufacture and distribution of adulterated and misbranded devices; and
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the Medical Device Reporting regulation, which requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause
or contribute to a death or serious injury if it were to recur.
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Further, the supplier we contract with to manufacture our
inhaler and cartridges is subject to QSRs, which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures during the manufacturing process of medical devices, among other requirements.
Failure to adhere to regulatory requirements at any stage of development, including the preclinical and clinical testing process, the
review process, or at any time afterward, including after approval, may result in various adverse consequences. These consequences include action by the FDA or another national regulatory body that has the effect of delaying approval or refusing to
approve a product; suspending or withdrawing an approved product from the market; seizing or recalling a product; or imposing criminal penalties against the manufacturer. In addition, later discovery of previously unknown problems may result in
restrictions on a product, its manufacturer, or the NDA holder, or market restrictions through labeling changes or product withdrawal. Also, new government requirements may be established or current government requirements may be changed at any
time, which could delay or prevent regulatory approval of our products under development. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either
in the United States or abroad.
In addition, the FDA imposes a number of complex regulations on entities that advertise and promote
drugs, which include, among other requirements, standards for and regulations of
direct-to-consumer
advertising,
off-label
promotion, industry sponsored scientific and educational activities, and promotional activities involving the Internet. The FDA has very broad enforcement authority under the FDCA, and failure to comply with these
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regulations can result in penalties, including the issuance of a warning letter requirements for corrective advertising to healthcare providers, a requirement that future advertising and
promotional materials be
pre-cleared
by the FDA, and state and federal civil and criminal investigations and prosecutions.
Products manufactured in the United States and marketed outside the United States are subject to certain FDA regulations, as well as
regulation by the country in which the products are to be sold. We also would be subject to foreign regulatory requirements governing clinical trials and drug product sales if products are studied or marketed abroad. Whether or not FDA approval has
been obtained, approval of a product by the comparable regulatory authorities of foreign countries usually must be obtained prior to the marketing of the product in those countries. The approval process varies from jurisdiction to jurisdiction and
the time required may be longer or shorter than that required for FDA approval.
There can be no assurance that the current regulatory
framework will not change or that additional regulation will not arise at any stage of our product development or marketing that may affect approval, delay the submission or review of an application or require additional expenditures by us. There
can be no assurance that we will be able to obtain necessary regulatory clearances or approvals on a timely basis, if at all, for any of our product candidates under development, and delays in receipt or failure to receive such clearances or
approvals, the loss of previously received clearances or approvals, or failure to comply with existing or future regulatory requirements could have a material adverse effect on our business and results of operations.
In addition to the foregoing, we are subject to numerous federal, state and local laws relating to such matters as laboratory practices, the
experimental use of animals, the use and disposal of hazardous or potentially hazardous substances, controlled drug substances, privacy of individually identifiable healthcare information, safe working conditions, manufacturing practices,
environmental protection and fire hazard control.
Healthcare Regulatory and Pharmaceutical Pricing
Government coverage and reimbursement policies both directly and indirectly affect our ability to successfully commercialize our approved
products, and such coverage and reimbursement policies will be affected by future healthcare reform measures. Third-party payors, like government health administration authorities, private health insurers and other organizations that provide
healthcare coverage, generally decide which drugs they will pay for and establish reimbursement levels for covered drugs. In particular, in the United States, private third-party payors often provide reimbursement for products and services based on
the level at which the government (through the Medicare or Medicaid programs) provides reimbursement for such treatments. In the United States, the European Union and other potentially significant markets for our product candidates, government
authorities and other third-party payors are increasingly attempting to limit or regulate the price of medical products and services, particularly for new and innovative products and therapies, which has resulted in lower average selling prices.
Further, the increased emphasis on managed healthcare in the United States and on country and regional pricing and reimbursement controls in the European Union will put additional pressure on product pricing, reimbursement and usage, which may
adversely affect our future product sales and results of operations. Recently, in the United States there has been heightened governmental scrutiny of the manner in which drug manufacturers set prices for their marketed products. For example, there
have been several recent U.S. Congressional inquiries regarding certain drug manufacturers pricing practices and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing
and manufacturer patient programs, reduce the cost of drugs under Medicare and reform government program reimbursement methodologies for drugs. Pricing pressures can arise from rules and practices of managed care organizations, judicial decisions
and governmental laws and regulations related to Medicare, Medicaid, healthcare reform, pharmaceutical reimbursement policies and pricing in general.
The United States and some foreign jurisdictions have enacted or are considering a number of additional legislative and regulatory proposals
to change the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payors in the U.S. and elsewhere, there is significant interest
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in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the United States, the pharmaceutical industry has
been a particular focus of these efforts and has been significantly affected by major legislative initiatives, including, most recently, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act
(collectively, PPACA), enacted in March 2010. The Physician Payments Sunshine Act within PPACA, and its implementing regulations, require certain manufacturers of drugs, devices, biological and medical supplies for which payment is
available under Medicare, Medicaid or the Childrens Health Insurance Program (with certain exceptions) to report information related to certain payments or other transfers of value made or distributed to physicians and teaching hospitals, or
to entities or individuals at the request of, or designated on behalf of, the physicians and teaching hospitals and to report annually certain ownership and investment interests held by physicians and their immediate family members.
Further, if a drug product is reimbursed by Medicare, Medicaid or other federal or state healthcare programs, we must comply with, among
others, the federal civil and criminal false claims laws, including the civil False Claims Act, as amended, the federal Anti-Kickback Statute, as amended, and similar state laws. If a drug product is reimbursed by Medicare or Medicaid, pricing and
rebate programs must comply with, as applicable, the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990, as amended, and the Medicare Prescription Drug Improvement and Modernization Act of 2003. Additionally, PPACA
substantially changed the way healthcare is financed by both governmental and private insurers. Among other cost containment measures, PPACA established: an annual, nondeductible fee on any entity that manufactures or imports certain branded
prescription drugs and biologic agents; a new Medicare Part D coverage gap discount program; and a new formula that increased the rebates a manufacturer must pay under the Medicaid Drug Rebate Program. There have been judicial and Congressional
challenges to certain aspects of PPACA. As a result there have been delays in the implementation of, and action taken to repeal or replace, certain aspects of the PPACA. In January 2017, President Trump signed an Executive Order directing federal
agencies with authorities and responsibilities under the PPACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the PPACA that would impose a fiscal or regulatory burden on states, individuals, healthcare
providers, health insurers, or manufacturers of pharmaceuticals or medical devices. Further, in January 2017, Congress adopted a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that
would repeal portions of the PPACA. Following the passage of the Budget Resolution, in March 2017, the U.S. House of Representatives introduced legislation known as the American Health Care Act, which, if enacted, would amend or repeal significant
portions of the PPACA. Among other changes, the American Health Care Act would repeal the annual fee on certain brand prescription drugs and biologics imposed on manufacturers and importers, eliminate the 2.3% excise tax on medical devices,
eliminate penalties on individuals and employers that fail to maintain or provide minimum essential coverage, and create refundable tax credits to assist individuals in buying health insurance. The American Health Care Act would also make
significant changes to Medicaid by, among other things, making Medicaid expansion optional for states, repealing the requirement that state Medicaid plans provide the same essential health benefits that are required by plans available on the
exchanges, modifying federal funding, including implementing a per capita cap on federal payments to states, and changing certain eligibility requirements. Other legislative changes have been proposed and adopted in the United States since PPACA.
For example, through the process created by the Budget Control Act of 2011, there are automatic reductions of Medicare payments to providers up to 2% per fiscal year, which went into effect in April 2013 and, following passage of the Bipartisan
Budget Act of 2015, will remain in effect through 2025 unless additional Congressional action is taken. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare
payments to several providers. In the future, there are likely to be additional proposals relating to the reform of the U.S. health care system, some of which could further limit the prices we are able to charge for our products, or the amounts of
reimbursement available for our products. If drug products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these activities are also
potentially subject to federal and state consumer protection and unfair competition laws.
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In addition, we may be subject to data privacy and security regulation by both the federal
government and the states in which we conduct our business. The federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended by the Health Information Technology and Clinical Health Act (HITECH),
and their respective implementing regulations, imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAAs privacy and security
standards directly applicable to business associates independent contractors or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity.
HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in
federal courts to enforce the federal HIPAA laws and seek attorneys fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in certain circumstances, many of
which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
Also, many
states have similar healthcare statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, that apply regardless of the payer. Additional state laws require pharmaceutical
companies to implement a comprehensive compliance program and/or limit expenditure for, or payments to, individual medical or health professionals.
We may incur significant costs to comply with these laws and regulations now or in the future. If our operations are found to be in violation
of any of the federal and state laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including criminal and significant civil monetary penalties, damages, fines, individual imprisonment,
disgorgement, exclusion of products from reimbursement under government programs, additional reporting requirements and/or oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of
non-compliance
with these laws and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.
Research and Development Expenses
Our
research and development expenses totaled $14.9 million, $29.7 million and $100.2 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Long-Lived Assets
Our long-lived assets
are located in the United States and totaled $28.9 million, $48.7 million and $192.1 million as of December 31, 2016, 2015 and 2014, respectively. Our long-lived assets as of December 31, 2016 do not include an asset held
for sale totaling $16.7 million.
Employees
As of December 31, 2016, we had 153 full-time employees, of which 66 were engaged in manufacturing, 34 in research and development, 30 in
general and administrative and 23 in selling and marketing. Fifteen of these employees had a Ph.D. degree and/or M.D. degree and were engaged in activities relating to research and development, manufacturing, quality assurance or business
development.
None of our employees is subject to a collective bargaining agreement. We believe relations with our employees are good.
Corporate Information
We were
incorporated in the State of Delaware on February 14, 1991. Our principal executive offices are located at 25134 Rye Canyon Loop Suite 300, Valencia, California 91355, and our telephone number at that
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address is
(661) 775-5300.
MannKind Corporation and the MannKind Corporation logo are our service marks. Our website address is
http://www.mannkindcorp.com. Our Annual Reports on Form
10-K,
Quarterly Reports on Form
10-Q,
Current Reports on Form
8-K,
and
amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, are available free of charge on our website as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. The contents of these websites are not incorporated into this Annual Report. Further, our references to the URLs for these websites are intended to be inactive textual reference only.
On March 1, 2017, we filed with the Secretary of State of the State of Delaware a Certificate of Amendment to our Amended and Restated
Certificate of Incorporation (the Charter Amendment) to (i) implement a
one-for-five
reverse stock split of our outstanding common stock (the
Reverse Stock Split), without any change in par value per share, and (ii) reduce the authorized number of shares of our common stock from 700,000,000 to 140,000,000 shares, as previously authorized and approved at a special meeting
of stockholders on March 1, 2017. The Charter Amendment became effective at 5:01 p.m. Eastern Time on March 2, 2017 (the Effective Time). No fractional shares were issued in connection with the Reverse Stock Split. Instead, we
issued one full share of the post-Reverse Stock Split common stock to any stockholder of record who was entitled to receive a fractional share as a result of the process.
As a result of the Reverse Stock Split, proportionate adjustments were made to the per share exercise price and the number of shares issuable
upon the exercise or vesting of all stock options, restricted stock units and warrants issued by us and outstanding immediately prior to the Effective Time, which resulted in a proportionate decrease in the number of shares of our common stock
reserved for issuance upon exercise or vesting of such stock options, restricted stock units and warrants, and, in the case of stock options and warrants, a proportionate increase in the exercise price of all such stock options and warrants. In
addition, the number of shares authorized for future grant under our equity incentive/compensation plans immediately prior to the Effective Time were reduced proportionately.
On March 3, 2017, our common stock began trading on The NASDAQ Global Market on a split-adjusted basis. All references to shares of
common stock, all per share data, and all warrant, stock option and restricted stock unit activity for all periods presented in this Annual Report have been adjusted to reflect the Reverse Stock Split on a retroactive basis.
Scientific Advisors
We seek advice from
a number of leading scientists and physicians on scientific, technical and medical matters. These advisors are leading scientists in the areas of pharmacology, chemistry, immunology and biology. Our scientific advisors are consulted regularly to
assess, among other things:
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our research and development programs;
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the design and implementation of our clinical programs;
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our patent and publication strategies;
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market opportunities from a clinical perspective;
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new technologies relevant to our research and development programs; and
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specific scientific and technical issues relevant to our business.
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14
Executive Officers of the Registrant
The following table sets forth our current executive officers and their ages:
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Name
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Age
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Position(s)
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Matthew J. Pfeffer
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59
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Chief Executive Officer, Chief Financial Officer and Director
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Michael E. Castagna, Pharm.D.
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40
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Corporate Vice President, Chief Commercial Officer
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Joseph Kocinsky
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53
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Corporate Vice President, Chief Technology Officer
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David B. Thomson, Ph.D., J.D.
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50
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Corporate Vice President, General Counsel and Secretary
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Stuart A. Tross, Ph.D.
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50
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Corporate Vice President, Chief People Officer
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Raymond W. Urbanski, M.D., Ph.D.
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57
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Corporate Vice President, Chief Medical Officer
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Rosabel R. Alinaya
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56
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Senior Vice President, Principal Accounting Officer
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Matthew J. Pfeffer
has served as our Chief Executive Officer and one of our directors since January
2016 and as our Chief Financial Officer since April 2008. Mr. Pfeffer also served as our Corporate Vice President from April 2008 until January 2016. Previously, Mr. Pfeffer served as Chief Financial Officer and Senior Vice President of
Finance and Administration of VaxGen, Inc. from March 2006 until April 2008, with responsibility for finance, tax, treasury, human resources, IT, purchasing and facilities functions. Prior to VaxGen, Mr. Pfeffer served as CFO of Cell Genesys,
Inc. During his nine year tenure at Cell Genesys, Mr. Pfeffer served as Director of Finance before being named CFO in 1998. Prior to that, Mr. Pfeffer served in a variety of financial management positions at other companies, including
roles as Corporate Controller, Manager of Internal Audit and Manager of Financial Reporting. Mr. Pfeffer began his career at Price Waterhouse. Mr. Pfeffer graduated from the University of California, Berkeley and is a Certified Public
Accountant.
Michael E. Castagna, Pharm.D.
has been our Corporate Vice President, Chief Commercial Officer since March 2016. From
November 2012 until he joined us, Dr. Castagna was at Amgen, Inc., where he initially served as Vice President, Global Lifecycle Management and was most recently Vice President, Global Commercial Lead for Amgens Biosimilar Business Unit.
From 2010 to 2012, he was Executive Director, Immunology, at Bristol-Myers Squibb Co. Before BMS, Dr. Castagna served as Vice President & Head, Biopharmaceuticals, North America, at Sandoz. He has also held positions with commercial
responsibilities at EMD (Merck) Serono, Pharmasset and DuPont Pharmaceuticals. He received his pharmacy degree from University of the Sciences-Philadelphia College of Pharmacy, a Doctor of Pharmacy from Massachusetts College of Pharmacy &
Sciences and an MBA from The Wharton School of Business at the University of Pennsylvania.
Joseph Kocinsky
has been our Corporate
Vice President, Chief Technology Officer since October 2015
.
Mr. Kocinsky has over 28 years of experience in the pharmaceutical industry in technical operations and product development. Prior to joining us in 2003, he held a variety of
technical and management positions with increased responsibility at Schering-Plough Corp. Mr. Kocinsky holds a bachelors degree in chemical engineering and a masters degree in Biomedical Engineering from New Jersey Institute of
Technology and a masters degree in business administration from Seton Hall University.
David B. Thomson, Ph.D., J.D.
has
been our Corporate Vice President, General Counsel and Corporate Secretary since January 2002. Prior to joining us, he practiced corporate/commercial and securities law at a major Toronto law firm. Earlier in his career, Dr. Thomson was a
post-doctoral fellow at the Rockefeller University. Dr. Thomson obtained his bachelors degree, masters degree and Ph.D. from Queens University and obtained his J.D. from the University of Toronto.
Stuart A. Tross, Ph.D.
has been our Corporate Vice President, Chief People Officer since December 2016, with responsibilities for human
resources, information technology and west coast facilities. From 2006 to 2016 he served in various roles of increasing responsibility at Amgen, Inc., most recently as Senior Vice President and Chief Human Resources Officer responsible for human
resources and security on a global basis. From 1998 to 2006 he served in a series of leadership roles at Bristol-Myers Squibb Co, most recently as Vice President and
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Global Head of Human Resources for Mead Johnson Company. Stuart received a B.S. degree from Cornell University and M.S. and Ph.D. degrees in Industrial-Organizational Psychology from the Georgia
Institute of Technology.
Raymond W. Urbanski, M.D., Ph.D.
has been our Chief Medical Officer since August 2015. Prior to joining
us, he served as Chief Medical Officer at Mylan, Inc. from September 2012 to September 2014 and Chief Medical Officer at Metabolex, Inc. from October 2011 to June 2012. From June 2004 to October 2011, Dr. Urbanski held several positions with
Pfizer Inc. most recently as Vice President and Medical Head of the Established Products Business Unit. He also served as Vice President of Research and Development and Chief Medical Officer at Suntory Pharmaceutical, Inc. Dr. Urbanski earned
both his M.D. and Ph.D. in pharmacology and toxicology at the University of Medicine and Dentistry of New Jersey. He completed his residency and fellowship training at Thomas Jefferson University Hospital in Philadelphia.
Ros
abel R.
Alinaya
has been our Senior Vice President, Principal Accounting Officer since January 2016 with
responsibility for finance, accounting, tax, treasury, investor relations and risk management. Previously, she was our Vice President, Finance since March 2011 after serving as our Corporate Controller since June 2003. Ms. Alinaya began her career
at Deloitte & Touche LLP, graduating from California State University, Northridge and is a Certified Public Accountant. She is also a member of the American Institute of Certified Public Accountants and a member of the California Society of
Certified Public Accountants.
Executive officers serve at the discretion of our Board of Directors. There are no family relationships
between any of our directors and executive officers.
Item 1A.
Risk Factors
You should consider carefully the following information about the risks described below, together with the other information contained in
this Annual Report before you decide to buy or maintain an investment in our common stock. We believe the risks described below are the risks that are material to us as of the date of this Annual Report. Additional risks and uncertainties that we
are unaware of may also become important factors that affect us. If any of the following risks actually occur, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In
these circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock.
RISKS RELATED TO OUR BUSINESS
We will need to
raise additional capital to fund our operations, and our inability to do so could raise substantial doubt about our ability to continue as a going concern.
This report includes disclosures stating that our existing cash resources and our accumulated stockholders deficit raise substantial
doubt about our ability to continue as a going concern. We will need to raise additional capital, whether through the sale of equity or debt securities, additional strategic business collaborations, the establishment of other funding
facilities, licensing arrangements, asset sales or other means, in order to support our ongoing activities, including the commercialization of Afrezza and the development of our product candidates, and to avoid defaulting under the covenant in our
facility agreement with Deerfield Private Design Fund II, L.P. (Deerfield Private Design Fund) and Deerfield Private Design International II, L.P. (collectively, Deerfield) dated July 1, 2013 (as amended, the
Facility Agreement), which requires us to maintain at least $25.0 million in cash and cash equivalents or available borrowings under the loan arrangement, dated as of October 2, 2007, between us and The Mann Group LLC (as
amended, restated, or otherwise modified as of the date hereof, The Mann Group Loan Arrangement), as of the last day of each fiscal quarter. It may be difficult for us to raise additional funds on favorable terms, or at all. As of
December 31, 2016, we had cash and cash equivalents of $22.9 million and a stockholders deficit of $183.6 million, which raises concerns about our
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solvency and ability to continue as a going concern. The extent of our additional funding requirements will depend on a number of factors, including:
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the degree to which Afrezza is commercially successful;
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the degree to which we are able to generate revenue from our Technosphere drug delivery platform;
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the costs of developing and commercializing Afrezza on our own in the United States, including the costs of building our commercialization capabilities;
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the costs of finding regional collaboration partners for the development and commercialization of Afrezza in foreign jurisdictions;
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the demand by any or all of the holders of the 5.75% Convertible Senior Subordinated Exchange Notes due 2018 (the 2018 notes), the 9.75% Senior Convertible Notes due 2019 issued to Deerfield (the 2019
notes), and the 8.75% Senior Convertible Notes due 2019 issued to Deerfield (the Tranche B notes) to require us to repay or repurchase such debt securities if and when required;
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our ability to repay or refinance existing indebtedness, and the extent to which the 2018 notes or any other convertible debt securities we may issue are converted into or exchanged for shares of our common stock;
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the rate of progress and costs of our clinical studies and research and development activities;
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the costs of procuring raw materials and operating our manufacturing facilities;
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our obligation to make milestone payments pursuant to the milestone rights issued to Deerfield Private Design Fund and Horizon Santé FLML SÁRL (collectively, the Milestone Purchasers) and
pursuant to the Milestone Rights Purchase Agreement dated July 1, 2013 (the Milestone Agreement);
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our success in establishing strategic business collaborations or other sales or licensing of assets, and the timing and amount of any payments we might receive from any such transactions;
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actions taken by the FDA and other regulatory authorities affecting Afrezza and our product candidates and competitive products;
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the emergence of competing technologies and products and other market developments;
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the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights or defending against claims of infringement by others;
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the level of our legal and litigation expenses; and
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the costs of discontinuing projects and technologies, and/or decommissioning existing facilities, if we undertake any such activities.
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We have raised capital in the past through the sale of equity and debt securities and we may in the future pursue the sale of additional
equity and/or debt securities, or the establishment of other funding facilities including asset-based borrowings. There can be no assurances, however, that we will be able to raise additional capital on acceptable terms, or at all. Issuances of
additional debt or equity securities or the conversion of any of our currently outstanding convertible debt securities into shares of our common stock or the exercise of our currently outstanding warrants for shares of our common stock could impact
the rights of the holders of our common stock and will dilute their ownership percentage. Moreover, the establishment of other funding facilities may impose restrictions on our operations. These restrictions could include limitations on additional
borrowing and specific restrictions on the use of our assets, as well as prohibitions on our ability to create liens, pay dividends, redeem our stock or make investments. We also will need to raise additional capital by pursuing opportunities for
the licensing or sale of certain intellectual property and other assets. We cannot offer assurances, however, that any strategic collaborations, sales of securities or sales or licenses of assets will be available to us on a timely basis or on
acceptable terms, if at all. We may be required to enter into relationships
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with third parties to develop or commercialize products or technologies that we otherwise would have sought to develop independently, and any such relationships may not be on terms as
commercially favorable to us as might otherwise be the case.
In the event that sufficient additional funds are not obtained through
strategic collaboration opportunities, sales of securities, funding facilities, licensing arrangements and/or asset sales on a timely basis, we may be required to reduce expenses through the delay, reduction or curtailment of our projects, or
further reduction of costs for facilities and administration. Moreover, if we do not obtain such additional funds, there will be substantial doubt about our ability to continue as a going concern and increased risk of insolvency and loss of
investment to the holders of our securities. As of the date hereof, we have not obtained a solvency opinion or otherwise conducted a valuation of our properties to determine whether our debts exceed the fair value of our property within the meaning
of applicable solvency laws. If we are or become insolvent, holders of our common stock or other securities may lose the entire value of their investment.
We cannot provide assurances that changed or unexpected circumstances will not result in the depletion of our capital resources more rapidly
than we currently anticipate, in which case we will be required to raise additional capital. There can be no assurances that we will be able to raise additional capital on favorable terms, or at all. If we are unable to raise adequate additional
capital we will be required to reduce expenses through the delay, reduction or curtailment of our projects, or further reduction of costs for facilities and administration, and there will continue to be substantial doubt about our ability to
continue as a going concern.
Our prospects are heavily dependent on the successful commercialization of our only approved product, Afrezza. The
continued commercialization and development of Afrezza will require substantial capital that we may not be able to obtain.
We have
expended significant time, money and effort in the development of our only approved product, Afrezza. We anticipate that in the near term our prospects and ability to generate significant revenues will heavily depend on our ability to successfully
commercialize Afrezza in the United States. We anticipate that our near term revenues will also, to a much lesser extent, depend on our ability to enter into licensing arrangements for our Technosphere platform technology that involve license,
milestone, royalty or other payments to us.
We assumed responsibility for worldwide commercialization of Afrezza in April 2016, prior to
which time Sanofi was responsible for global commercial activities for Afrezza. We began distributing Afrezza in the United States in late July 2016, and intend to continue the commercialization of Afrezza in the United States through our own
commercial organization. Successful commercialization of Afrezza is subject to many risks and there are many factors that could cause the commercialization of Afrezza to be unsuccessful, including a number of factors that are outside our
control. We ultimately may be unable to gain market acceptance of Afrezza for a variety of reasons, including the treatment and dosage regimen, potential adverse effects, relative pricing compared with alternative products, the availability of
alternative treatments and lack of coverage or adequate reimbursement.
We have never, as an organization, launched or commercialized a
product other than Afrezza, and there is no guarantee that we will be able to successfully do so with Afrezza. There are numerous examples of unsuccessful product launches, second launches that underperform original expectations and other failures
to fully exploit the market potential of drug products, including by pharmaceutical companies with more experience and resources than us. During our initial transition of the commercial responsibilities from Sanofi, we utilized a contract sales
organization to promote Afrezza while we focused our internal resources on establishing a channel strategy, entering into distribution agreements and developing
co-pay
assistance programs, a voucher program,
data agreements and payor relationships. In early 2017, we recruited our own sales force, which included some of the sales representatives that previously were employed by the contract sales organization. We intend to continue the commercialization
of Afrezza in the United States through our internal commercial organization. We will need to maintain and continue to build our commercialization capabilities in order to successfully commercialize Afrezza in the United States, and we may not have
sufficient resources to do so. The market for skilled
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commercial personnel is highly competitive, and we may not be able to retain and find and hire all of the personnel we need on a timely basis or retain them for a sufficient period. In
addition, Afrezza is a novel insulin therapy with a distinct profile and
non-injectable
administration, and we are therefore required to expend significant time and resources to train our sales force to be
credible, persuasive and compliant with applicable laws in marketing Afrezza for the treatment diabetes to physicians and to ensure that a consistent and appropriate message about Afrezza is being delivered to our potential customers. If we are
unable to effectively train our sales force and equip them with effective materials, including medical and sales literature to help them inform and educate potential customers about the benefits of Afrezza and its proper administration, our efforts
to successfully commercialize Afrezza could be put in jeopardy, which would negatively impact our ability to generate product revenues.
If we are unable to maintain coverage of, and adequate payment levels for Afrezza, physicians may limit how much or under what circumstances
they will prescribe or administer Afrezza. As a result, patients may decline to purchase Afrezza, which would have an adverse effect on our ability to generate revenues.
We are responsible for the NDA for Afrezza and its maintenance. Prior to the termination of the Sanofi License Agreement in April 2016,
we had no experience with the maintenance of an NDA and may fail to comply with maintenance requirements, including timely submitting required reports. Furthermore, we are responsible for the conduct of the remaining required post-approval trials of
Afrezza. Our financial and other resource constraints may result in delays or adversely impact the reliability and completion of these trials.
Maintaining and further building the internal infrastructure to further develop and commercialize Afrezza is costly and time-consuming, and we
may not be successful in our efforts or successful in obtaining financing to support those efforts.
If we fail to successfully
commercialize Afrezza in the United States, our business, financial condition and results of operations will be materially and adversely affected.
We expect that our results of operations will fluctuate for the foreseeable future, which may make it difficult to predict our future performance from
period to period.
Our operating results have fluctuated in the past and are likely to do so in future periods. Some of the factors
that could cause our operating results to fluctuate from period to period include the factors that will affect our funding requirements described above under Risk Factors We will need to raise additional capital to fund our operations,
and our inability to do so could raise substantial doubt about our ability to continue as a going concern.
We believe that
comparisons from period to period of our financial results are not necessarily meaningful and should not be relied upon as indications of our future performance.
If we do not obtain regulatory approval of Afrezza in foreign jurisdictions, we will not be able to market Afrezza in any jurisdiction outside of the
United States, which could limit our commercial revenues. We may not be successful in establishing regional partnerships or other arrangements with third parties for the commercialization of Afrezza outside of the United States.
While Afrezza has been approved in the United States by the FDA for glycemic control in adult patients with diabetes, we have not yet sought
approval in any other jurisdiction. In order to market Afrezza outside of the United States, we must obtain regulatory approval in each applicable foreign jurisdiction, and we may never be able to obtain such approvals. The research, testing,
manufacturing, labeling, approval, sale, import, export, marketing, and distribution of pharmaceutical products outside the United States are subject to extensive
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regulation by foreign regulatory authorities, whose regulations differ from country to country. We will be required to comply with different regulations and policies of the jurisdictions where we
seek approval for Afrezza, and we have not yet identified all of the requirements that we will need to satisfy to submit Afrezza for approval for other jurisdictions. This will require additional time, expertise and expense, including the potential
need to conduct additional studies or development work for other jurisdictions beyond the work that we have conducted to support the NDA for Afrezza.
Our current strategy for the future commercialization of Afrezza outside of the United States, subject to receipt of the necessary regulatory
approvals, is to seek and establish regional partnerships in foreign jurisdictions where there are appropriate commercial opportunities. It may be difficult to find collaboration partners that are able and willing to devote the time and resources
necessary to successfully commercialize Afrezza. Collaborations with third parties may require us to relinquish material rights, including revenue from commercialization, agree to unfavorable terms or assume material ongoing development obligations
that we would have to fund. These collaboration arrangements are complex and time-consuming to negotiate, and if we are unable to reach agreements with third-party collaborators, we may fail to meet our business objectives and our financial
condition may be adversely affected. We may also face significant competition in seeking collaboration partners, especially in the current market, and may not be able to find a suitable collaboration partner in a timely manner on acceptable terms,
or at all. Any of these factors could cause delay or prevent the successful commercialization of Afrezza in foreign jurisdictions and could have a material and adverse impact on our business, financial condition and results of operations and the
market price of our common stock and other securities could decline.
We may not be successful in our efforts to develop and commercialize our
product candidates.
We have sought to develop our product candidates through our internal research programs. All of our product
candidates will require additional research and development and, in some cases, significant preclinical, clinical and other testing prior to seeking regulatory approval to market them. Accordingly, these product candidates will not be commercially
available for a number of years, if at all. Further research and development on these programs will require significant financial resources. Given our limited financial resources and our focus on development and commercialization of Afrezza, we will
not be able to advance these programs unless we are able to enter into collaborations with third parties to fund of these programs or to obtain funding to enable us to continue these programs.
A significant portion of the research that we have conducted involves new technologies, including our Technosphere platform technology. Even
if our research programs identify product candidates that initially show promise, these candidates may fail to progress to clinical development for any number of reasons, including discovery upon further research that these candidates have adverse
effects or other characteristics that indicate they are unlikely to be effective. In addition, the clinical results we obtain at one stage are not necessarily indicative of future testing results. If we fail to develop and commercialize our product
candidates, or if we are significantly delayed in doing so, our ability to generate product revenues will be limited to the revenues we can generate from Afrezza.
We have a history of operating losses, we expect to incur losses in the future and we may not generate positive cash flow from
operations in the future.
We have never been profitable or generated positive cash flow from cumulative operations to date.
Historically, we have reported negative cash flow from operations other than for the nine months ended September 30, 2014, for the year ended December 31, 2014, and for the three months ended March 31, 2015 as a result of our receipt
of an upfront payment and milestone payments from Sanofi. As of December 31, 2016, we had an accumulated deficit of $2.7 billion. The accumulated deficit has resulted principally from costs incurred in our research and development
programs, the
write-off
of goodwill and general operating expenses. We expect to make substantial expenditures and to incur increasing operating losses in the future in order to continue the
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commercialization of Afrezza. In connection with our quarterly assessment of impairment indicators and inventory valuation for the quarter ended December 31, 2015, we identified an
impairment of our long-lived assets and inventory, which resulted in charges of $140.4 million and $36.1 million, respectively, in such quarter. In addition, under the amended Insulin Supply Agreement with Amphastar, we agreed to purchase
certain annual minimum quantities of insulin for calendar years 2017 through 2023 for an aggregate total remaining purchase price of 93.0 million at December 31, 2016. We may not have the necessary capital resources on hand in order
to service this contractual commitment.
Our losses have had, and are expected to continue to have, an adverse impact on our working
capital, total assets and stockholders equity. As of December 31, 2016, we had stockholders deficit of $183.6 million. Our ability to achieve and sustain positive cash flow from operations and profitability depends heavily upon
successfully commercializing Afrezza, and we cannot be sure when, if ever, we will generate positive cash flow from operations or become profitable.
We have a substantial amount of debt pursuant to the 2018 notes, 2019 notes, Tranche B notes and The Mann Group Loan Arrangement, and we may be unable
to make required payments of interest and principal as they become due.
As of December 31, 2016, we had $152.1 million
principal amount of outstanding debt, consisting of:
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$27.6 million principal amount of 2018 notes bearing interest at 5.75% per annum and maturing on August 15, 2018;
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$55.0 million principal amount of 2019 notes bearing interest at 9.75% per annum, $15.0 million of which is due and payable in July 2017, $15.0 million of which is due and payable in July 2018 and
$25.0 million of which is due and payable in July and December 2019;
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$20.0 million principal amount of Tranche B notes bearing interest at 8.75% per annum, $5.0 million of which is due and payable in each of May 2017, 2018 and 2019, and $5.0 million of which is due
and payable in December 2019; and
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$49.5 million principal amount of indebtedness under The Mann Group Loan Arrangement bearing interest at 5.84% and maturing and due on January 5, 2020.
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We may borrow an additional $30.1 million under The Mann Group Loan Arrangement. The available borrowings may be used to capitalize
accrued interest into principal upon mutual agreement of the parties, as accrued interest becomes due and payable under The Mann Group Loan Arrangement. As of December 31, 2016 the accrued and unpaid interest under The Mann Group Loan
Arrangement was $9.3 million.
There can be no assurance that we will have sufficient resources to make any required repayments of
principal under the terms of our indebtedness when required. Further, if we undergo a fundamental change, as that term is defined in the indentures governing the terms of the 2018 notes, or certain Major Transactions as defined in the Facility
Agreement in respect of the 2019 notes and the Tranche B notes, the holders of the respective debt securities will have the option to require us to repurchase all or any portion of such debt securities at a repurchase price of 100% of the principal
amount of such debt securities to be repurchased plus accrued and unpaid interest, if any. The 2018 notes bear interest at the rate of 5.75% per year on the outstanding principal amount, payable in cash semiannually in arrears on
February 15 and August 15 of each year. The 2019 notes bear interest at the rate of 9.75% per year on the outstanding principal amount and the Tranche B notes bear interest at the rate of 8.75% on the outstanding principal amount,
with accrued interest on each payable in cash quarterly in arrears on the last business day of March, June, September and December of each year. Loans under The Mann Group Loan Arrangement accrue interest at a rate of 5.84% per annum, due and
payable quarterly in arrears on the first day of each calendar quarter for the preceding quarter, or at such other time as we and The Mann Group mutually agree. While we have been able to timely make our required interest payments to date, we cannot
guarantee that we will be able to do so in the future. If we fail to pay interest on the 2018 notes, 2019 notes, or
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Tranche B notes, or if we fail to repay or repurchase the 2018 notes, 2019 notes, Tranche B notes, or the loans under The Mann Group Loan Arrangement when required, we will be in default under
the instrument for such debt securities or loans, and may also suffer an event of default under the terms of other borrowing arrangements that we may enter into from time to time. Any of these events could have a material adverse effect on our
business, results of operations and financial condition, up to and including the note holders initiating bankruptcy proceedings or causing us to cease operations altogether.
The agreements governing our indebtedness contain covenants that we may not be able to meet and place restrictions on our operating and financial
flexibility.
Our obligations under the Facility Agreement, including any indebtedness under the 2019 notes and the Tranche B
notes, and the Milestone Agreement are secured by substantially all of our assets, including our intellectual property, accounts receivables, equipment, general intangibles, inventory (excluding the insulin inventory) and investment property, and
all of the proceeds and products of the foregoing. Our obligations under the Facility Agreement and the Milestone Agreement are also secured by a certain mortgage on our facility in Danbury, Connecticut. The Facility Agreement includes customary
representations, warranties and covenants by us, including restrictions on our ability to incur additional indebtedness, grant certain liens, engage in certain mergers and acquisitions, make certain distributions and make certain voluntary
prepayments. Events of default under the Facility Agreement include: our failure to timely make payments due under the 2019 notes or the Tranche B notes; inaccuracies in our representations and warranties to Deerfield; our failure to comply with any
of our covenants under any of the Facility Agreement, Milestone Agreement or certain other related security agreements and documents entered into in connection with the Facility Agreement, subject to a cure period with respect to most covenants; our
insolvency or the occurrence of certain bankruptcy-related events; certain judgments against us; the suspension, cancellation or revocation of governmental authorizations that are reasonably expected to have a material adverse effect on our
business; the acceleration of a specified amount of our indebtedness; our cash and cash equivalents, including amounts available to us under The Mann Group Loan Arrangement, falling below $25.0 million as of the last day of any fiscal quarter.
If we fail to timely pay accrued interest under The Mann Group Loan Arrangement when required, we will be in default under The Mann Group Loan Arrangement. During any such time as an event of default is continuing under The Mann Group Loan
Arrangement, The Mann Group will not be obligated to make additional borrowings available to us. If an event of default is continuing under The Mann Group Loan Arrangement as of the last day of a fiscal quarter, we may be in breach of the financial
covenant under the Facility Agreement that requires us to maintain cash and cash equivalents (including available borrowings under The Mann Group Loan Arrangement) of at least $25.0 million if our other cash and cash equivalents on hand do not
equal or exceed $25.0 million. If one or more events of default under the Facility Agreement occurs and continues beyond any applicable cure period, the holders of the 2019 notes and Tranche B notes may declare all or any portion of the 2019
notes and Tranche B notes to be immediately due and payable. The Milestone Agreement includes customary representations and warranties and covenants by us, including restrictions on transfers of intellectual property related to Afrezza. The
milestones are subject to acceleration in the event we transfer our intellectual property related to Afrezza in violation of the terms of the Milestone Agreement.
There can be no assurance that we will be able to comply with the covenants under any of the foregoing agreements, and we cannot predict
whether the holders of the 2019 notes or Tranche B notes would demand repayment of the outstanding balance of the 2019 notes or the Tranche B notes as applicable or exercise any other remedies available to such holders if we were unable to comply
with these covenants. The covenants and restrictions contained in the foregoing agreements could significantly limit our ability to respond to changes in our business or competitive activities or take advantage of business opportunities that may
create value for our stockholders and the holders of our other securities. In addition, our inability to meet or otherwise comply with the covenants under these agreements could have an adverse impact on our financial position and results of
operations and could result in an event of default under the terms of our other indebtedness, including our indebtedness under the 2018 notes. In the event of certain future defaults under the foregoing agreements for which we are not able to obtain
waivers, the holders of the 2018 notes, 2019 notes and Tranche B notes may
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accelerate all of our repayment obligations, and, with respect to the 2019 notes and Tranche B notes, take control of our pledged assets, potentially requiring us to renegotiate the terms of our
indebtedness on terms less favorable to us, or to immediately cease operations. If we enter into additional debt arrangements, the terms of such additional arrangements could further restrict our operating and financial flexibility. In the event we
must cease operations and liquidate our assets, the rights of any holders of our outstanding secured debt would be senior to the rights of the holders of our unsecured debt and our common stock to receive any proceeds from the liquidation.
If we do not achieve our projected development goals in the timeframes we expect, our business, financial condition and results of operations will be
harmed and the market price of our common stock and other securities could decline.
For planning purposes, we estimate the timing
of the accomplishment of various scientific, clinical, regulatory and other product development goals, which we sometimes refer to as milestones. These milestones may include the commencement or completion of scientific studies and clinical studies
and the submission of regulatory filings. From time to time, we publicly announce the expected timing of some of these milestones. All of these milestones are based on a variety of assumptions. The actual timing of the achievement of these
milestones can vary dramatically from our estimates, in many cases for reasons beyond our control, depending on numerous factors, including:
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the rate of progress, costs and results of our clinical studies and preclinical research and development activities;
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our ability to identify and enroll patients who meet clinical study eligibility criteria;
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our ability to access sufficient, reliable and affordable supplies of components used in the manufacture of our product candidates;
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the costs of expanding and maintaining manufacturing operations, as necessary;
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the extent to which our clinical studies compete for clinical sites and eligible subjects with clinical studies sponsored by other companies; and
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In addition, if we do not obtain sufficient additional funds through
sales of securities, strategic collaborations or the license or sale of certain of our assets on a timely basis, we may be required to reduce expenses by delaying, reducing or curtailing our development of product candidates. If we fail to commence
or complete, or experience delays in or are forced to curtail, our proposed clinical programs or otherwise fail to adhere to our projected development goals in the timeframes we expect (or within the timeframes expected by analysts or investors),
our business, financial condition and results of operations will be harmed and the market price of our common stock and other securities may decline.
Afrezza or our product candidates may be rendered obsolete by rapid technological change.
A number of established pharmaceutical companies have or are developing technologies for the treatment of unmet medical needs.
The rapid rate of scientific discoveries and technological changes could result in Afrezza or one or more of our product candidates becoming
obsolete or noncompetitive. Our competitors may develop or introduce new products that render our technology or Afrezza less competitive, uneconomical or obsolete. For example, in January 2017, Novo Nordisk announced that Fiasp
®
, a faster formulation of insulin aspart, was approved in Europe and Canada. It is currently undergoing regulatory review in the United States. Our future success will depend not only on our
ability to develop our product candidates but to improve them and keep pace with emerging industry developments. We cannot assure you that we will be able to do so.
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We also expect to face competition from universities and other
non-profit
research organizations. These institutions carry out a significant amount of research and development in various areas of unmet medical need. These institutions are becoming increasingly aware of
the commercial value of their findings and are more active in seeking patent and other proprietary rights as well as licensing revenues.
Continued
testing of Afrezza or our product candidates may not yield successful results, and even if it does, we may still be unable to commercialize our product candidates.
Forecasts about the effects of the use of drugs, including Afrezza, over terms longer than the clinical studies or in much larger populations
may not be consistent with the earlier clinical results. For example, with the approval of Afrezza, the FDA has required a five-year, randomized, controlled trial in 8,000 10,000 patients with type 2 diabetes, the primary objective of which
is to compare the incidence of pulmonary malignancy observed with Afrezza to that observed in a standard of care control group. If long-term use of a drug results in adverse health effects or reduced efficacy or both, the FDA or other regulatory
agencies may terminate our or any future marketing partners ability to market and sell the drug, may narrow the approved indications for use or otherwise require restrictive product labeling or marketing, or may require further clinical
studies, which may be time-consuming and expensive and may not produce favorable results.
Our research and development programs are
designed to test the safety and efficacy of our product candidates through extensive nonclinical and clinical testing. We may experience numerous unforeseen events during, or as a result of, the testing process that could delay or impact
commercialization of any of our product candidates, including the following:
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safety and efficacy results obtained in our nonclinical and early clinical testing may be inconclusive or may not be predictive of results that we may obtain in our future clinical studies or following long-term use,
and we may as a result be forced to stop developing a product candidate or alter the marketing of an approved product;
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the analysis of data collected from clinical studies of our product candidates may not reach the statistical significance necessary, or otherwise be sufficient to support FDA or other regulatory approval for the claimed
indications;
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after reviewing clinical data, we or any collaborators may abandon projects that we previously believed were promising; and
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our product candidates may not produce the desired effects or may result in adverse health effects or other characteristics that preclude regulatory approval or limit their commercial use once approved.
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As a result of any of these events, we, any collaborator, the FDA, or any other regulatory authorities, may suspend or
terminate clinical studies or marketing of the drug at any time. Any suspension or termination of our clinical studies or marketing activities may harm our business, financial condition and results of operations and the market price of our common
stock and other securities may decline.
If our suppliers fail to deliver materials and services needed for the production of Afrezza in a timely
and sufficient manner or fail to comply with applicable regulations, and if we fail to timely identify and qualify alternative suppliers, our business, financial condition and results of operations would be harmed and the market price of our common
stock and other securities could decline.
For the commercial manufacture of Afrezza, we need access to sufficient, reliable and
affordable supplies of insulin, our Afrezza inhaler, the related cartridges and other materials. Currently, the only approved source of insulin for Afrezza is manufactured by Amphastar. We must rely on our suppliers, including Amphastar, to comply
with relevant regulatory and other legal requirements, including the production of insulin and FDKP in accordance with the FDAs cGMP for drug products, and the production of the Afrezza inhaler and related cartridges in accordance with QSRs.
The supply of any of these materials may be limited or any of the
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manufacturers may not meet relevant regulatory requirements, and if we are unable to obtain any of these materials in sufficient amounts, in a timely manner and at reasonable prices, or if we
encounter delays or difficulties in our relationships with manufacturers or suppliers, the production of Afrezza may be delayed. Likewise, if Amphastar ceases to manufacture or is otherwise unable to deliver insulin for Afrezza, we will need to
locate an alternative source of supply and the production of Afrezza may be delayed. If any of our suppliers is unwilling or unable to meet its supply obligations and we are unable to secure an alternative supply source in a timely manner and on
favorable terms, our business, financial condition, and results of operations may be harmed and the market price of our common stock and other securities may decline.
If we fail as an effective manufacturing organization or fail to engage third-party manufacturers with this capability, we may be unable to support
commercialization of this product.
We use our Danbury, Connecticut facility to formulate Afrezza inhalation powder, fill plastic
cartridges with the powder, package the cartridges in blister packs, and place the blister packs into foil pouches. We utilize a contract packager to assemble the final kits of foil-pouched blisters containing cartridges along with inhalers and the
package insert. The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often
encounter difficulties in production, especially in scaling up initial production. These problems include difficulties with production costs and yields, quality control and assurance and shortages of qualified personnel, as well as compliance with
strictly enforced federal, state and foreign regulations. If we engage a third-party manufacturer, we would need to transfer our technology to that third-party manufacturer and gain FDA approval, potentially causing delays in product delivery. In
addition, our third-party manufacturer may not perform as agreed or may terminate its agreement with us.
Any of these factors could cause
us to delay or suspend production, could entail higher costs and may result in our being unable to obtain sufficient quantities for the commercialization of Afrezza at the costs that we currently anticipate. Furthermore, if we or a third-party
manufacturer fail to deliver the required commercial quantities of the product or any raw material on a timely basis, and at commercially reasonable prices, sustainable compliance and acceptable quality, and we were unable to promptly find one or
more replacement manufacturers capable of production at a substantially equivalent cost, in substantially equivalent volume and quality on a timely basis, we would likely be unable to meet demand for Afrezza and we would lose potential revenues.
If Afrezza or any other product that we develop does not become widely accepted by physicians, patients, third-party payors and the healthcare
community, we may be unable to generate significant revenue, if any.
Afrezza and other products that we may develop in the future
may not gain market acceptance among physicians, patients, third-party payors and the healthcare community. Failure to achieve market acceptance would limit our ability to generate revenue and would adversely affect our results of operations.
The degree of market acceptance of Afrezza and other products that we may develop in the future depends on many factors, including the:
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approved labeling claims;
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effectiveness of efforts by us or any future marketing partner to educate physicians about the benefits and advantages of Afrezza or our other products and to provide adequate support for them, and the perceived
advantages and disadvantages of competitive products;
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willingness of the healthcare community and patients to adopt new technologies;
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ability to manufacture the product in sufficient quantities with acceptable quality and cost;
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perception of patients and the healthcare community, including third-party payors, regarding the safety, efficacy and benefits compared to competing products or therapies;
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convenience and ease of administration relative to existing treatment methods;
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coverage and pricing and reimbursement relative to other treatment therapeutics and methods; and
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marketing and distribution support.
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Because of these and other factors, Afrezza and any other
product that we develop may not gain market acceptance, which would materially harm our business, financial condition and results of operations.
If
third-party payors do not cover Afrezza or any of our product candidates for which we receive regulatory approval, Afrezza or such product candidates might not be prescribed, used or purchased, which would adversely affect our revenues.
Our future revenues and ability to generate positive cash flow from operations may be affected by the continuing efforts of government and
other third-party payors to contain or reduce the costs of healthcare through various means. For example, in certain foreign markets the pricing of prescription pharmaceuticals is subject to governmental control. In the United States, there has
been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental controls. We cannot be certain what legislative proposals will be adopted or what actions federal, state or private payors
for healthcare goods and services may take in response to any drug pricing and reimbursement reform proposals or legislation. Such reforms may limit our ability to generate revenues from sales of Afrezza or other products that we may develop in the
future and achieve profitability. Further, to the extent that such reforms have a material adverse effect on the business, financial condition and profitability of any future marketing partner for Afrezza, and companies that are prospective
collaborators for our product candidates, our ability to commercialize Afrezza and our product candidates under development may be adversely affected.
In the United States and elsewhere, sales of prescription pharmaceuticals still depend in large part on the availability of coverage and
adequate reimbursement to the consumer from third-party payors, such as governmental and private insurance plans. Third-party payors are increasingly challenging the prices charged for medical products and services. The market for Afrezza and our
product candidates for which we may receive regulatory approval will depend significantly on access to third-party payors drug formularies, or lists of medications for which third-party payors provide coverage and reimbursement. The industry
competition to be included in such formularies often leads to downward pricing pressures on pharmaceutical companies. Also, third-party payors may refuse to include a particular branded drug in their formularies or otherwise restrict patient access
to a branded drug when a less costly generic equivalent or other alternative is available. In addition, because each third-party payor individually approves coverage and reimbursement levels, obtaining coverage and adequate reimbursement is a
time-consuming and costly process. We may be required to provide scientific and clinical support for the use of any product to each third-party payor separately with no assurance that approval would be obtained. This process could delay the market
acceptance of any product and could have a negative effect on our future revenues and operating results. Even if we succeed in bringing more products to market, we cannot be certain that any such products would be considered cost-effective or that
coverage and adequate reimbursement to the consumer would be available. Patients will be unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products.
In addition, in many foreign countries, particularly the countries of the European Union, the pricing of prescription drugs is subject to
government control. In some
non-U.S.
jurisdictions, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to
country. For example, the European Union provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for
human use. A member state may approve a specific price for the
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medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. We may face competition for
Afrezza or any of our other product candidates that receives marketing approval from lower-priced products in foreign countries that have placed price controls on pharmaceutical products. In addition, there may be importation of foreign products
that compete with our own products, which could negatively impact our profitability.
If we or any future marketing partner is unable to
obtain coverage of, and adequate payment levels for, Afrezza or any of our other product candidates that receive marketing approval from third-party payors, physicians may limit how much or under what circumstances they will prescribe or administer
them and patients may decline to purchase them. This in turn could affect our and any future marketing partners ability to successfully commercialize Afrezza and our ability to successfully commercialize any of our other product candidates
that receives regulatory approval and impact our profitability, results of operations, financial condition, and prospects.
Healthcare legislation
may make it more difficult to receive revenues.
In both the United States and certain foreign jurisdictions, there have been a
number of legislative and regulatory proposals in recent years to change the healthcare system in ways that could impact our ability to sell our products profitably. For example, in March 2010, PPACA became law in the United States. PPACA
substantially changes the way healthcare is financed by both governmental and private insurers and significantly affects the healthcare industry. Among the provisions of PPACA of importance to us are the following:
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an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government
healthcare programs;
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a 2.3% medical device excise tax on certain transactions, including many U.S. sales of medical devices, which currently includes and we expect will continue to include U.S. sales of certain drug-device combination
products;
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an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13% of the average manufacturer price for most branded and generic drugs, respectively;
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a licensure framework for
follow-on
biological products;
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expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers, and enhanced penalties for noncompliance;
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a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50%
point-of-sale
discounts off negotiated
prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturers outpatient drugs to be covered under Medicare Part D;
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extension of manufacturers Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;
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expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals with income at or below 133% of the Federal Poverty Level, thereby
potentially increasing manufacturers Medicaid rebate liability;
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expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
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new requirements to report annually to the Centers for Medicare & Medicaid Services (CMS)
certain financial arrangements with physicians and teaching hospitals, as defined in PPACA and its implementing regulations, including reporting any payments or transfers of value made or distributed to prescribers, teaching hospitals
and other healthcare providers and reporting any ownership and
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investment interests held by physicians and their immediate family members and applicable group purchasing organizations during the preceding calendar year;
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a new requirement to annually report drug samples that certain manufacturers and authorized distributors provide to physicians; and
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a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.
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The medical device excise tax has been suspended by the Consolidated Appropriations Act of 2016 (the CAA) through
December 31, 2017. Absent further Congressional action, the excise tax will be reinstated for medical device sales beginning January 1, 2018. The CAA also temporarily delays implementation of other taxes intended to help fund PPACA
programs.
Further, there have been judicial and Congressional challenges to other aspects of PPACA. As a result there have been delays in
the implementation of, and action taken to repeal or replace, certain aspects of the PPACA. In January 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the PPACA to waive, defer,
grant exemptions from, or delay the implementation of any provision of the PPACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices.
Further, in January 2017, Congress adopted a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repeal portions of the PPACA. Following the passage of the Budget Resolution,
in March 2017, the U.S. House of Representatives introduced legislation known as the American Health Care Act, which, if enacted, would amend or repeal significant portions of the PPACA. Among other changes, the American Health Care Act would repeal
the annual fee on certain brand prescription drugs and biologics imposed on manufacturers and importers, eliminate the 2.3% excise tax on medical devices, eliminate penalties on individuals and employers that fail to maintain or provide minimum
essential coverage, and create refundable tax credits to assist individuals in buying health insurance. The American Health Care Act would also make significant changes to Medicaid by, among other things, making Medicaid expansion optional for
states, repealing the requirement that state Medicaid plans provide the same essential health benefits that are required by plans available on the exchanges, modifying federal funding, including implementing a per capita cap on federal payments to
states, and changing certain eligibility requirements. While it is uncertain when or if the provisions in the American Health Care Act will become law, or the extent to which any changes may impact our business, it is clear that concrete steps are
being taken to repeal and replace certain aspects of the PPACA.
In addition, other legislative changes have been proposed and adopted
since PPACA was enacted. For example, on August 2, 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a
targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislations automatic reduction to several government programs. This includes aggregate
reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013, and, following passage of the Bipartisan Budget Act of 2015, will stay in effect through 2025 unless additional Congressional action is taken. On
January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (the ATRA), which, among other things, reduced Medicare payments to several providers, including hospitals, imaging centers and cancer
treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. In addition, recently there has been heightened governmental scrutiny over the manner in which
manufacturers set prices for their marketed products. Specifically, there have been several recent U.S. Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, reduce the cost of
prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. These new laws and initiatives may result in additional reductions in
Medicare and other healthcare funding, which could have a material adverse effect on our customers and accordingly, our financial operations.
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We expect that PPACA, as well as other healthcare reform measures that may be adopted in the
future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved product, and could seriously harm our future revenues. Any reduction in reimbursement from Medicare or other
government programs may result in a similar reduction in payments from private third-party payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability,
or commercialize our products.
If we or any future marketing partner fails to comply with federal and state healthcare laws, including fraud and
abuse and health information privacy and security laws, we could face substantial penalties and our business, results of operations, financial condition and prospects could be adversely affected.
As a biopharmaceutical company, even though we do not and will not control referrals of healthcare services or bill directly to Medicare,
Medicaid or other third-party payors, certain federal and state healthcare laws and regulations, including those pertaining to fraud and abuse and patients rights are and will be applicable to our business. For example, we could be subject to
healthcare fraud and abuse and patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include, among others:
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the federal Anti-Kickback Statute (as amended by PPACA, which modified the intent requirement of the federal Anti-Kickback Statute so that a person or entity no longer needs to have actual knowledge of the Statute or
specific intent to violate it to have committed a violation), which constrains our business activities, including our marketing practices, educational programs, pricing policies, and relationships with healthcare providers or other entities by
prohibiting, among other things, knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, either the referral of an individual or the purchase or recommendation of an item
or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs;
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federal civil and criminal false claims laws, including without limitation the civil False Claims Act, and civil monetary penalties laws, which prohibit, among other things, individuals or entities from knowingly
presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other federal healthcare programs that are false or fraudulent, and knowingly making, or causing to be made, a false record or statement material to a false or
fraudulent claim to avoid, decrease or conceal an obligation to pay money to the federal government, and under PPACA, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute
constitutes a false or fraudulent claim for purposes of the federal false claims laws;
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HIPAA, which created new federal criminal statutes that prohibit, among other things, knowingly and willfully executing a scheme to defraud any healthcare benefit program or falsifying, concealing, or covering up a
material fact in connection with the delivery of or payment for health care benefits;
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HIPAA, as amended by HITECH, and their respective implementing regulations, which imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information on
entities subject to the law, such as healthcare providers, health plans, and healthcare clearinghouses and their respective business associates that perform services for them that involve the creation, use, maintenance or disclosure of, individually
identifiable health information;
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the federal physician sunshine requirements under PPACA, which requires certain manufacturers of drugs, devices, biologics, and medical supplies to report annually to the CMS information related to payments and other
transfers of value to physicians, other healthcare providers, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members; and
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state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws
which may apply to items or services reimbursed by any third-party payor, including commercial insurers, and state and foreign laws governing the privacy and security of health
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information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts; state laws that require
pharmaceutical companies to comply with the industrys voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government that otherwise restricts certain payments that may be made to healthcare
providers and entities; and state laws that require drug manufacturers to report information related to payments and other transfer of value to physicians and other healthcare providers and entities.
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Because of the breadth of these laws and the narrowness of available statutory and regulatory exceptions, it is possible that some of our
business activities could be subject to challenge under one or more of such laws. To the extent that Afrezza or any of our product candidates that receives marketing approval is ultimately sold in a foreign country, we may be subject to similar
foreign laws and regulations. If we or our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties,
damages, fines, individual imprisonment, disgorgement, exclusion of products from reimbursement under U.S. federal or state healthcare programs, additional reporting requirements and/or oversight if we become subject to a corporate integrity
agreement or similar agreement to resolve allegations of
non-compliance
with these laws, and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of
our operations could materially adversely affect our ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be
entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our managements attention from the operation of our business.
Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.
If we fail to
comply with our reporting and payment obligations under the Medicaid Drug Rebate Program or other governmental pricing programs in the United States, we could be subject to additional reimbursement requirements, fines, sanctions and exposure under
other laws which could have a material adverse effect on our business, results of operations and financial condition.
We
participate in the Medicaid Drug Rebate Program, as administered by CMS, and other federal and state government pricing programs in the United States, and we may participate in additional government pricing programs in the future. These programs
generally require us to pay rebates or otherwise provide discounts to government payors in connection with drugs that are dispensed to beneficiaries/recipients of these programs. In some cases, such as with the Medicaid Drug Rebate Program, the
rebates are based on pricing that we report on a monthly and quarterly basis to the government agencies that administer the programs. Pricing requirements and rebate/discount calculations are complex, vary among products and programs, and are often
subject to interpretation by governmental or regulatory agencies and the courts. The requirements of these programs, including, by way of example, their respective terms and scope, change frequently. Responding to current and future changes may
increase our costs, and the complexity of compliance will be time consuming. Invoicing for rebates is provided in arrears, and there is frequently a time lag of up to several months between the sales to which rebate notices relate and our receipt of
those notices, which further complicates our ability to accurately estimate and accrue for rebates related to the Medicaid program as implemented by individual states. Thus, there can be no assurance that we will be able to identify all factors that
may cause our discount and rebate payment obligations to vary from period to period, and our actual results may differ significantly from our estimated allowances for discounts and rebates. Changes in estimates and assumptions may have a material
adverse effect on our business, results of operations and financial condition.
In addition, the Office of Inspector General of the
Department of Health and Human Services and other Congressional, enforcement and administrative bodies have recently increased their focus on pricing requirements for products, including, but not limited to the methodologies used by manufacturers to
calculate average manufacturer price (AMP) and best price (BP) for compliance with reporting requirements under the
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Medicaid Drug Rebate Program. We are liable for errors associated with our submission of pricing data and for any overcharging of government payors. For example, failure to submit
monthly/quarterly AMP and BP data on a timely basis could result in a civil monetary penalty of $10,000 per day for each day the submission is late beyond the due date. Failure to make necessary disclosures and/or to identify overpayments could
result in allegations against us under the False Claims Act and other laws and regulations. Any required refunds to the U.S. government or responding to a government investigation or enforcement action would be expensive and time consuming and could
have a material adverse effect on our business, results of operations and financial condition. In addition, in the event that the CMS were to terminate our rebate agreement, no federal payments would be available under Medicaid or Medicare for our
covered outpatient drugs.
If product liability claims are brought against us, we may incur significant liabilities and suffer damage to our
reputation.
The testing, manufacturing, marketing and sale of Afrezza and any clinical testing of our product candidates expose us
to potential product liability claims. A product liability claim may result in substantial judgments as well as consume significant financial and management resources and result in adverse publicity, decreased demand for a product, injury to our
reputation, withdrawal of clinical studies volunteers and loss of revenues. We currently carry worldwide product liability insurance in the amount of $10.0 million. Our insurance coverage may not be adequate to satisfy any liability that may
arise, and because insurance coverage in our industry can be very expensive and difficult to obtain, we cannot assure you that we will seek to obtain, or be able to obtain if desired, sufficient additional coverage. If losses from such claims exceed
our liability insurance coverage, we may incur substantial liabilities that we may not have the resources to pay. If we are required to pay a product liability claim our business, financial condition and results of operations would be harmed and the
market price of our common stock and other securities may decline.
If we lose any key employees or scientific advisors, our operations and our
ability to execute our business strategy could be materially harmed.
We face intense competition for qualified employees among
companies in the biotechnology and biopharmaceutical industries. Our success depends upon our ability to attract, retain and motivate highly skilled employees. We may be unable to attract and retain these individuals on acceptable terms, if at all.
In addition, in order to commercialize Afrezza successfully, we may be required to expand our work force, particularly in the areas of manufacturing and sales and marketing. These activities will require the addition of new personnel, including
management, and the development of additional expertise by existing personnel, and we cannot assure you that we will be able to attract or retain any such new personnel on acceptable terms, if at all.
The loss of the services of any principal member of our management and scientific staff could significantly delay or prevent the achievement
of our scientific and business objectives. All of our employees are at will and we currently do not have employment agreements with any of the principal members of our management or scientific staff, and we do not have key person life
insurance to cover the loss of any of these individuals. Replacing key employees may be difficult and time-consuming because of the limited number of individuals in our industry with the skills and experience required to develop, gain regulatory
approval of and commercialize products successfully.
We have relationships with scientific advisors at academic and other institutions to
conduct research or assist us in formulating our research, development or clinical strategy. These scientific advisors are not our employees and may have commitments to, and other obligations with, other entities that may limit their availability to
us. We have limited control over the activities of these scientific advisors and can generally expect these individuals to devote only limited time to our activities. Failure of any of these persons to devote sufficient time and resources to our
programs could harm our business. In addition, these advisors are not prohibited from, and may have arrangements with, other companies to assist those companies in developing technologies that may compete with Afrezza or our product candidates.
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If our internal controls over financial reporting are not considered effective, our business, financial
condition and market price of our common stock and other securities could be adversely affected.
Section 404 of the
Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal controls over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal controls over
financial reporting in our annual report on Form 10-K for that fiscal year. Section 404 also requires our independent registered public accounting firm to attest to, and report on, our internal controls over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls over financial
reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud involving a company have been, or will be, detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure
you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or
procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. A material weakness in our internal controls has been identified in the past, and we cannot assure
you that we or our independent registered public accounting firm will not identify a material weakness in our internal controls in the future. A material weakness in our internal controls over financial reporting would require management and our
independent registered public accounting firm to evaluate our internal controls as ineffective. If our internal controls over financial reporting are not considered effective, we may experience a loss of public confidence, which could have an
adverse effect on our business, financial condition and the market price of our common stock and other securities.
We may undertake internal
restructuring activities in the future that could result in disruptions to our business or otherwise materially harm our results of operations or financial condition.
From time to time we may undertake internal restructuring activities as we continue to evaluate and attempt to optimize our cost and operating
structure in light of developments in our business strategy and long-term
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operating plans. These activities may result in write-offs or other restructuring charges. There can be no assurance that any restructuring activities that we undertake will achieve the cost
savings, operating efficiencies or other benefits that we may initially expect. Restructuring activities may also result in a loss of continuity, accumulated knowledge and inefficiency during transitional periods and thereafter. In addition,
internal restructurings can require a significant amount of time and focus from management and other employees, which may divert attention from commercial operations. If we undertake any internal restructuring activities and fail to achieve some or
all of the expected benefits therefrom, our business, results of operations and financial condition could be materially and adversely affected.
We
and certain of our executive officers and directors have been named as defendants in ongoing securities class action lawsuits that could result in substantial costs and divert managements attention.
Following the public announcement of Sanofis election to terminate the Sanofi License Agreement and the subsequent decline in our stock
price, several complaints were filed in the U.S. District Court for the Central District of California (the District Court) against MannKind and certain of our officers and directors on behalf of certain purchasers of our common stock,
which were consolidated into a single action. The amended complaint alleged that MannKind and certain of our officers and directors violated federal securities laws by making materially false and misleading statements regarding the prospects for
Afrezza, thereby artificially inflating the price of MannKinds common stock. We and the other defendants brought a motion to dismiss the class action that was pending against MannKind and two of our executives, which the District Court granted
without leave to amend the complaint. The lead plaintiff appealed that decision to the Ninth Circuit Court of Appeals. On March 2, 2017, the lead plaintiff filed a voluntary motion to dismiss his appeal, which the Court of Appeals granted on
March 9, 2017.
We and certain of our directors and executive officers have also been named in similar lawsuits filed in Israel. In
November 2016, the court in Israel dismissed one of the actions without prejudice. In the remaining action, a hearing is scheduled for May 2017 to determine whether Israeli or U.S. law is applicable before the case can be certified as a class
action. We intend to vigorously defend against these claims. If we are not successful in our defense, we could be forced to make significant payments to or other settlements with our stockholders and their lawyers, and such payments or settlement
arrangements could have a material adverse effect on our business, operating results or financial condition. Even if such claims are not successful, the litigation could result in substantial costs and significant adverse impact on our reputation
and divert managements attention and resources, which could have a material adverse effect on our business, operating results and financial condition.
Our operations might be interrupted by the occurrence of a natural disaster or other catastrophic event.
We expect that at least for the foreseeable future, our manufacturing facility in Danbury, Connecticut will be the sole location for the
manufacturing of Afrezza. This facility and the manufacturing equipment we use would be costly to replace and could require substantial lead time to repair or replace. We depend on our facilities and on collaborators, contractors and vendors for the
continued operation of our business, some of whom are located in other countries. Natural disasters or other catastrophic events, including interruptions in the supply of natural resources, political and governmental changes, severe weather
conditions, wildfires and other fires, explosions, actions of animal rights activists, terrorist attacks, volcanic eruptions, earthquakes and wars could disrupt our operations or those of our collaborators, contractors and vendors. We might suffer
losses as a result of business interruptions that exceed the coverage available under our and our contractors insurance policies or for which we or our contractors do not have coverage. For example, we are not insured against a terrorist
attack. Any natural disaster or catastrophic event could have a significant negative impact on our operations and financial results. Moreover, any such event could delay our research and development programs or cause interruptions in our
commercialization of Afrezza.
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We deal with hazardous materials and must comply with environmental laws and regulations, which can be
expensive and restrict how we do business.
Our research and development and commercialization of Afrezza work involves the
controlled storage and use of hazardous materials, including chemical and biological materials. In addition, our manufacturing operations involve the use of a chemical that may form an explosive mixture under certain conditions. Our operations also
produce hazardous waste products. We are subject to federal, state and local laws and regulations (i) governing how we use, manufacture, store, handle and dispose of these materials (ii) imposing liability for costs of cleaning up, and
damages to natural resources from past spills, waste disposals on and
off-site,
or other releases of hazardous materials or regulated substances, and (iii) regulating workplace safety. Moreover, the risk
of accidental contamination or injury from hazardous materials cannot be completely eliminated, and in the event of an accident, we could be held liable for any damages that may result, and any liability could fall outside the coverage or exceed the
limits of our insurance. Currently, our general liability policy provides coverage up to $1.0 million per occurrence and $2.0 million in the aggregate and is supplemented by an umbrella policy that provides a further $20.0 million of
coverage; however, our insurance policy excludes pollution liability coverage and we do not carry a separate hazardous materials policy. In addition, we could be required to incur significant costs to comply with environmental laws and regulations
in the future. Finally, current or future environmental laws and regulations may impair our research, development or production efforts or have an adverse impact on our business, results of operations and financial condition. When we purchased the
facilities located in Danbury, Connecticut in 2001, a soil and groundwater investigation and remediation was being conducted by a former site operator (the responsible party) under the oversight of the Connecticut Department of Environmental
Protection. During the construction of our expanded manufacturing facility, we excavated contaminated soil under the footprint of our building expansion location. The responsible party reimbursed us for our increased excavation and disposal costs of
contaminated soil in the amount of $1.6 million. It has conducted at its expense all work and will make all filings necessary to achieve closure for the environmental remediation conducted at the site, and has agreed to indemnify us for any
future costs and expenses we may incur that are directly related to the final closure. If we are unable to collect these future costs and expenses, if any, from the responsible party, our business, financial condition and results of operations may
be harmed.
We are increasingly dependent on information technology systems, infrastructure and data security.
We are increasingly dependent upon information technology systems, infrastructure and data security. Our business requires manipulating,
analyzing and storing large amounts of data. In addition, we rely on an enterprise software system to operate and manage our business. Our business therefore depends on the continuous, effective, reliable and secure operation of our computer
hardware, software, networks, Internet servers and related infrastructure. The multitude and complexity of our computer systems and the potential value of our data make them inherently vulnerable to service interruption or destruction,
malicious intrusion and random attack. Likewise, data privacy or security breaches by employees or others may pose a risk that sensitive data including intellectual property, trade secrets or personal information belonging to us or our customers or
other business partners may be exposed to unauthorized persons or to the public. Our systems are also potentially subject to cyber-attacks, which can be highly sophisticated and may be difficult to detect. Such attacks are often carried out by
motivated, well-resourced, skilled and persistent actors including nation states, organized crime groups and hacktivists. Cyber-attacks could include the deployment of harmful malware and key loggers, a
denial-of-service
attack, a malicious website, the use of social engineering and other means to affect the confidentiality, integrity and availability of our information technology systems, infrastructure and
data. Our key business partners face similar risks and any security breach of their systems could adversely affect our security status. While we continue to invest in the protection of our critical or sensitive data and information technology, there
can be no assurance that our efforts will prevent or detect service interruptions or breaches in our systems that could adversely affect our business and operations and/or result in the loss of critical or sensitive information, which could result
in financial, legal, business or reputational harm to us.
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RISKS RELATED TO GOVERNMENT REGULATION
Our product candidates must undergo costly and time-consuming rigorous nonclinical and clinical testing and we must obtain regulatory approval prior to
the sale and marketing of any product in each jurisdiction. The results of this testing or issues that develop in the review and approval by a regulatory agency may subject us to unanticipated delays or prevent us from marketing any products.
Our research and development activities, as well as the manufacturing and marketing of Afrezza and our product candidates, are
subject to regulation, including regulation for safety, efficacy and quality, by the FDA in the United States and comparable authorities in other countries. FDA regulations and the regulations of comparable foreign regulatory authorities are
wide-ranging and govern, among other things:
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product design, development, manufacture and testing;
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product storage and shipping;
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pre-market
clearance or approval;
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advertising and promotion; and
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product sales and distribution.
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The requirements governing the conduct of clinical studies
and manufacturing and marketing of Afrezza and our product candidates outside the United States vary widely from country to country. Foreign approvals may take longer to obtain than FDA approvals and can require, among other things, additional
testing and different clinical study designs. Foreign regulatory approval processes include essentially all of the risks associated with the FDA approval processes. Some of those agencies also must approve prices of the products. Approval of a
product by the FDA does not ensure approval of the same product by the health authorities of other countries. In addition, changes in regulatory policy in the United States or in foreign countries for product approval during the period of product
development and regulatory agency review of each submitted new application may cause delays or rejections.
Clinical testing can be costly
and take many years, and the outcome is uncertain and susceptible to varying interpretations. We cannot be certain if or when regulatory agencies might request additional studies, under what conditions such studies might be requested, or what the
size or length of any such studies might be. The clinical studies of our product candidates may not be completed on schedule, regulatory agencies may order us to stop or modify our research, or these agencies may not ultimately approve any of our
product candidates for commercial sale. The data collected from our clinical studies may not be sufficient to support regulatory approval of our product candidates. Even if we believe the data collected from our clinical studies are sufficient,
regulatory agencies have substantial discretion in the approval process and may disagree with our interpretation of the data. Our failure to adequately demonstrate the safety and efficacy of any of our product candidates would delay or prevent
regulatory approval of our product candidates, which could prevent us from achieving profitability.
Questions that have been raised about
the safety of marketed drugs generally, including pertaining to the lack of adequate labeling, may result in increased cautiousness by regulatory agencies in reviewing new drugs based on safety, efficacy, or other regulatory considerations and may
result in significant delays in obtaining regulatory approvals. Such regulatory considerations may also result in the imposition of more restrictive drug labeling or marketing requirements as conditions of approval, which may significantly affect
the marketability of our drug products.
The FDA and other regulatory authorities impose significant restrictions on approved products
through regulations on advertising, promotional and distribution activities. This oversight encompasses, but is not limited to,
direct-to-consumer
advertising,
healthcare provider-directed advertising and promotion, sales representative communications to healthcare professionals, promotional programming and promotional activities involving the
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Internet. Regulatory authorities may also review industry-sponsored scientific and educational activities that make representations regarding product safety or efficacy in a promotional
context. The FDA and other regulatory authorities may take enforcement action against a company for promoting unapproved uses of a product or for other violations of its advertising and labeling laws and regulations. Enforcement action may include
product seizures, injunctions, civil or criminal penalties or regulatory letters, which may require corrective advertising or other corrective communications to healthcare professionals. Failure to comply with such regulations also can result in
adverse publicity or increased scrutiny of company activities by the U.S. Congress or other legislators. Certain states have also adopted regulations and reporting requirements surrounding the promotion of pharmaceuticals. Failure to comply
with state requirements may affect our ability to promote or sell our products in certain states.
If we do not comply with regulatory requirements
at any stage, whether before or after marketing approval is obtained, we may be fined or forced to remove a product from the market, subject to criminal prosecution, or experience other adverse consequences, including restrictions or delays in
obtaining regulatory marketing approval.
Even if we comply with regulatory requirements, we may not be able to obtain the labeling
claims necessary or desirable for product promotion. We may also be required to undertake post-marketing studies. For example, as part of the approval of Afrezza, the FDA required that we complete a clinical trial to evaluate the potential risk of
pulmonary malignancy with Afrezza. To date, we have not enrolled any subjects in this trial.
In addition, if we or other parties identify
adverse effects after any of our products are on the market, or if manufacturing problems occur, regulatory approval may be withdrawn and a reformulation of our products, additional clinical studies, changes in labeling of, or indications of use
for, our products and/or additional marketing applications may be required. If we encounter any of the foregoing problems, our business, financial condition and results of operations will be harmed and the market price of our common stock and other
securities may decline.
We are subject to stringent, ongoing government regulation.
The manufacture, marketing and sale of Afrezza are subject to stringent and ongoing government regulation. The FDA may also withdraw product
approvals if problems concerning the safety or efficacy of a product appear following approval. We cannot be sure that FDA and United States Congressional initiatives or actions by foreign regulatory bodies pertaining to ensuring the safety of
marketed drugs or other developments pertaining to the pharmaceutical industry will not adversely affect our operations. For example, stability failure of Afrezza could lead to product recall or other sanctions.
We also are required to register our establishments and list our products with the FDA and certain state agencies. We and any third-party
manufacturers or suppliers must continually adhere to federal regulations setting forth requirements, known as cGMP (for drugs) and QSR (for medical devices), and their foreign equivalents, which are enforced by the FDA and other national regulatory
bodies through their facilities inspection programs. In complying with cGMP and foreign regulatory requirements, we and any of our potential third-party manufacturers or suppliers will be obligated to expend time, money and effort in production,
record-keeping and quality control to ensure that our products meet applicable specifications and other requirements. QSR requirements also impose extensive testing, control and documentation requirements. State regulatory agencies and the
regulatory agencies of other countries have similar requirements. In addition, we will be required to comply with regulatory requirements of the FDA, state regulatory agencies and the regulatory agencies of other countries concerning the reporting
of adverse events and device malfunctions, corrections and removals (e.g., recalls), promotion and advertising and general prohibitions against the manufacture and distribution of adulterated and misbranded devices. Failure to comply with these
regulatory requirements could result in civil fines, product seizures, injunctions and/or criminal prosecution of responsible individuals and us. Any such actions would have a material adverse effect on our business, financial condition and results
of operations.
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FDA and comparable foreign regulatory authorities subject Afrezza and any approved drug product
to extensive and ongoing regulatory requirements concerning the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export and recordkeeping. These requirements include
submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMPs and GCP requirements for any clinical trials that we conduct post-approval. Later discovery of previously unknown
problems, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:
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restrictions on the marketing or manufacturing of our product candidates, withdrawal of the product from the market, or voluntary or mandatory product recalls;
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fines, warning letters or holds on clinical trials;
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refusal by the FDA to approve pending applications or supplements to approved applications filed by us or suspension or revocation of approvals;
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product seizure or detention, or refusal to permit the import or export of our product candidates; and
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injunctions or the imposition of civil or criminal penalties.
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The FDAs and other
regulatory authorities policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government
regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are
not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability.
Our suppliers are subject to FDA inspection.
We depend on suppliers for insulin and other materials that comprise Afrezza, including our Afrezza inhaler and cartridges. Each supplier must
comply with relevant regulatory requirements and is subject to inspection by the FDA. Although we conduct our own inspections and review and/or approve investigations of each supplier, there can be no assurance that the FDA, upon inspection, would
find that the supplier substantially complies with the QSR or cGMP requirements, where applicable. If we or any potential third-party manufacturer or supplier fails to comply with these requirements or comparable requirements in foreign countries,
regulatory authorities may subject us to regulatory action, including criminal prosecutions, fines and suspension of the manufacture of our products.
If we are required to find a new or additional supplier of insulin, we will be required to evaluate the new suppliers ability to provide
insulin that meets regulatory requirements, including cGMP requirements as well as our specifications and quality requirements, which would require significant time and expense and could delay the manufacturing and commercialization of Afrezza.
Reports of side effects or safety concerns in related technology fields or in other companies clinical studies could delay or prevent us from
obtaining regulatory approval for our product candidates or negatively impact public perception of Afrezza or any other products we may develop.
If other pharmaceutical companies announce that they observed frequent adverse events in their studies involving insulin therapies, we may be
subject to class warnings in the label for Afrezza. In addition, the public perception of Afrezza might be adversely affected, which could harm our business, financial condition and results of operations and cause the market price of our common
stock and other securities to decline, even if the concern relates to another companys products or product candidates.
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There are also a number of clinical studies being conducted by other pharmaceutical companies
involving compounds similar to, or potentially competitive with, our product candidates. Adverse results reported by these other companies in their clinical studies could delay or prevent us from obtaining regulatory approval or negatively impact
public perception of our product candidates, which could harm our business, financial condition and results of operations and cause the market price of our common stock and other securities to decline.
RISKS RELATED TO INTELLECTUAL PROPERTY
If we are
unable to protect our proprietary rights, we may not be able to compete effectively, or operate profitably.
Our commercial success
depends, in large part, on our ability to obtain and maintain intellectual property protection for our technology. Our ability to do so will depend on, among other things, complex legal and factual questions, and it should be noted that the
standards regarding intellectual property rights in our fields are still evolving. We attempt to protect our proprietary technology through a combination of patents, trade secrets and confidentiality agreements. We own a number of domestic and
international patents, have a number of domestic and international patent applications pending and have licenses to additional patents. We cannot assure you that our patents and licenses will successfully preclude others from using our technologies,
and we could incur substantial costs in seeking enforcement of our proprietary rights against infringement. Even if issued, the patents may not give us an advantage over competitors with alternative technologies.
Moreover, the term of a patent is limited and, as a result, the patents protecting our products expire at various dates. For example, some
patents providing protection for Afrezza inhalation powder have terms extending into 2020, 2026, 2028, 2029, and 2030. In addition, patents providing protection for our inhaler and cartridges have terms extending into 2023, 2031 and 2032, and we
have method of treatment claims that extend into 2026, 2029, 2030 and 2031. As and when these different patents expire, Afrezza could become subject to increased competition. As a consequence, we may not be able to recover our development costs.
An issued patent is presumed valid unless it is declared otherwise by a court of competent jurisdiction. However, the issuance of a
patent is not conclusive as to its validity or enforceability and it is uncertain how much protection, if any, will be afforded by our patents. A third party may challenge the validity or enforceability of a patent after its issuance by various
proceedings such as oppositions in foreign jurisdictions, or post grant proceedings, including, oppositions,
re-examinations
or other review in the United States. In some instances we may seek
re-examination
or reissuance of our own patents. If we attempt to enforce our patents, they may be challenged in court where they could be held invalid, unenforceable, or have their breadth narrowed to an extent
that would destroy their value.
Changes in either the patent laws or interpretation of the patent laws in the United States and other
countries may diminish the value of our patents or narrow the scope of our patent protection. The laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Publications of discoveries in the scientific
literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. We therefore cannot be certain that we or
our licensors were the first to make the invention claimed in our owned and licensed patents or pending applications, or that we or our licensor were the first to file for patent protection of such inventions. Assuming the other requirements for
patentability are met, in the United States prior to March 15, 2013, the first to make the claimed invention is entitled to the patent, while outside the United States, the first to file a patent application is entitled to the patent. After
March 15, 2013, under the Leahy-Smith America Invents Act (AIA), or the Leahy-Smith Act, enacted on September 16, 2011, the United States moved to a first inventor to file system. The Leahy-Smith Act also includes a number of
significant changes that affect the way patent applications will be prosecuted and may also affect patent litigation. The full effects of these changes are currently unclear. In general, the Leahy-Smith Act and its implementation could increase the
uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.
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Moreover, patent law continues to evolve. Several further changes to patent law are before
Congress. The United States Supreme Court has exhibited an increased interest in patent law and several of its recent decisions have tended to narrow the scope of patentable subject matter related to medical products and methods. These and recent
decisions of lower courts and guidelines issued by the USPTO call into question the patentability of biological inventions that had previously been considered patentable. While none of this has had an immediately apparent impact on our core
technology and patents, the full and ultimate effect of these developments is not yet known. We also rely on unpatented technology, trade secrets,
know-how
and confidentiality agreements. We require our
officers, employees, consultants and advisors to execute proprietary information and invention and assignment agreements upon commencement of their relationships with us. These agreements provide that all inventions developed by the individual on
behalf of us must be assigned to us and that the individual will cooperate with us in connection with securing patent protection on the invention if we wish to pursue such protection. We also execute confidentiality agreements with outside
collaborators. There can be no assurance, however, that our inventions and assignment agreements and our confidentiality agreements will provide meaningful protection for our inventions, trade secrets,
know-how
or other proprietary information in the event of unauthorized use or disclosure of such information. If any trade secret,
know-how
or other technology not
protected by a patent were to be disclosed to or independently developed by a competitor, our business, results of operations and financial condition could be adversely affected.
If we become involved in lawsuits to protect or enforce our patents or the patents of our collaborators or licensors, we would be required to devote
substantial time and resources to prosecute or defend such proceedings.
Competitors may infringe our patents or the patents of our
collaborators or licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours
is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover its technology. A court may also decide to award us a royalty from an infringing party instead of
issuing an injunction against the infringing activity. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications
at risk of not issuing.
Interference proceedings brought by the USPTO, may be necessary to determine the priority of inventions with
respect to our
pre-AIA
patent applications or those of our collaborators or licensors. Additionally, the Leahy-Smith Act has greatly expanded the options for post-grant review of patents that can be brought by
third parties. In particular Inter Partes Review (IPR), available against any issued United States patent (pre - and
post-AIA),
has resulted in a higher rate of claim invalidation, due in part to
the much reduced opportunity to repair claims by amendment as compared to
re-examination,
as well as the lower standard of proof used at the USPTO as compared to the federal courts. With the passage of time an
increasing number of patents related to successful pharmaceutical products are being subjected to IPR. Moreover, the filing of IPR petitions has been used by short-sellers as a tool to help drive down stock prices. We may not prevail in any
litigation, post-grant review, or interference proceedings in which we are involved and, even if we are successful, these proceedings may result in substantial costs and be a distraction to our management. Further, we may not be able, alone or with
our collaborators and licensors, to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that
some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other
interim proceedings or developments. If securities analysts or investors perceive these results to be negative, the market price of our common stock and other securities may decline.
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If our technologies conflict with the proprietary rights of others, we may incur substantial costs as a
result of litigation or other proceedings and we could face substantial monetary damages and be precluded from commercializing our products, which would materially harm our business and financial condition.
Biotechnology patents are numerous and may, at times, conflict with one another. As a result, it is not always clear to industry participants,
including us, which patents cover the multitude of biotechnology product types. Ultimately, the courts must determine the scope of coverage afforded by a patent and the courts do not always arrive at uniform conclusions.
A patent owner may claim that we are making, using, selling or offering for sale an invention covered by the owners patents and may go
to court to stop us from engaging in such activities. Such litigation is not uncommon in our industry.
Patent lawsuits can be expensive
and would consume time and other resources. There is a risk that a court would decide that we are infringing a third partys patents and would order us to stop the activities covered by the patents, including the commercialization of our
products. In addition, there is a risk that we would have to pay the other party damages for having violated the other partys patents (which damages may be increased, as well as attorneys fees ordered paid, if infringement is found to be
willful), or that we will be required to obtain a license from the other party in order to continue to commercialize the affected products, or to design our products in a manner that does not infringe a valid patent. We may not prevail in any legal
action, and a required license under the patent may not be available on acceptable terms or at all, requiring cessation of activities that were found to infringe a valid patent. We also may not be able to develop a
non-infringing
product design on commercially reasonable terms, or at all.
Moreover, certain
components of Afrezza may be manufactured outside the United States and imported into the United States. As such, third parties could file complaints under 19 U.S.C. Section 337(a)(1)(B) (a 337 action) with the International Trade
Commission (the ITC). A 337 action can be expensive and would consume time and other resources. There is a risk that the ITC would decide that we are infringing a third partys patents and either enjoin us from importing the
infringing products or parts thereof into the United States or set a bond in an amount that the ITC considers would offset our competitive advantage from the continued importation during the statutory review period. The bond could be up to 100% of
the value of the patented products. We may not prevail in any legal action, and a required license under the patent may not be available on acceptable terms, or at all, resulting in a permanent injunction preventing any further importation of the
infringing products or parts thereof into the United States. We also may not be able to develop a
non-infringing
product design on commercially reasonable terms, or at all.
Although we own a number of domestic and foreign patents and patent applications relating to Afrezza, we have identified certain third-party
patents having claims that may trigger an allegation of infringement in connection with the commercial manufacture and sale of Afrezza. If a court were to determine that Afrezza was infringing any of these patent rights, we would have to establish
with the court that these patents are invalid or unenforceable in order to avoid legal liability for infringement of these patents. However, proving patent invalidity or unenforceability can be difficult because issued patents are presumed valid.
Therefore, in the event that we are unable to prevail in a
non-infringement
or invalidity action we will have to either acquire the third-party patents outright or seek a royalty-bearing license.
Royalty-bearing licenses effectively increase production costs and therefore may materially affect product profitability. Furthermore, should the patent holder refuse to either assign or license us the infringed patents, it may be necessary to cease
manufacturing the product entirely and/or design around the patents, if possible. In either event, our business, financial condition and results of operations would be harmed and our profitability could be materially and adversely impacted.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that
some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public
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announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, the market price of our
common stock and other securities may decline.
In addition, patent litigation may divert the attention of key personnel and we may not
have sufficient resources to bring these actions to a successful conclusion. At the same time, some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater
resources. An adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our products or result in substantial monetary damages, which would adversely
affect our business, financial condition and results of operations and cause the market price of our common stock and other securities to decline.
We may not obtain trademark registrations for our potential trade names.
We have not selected trade names for some of our product candidates in our pipeline; therefore, we have not filed trademark registrations for
such potential trade names for our product candidates, nor can we assure that we will be granted registration of any potential trade names for which we do file. No assurance can be given that any of our trademarks will be registered in the United
States or elsewhere, or once registered that, prior to our being able to enter a particular market, they will not be cancelled for
non-use.
Nor can we give assurances, that the use of any of our trademarks
will confer a competitive advantage in the marketplace.
Furthermore, even if we are successful in our trademark registrations, the FDA
has its own process for drug nomenclature and its own views concerning appropriate proprietary names. It also has the power, even after granting market approval, to request a company to reconsider the name for a product because of evidence of
confusion in the marketplace. We cannot assure you that the FDA or any other regulatory authority will approve of any of our trademarks or will not request reconsideration of one of our trademarks at some time in the future.
RISKS RELATED TO OUR COMMON STOCK
We may not be
able to generate sufficient cash to service all of our indebtedness. We may be forced to take other actions to satisfy our obligations under our indebtedness or we may experience a financial failure.
Our ability to make scheduled payments on or to refinance our debt obligations will depend on our financial and operating performance, which is
subject to the commercial success of Afrezza, the extent to which we are able to successfully develop and commercialize our Technosphere drug delivery platform and any other product candidates that we develop, prevailing economic and competitive
conditions, and to certain financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and
interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure
or refinance our indebtedness. We cannot assure you that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled debt service obligations or that these actions would be permitted
under the terms of our future debt agreements. In the absence of sufficient operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and
other obligations. We may not be able to consummate those dispositions or obtain sufficient proceeds from those dispositions to meet our debt service and other obligations when due.
Future sales of shares of our common stock in the public market, or the perception that such sales may occur, may depress our stock price and adversely
impact the market price of our common stock and other securities.
If our existing stockholders or their distributees sell
substantial amounts of our common stock in the public market, the market price of our common stock could decrease significantly. The perception in the public market
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that our existing stockholders might sell shares of common stock could also depress the market price of our common stock and the market price of our other securities. Any such sales of our common
stock in the public market may affect the price of our common stock or the market price of our other securities.
In the future, we may
sell additional shares of our common stock to raise capital. In addition, a substantial number of shares of our common stock is reserved for: issuance upon the exercise of stock options, warrant exercises, and the vesting of restricted stock unit
awards; the purchase of shares of common stock under our employee stock purchase program; and the issuance of shares upon exchange or conversion of the 2018 notes or any other convertible debt we may issue. We cannot predict the size of future
issuances or the effect, if any, that they may have on the market price for our common stock. The issuance or sale of substantial amounts of common stock, or the perception that such issuances or sales may occur, could adversely affect the market
price of our common stock and other securities.
As a result of the death of Alfred E. Mann, our founder and former largest
stockholder, the stock that he previously controlled is currently controlled by a trust, and we cannot assure you of the manner in which the trustees will manage the holdings.
At February 1, 2017, the estate of Alfred E. Mann beneficially owned approximately 23.7% of our outstanding shares of capital stock, including
shares held in the Alfred E. Mann Living Trust and The Mann Group LLC (collectively, the Mann Affiliated Entities).
Mr. Mann passed away on February 25, 2016. All of the shares beneficially owned by Mr. Mann in his individual capacity, the
Alfred E. Mann Living Trust and The Mann Group LLC are controlled by the Alfred E. Mann Living Trust. The trustees of the Alfred E. Mann Living Trust are Mr. Manns wife and two other trustees. The trustees have the power to sell the
shares or deal with them as an owner. Relatives, other individuals and charities may receive bequests of shares under the trust. The residuary beneficiary of the trust is the Alfred E. Mann Family Foundation, a charitable organization under section
501(c)(3) of the Internal Revenue Code that is a private foundation under section 509 of the Code. The same three trustees control the Alfred E. Mann Family Foundation. The Alfred E. Mann Family Foundation will have the power to sell the shares or
deal with them as an owner.
We have been informed by the trustees for the Mann Affiliated Entities that the trustees may seek to dispose
of some or all of the shares beneficially owned by the Mann Affiliated Entities, pursuant to distributions to trust beneficiaries, one or more trading plans under Rule 10b5-1 of the Exchange Act or otherwise. Any sales or other disposition of our
common stock by the Mann Affiliated Entities, or the perception that such sales may occur, including the entry into any such trading plans, could have a material adverse effect on the trading price of our common stock and could make it more
difficult for us to raise capital through the sale of our common stock or securities convertible into or exercisable for our common stock, which could have a material adverse effect on our business and financial condition.
Our stock price is volatile and may affect the market price of our common stock and other securities.
Since January 1, 2014, our closing stock price as reported on The NASDAQ Global Market has ranged from $1.89 to $54.80 (giving retroactive
effect to our recently completed
1-for-5
reverse stock split). The trading price of our common stock is likely to continue to be volatile. The stock market, particularly
in recent years, has experienced significant volatility particularly with respect to pharmaceutical and biotechnology stocks, and this trend may continue.
The volatility of pharmaceutical and biotechnology stocks often does not relate to the operating performance of the companies represented by
the stock. Our business and the market price of our common stock may be influenced by a large variety of factors, including:
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the progress of our recent commercial launch of Afrezza in the United States and other events or circumstances that we or others estimate will impact the future commercial success of Afrezza;
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our ability to obtain marketing approval for Afrezza outside of the United States and to find collaboration partners for the commercialization of Afrezza in foreign jurisdictions;
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our future estimates of Afrezza sales, prescriptions or other operating metrics;
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our ability to successful commercialize our Technosphere drug delivery platform;
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the progress of preclinical and clinical studies of our product candidates and of post-approval studies of Afrezza required by the FDA;
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the results of preclinical and clinical studies of our product candidates;
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general economic, political or stock market conditions;
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legislative developments;
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announcements by us, our collaborators, or our competitors concerning clinical study results, acquisitions, strategic alliances, technological innovations, newly approved commercial products, product discontinuations,
or other developments;
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the availability of critical materials used in developing and manufacturing Afrezza or other product candidates;
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developments or disputes concerning our relationship with any of our current or future collaborators or third party manufacturers;
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developments or disputes concerning our patents or proprietary rights;
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the expense and time associated with, and the extent of our ultimate success in, securing regulatory approvals;
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announcements by us concerning our financial condition or operating performance;
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changes in securities analysts estimates of our financial condition or operating performance;
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general market conditions and fluctuations for emerging growth and pharmaceutical market sectors;
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sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;
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our ability, or the perception of investors of our ability, to continue to meet all applicable requirements for continued listing of our common stock on The NASDAQ Stock Market, and the possible delisting of our common
stock if we are unable to do so;
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the status of any legal proceedings or regulatory matters against or involving us or any of our executive officers and directors; and
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discussion of Afrezza, our other product candidates, competitors products, or our stock price by the financial and scientific press, the healthcare community and online investor communities such as chat rooms. In
particular, it may be difficult to verify statements about us and our investigational products that appear on interactive websites that permit users to generate content anonymously or under a pseudonym and statements attributed to company officials
may, in fact, have originated elsewhere.
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Any of these risks, as well as other factors, could cause the market value of our
common stock and other securities to decline.
If we fail to continue to meet all applicable listing requirements, our common stock may be delisted
from The NASDAQ Global Market, which could have an adverse impact on the liquidity and market price of our common stock.
Our
common stock is currently listed on The NASDAQ Global Market, which has qualitative and quantitative listing criteria. If we are unable to meet any of the NASDAQ listing requirements in the future, such
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as the corporate governance requirements, the minimum closing bid price requirement, or the minimum market value of listed securities requirement, NASDAQ could determine to delist our common
stock. A delisting of our common stock could adversely affect the market liquidity of our common stock, decrease the market price of our common stock, adversely affect our ability to obtain financing for the continuation of our operations and result
in the loss of confidence in our company. On September 14, 2016, we received notice from the Listing Qualifications Department of the NASDAQ Stock Market indicating that, for the previous 30 consecutive business days, the bid price for our
common stock closed below the minimum $1.00 per share required for continued inclusion on The NASDAQ Global Market. The notification letter stated that we would be afforded 180 calendar days, or until March 13, 2017, to regain compliance with
the minimum bid price requirement. In order to regain compliance, shares of our common stock must maintain a minimum bid closing price of at least $1.00 per share for a minimum of 10 consecutive business days. On March 1, 2017, our board of
directors and stockholders approved the Charter Amendment to effect the Reverse Stock Split. On March 3, 2017, our common stock began trading on The NASDAQ Global Market on a split-adjusted basis at a ratio of 1 share for 5. As of the date of
this filing, the shares of our common stock have maintained a minimum bid closing price of at least $1.00 per share for 10 consecutive business days. Accordingly, we expect to receive a notice from the Listing Qualifications Department of the NASDAQ
Stock Market indicating that we have regained compliance with the minimum closing bid price requirement. Despite effecting the Reverse Stock Split, there can be no assurance that the market price per share of our common stock will remain in excess
of the $1.00 minimum closing bid price requirement in the future. The continuing effect of the Reverse Stock Split on the market price of our common stock cannot be predicted with any certainty, and the history of similar stock split combinations
for companies in like circumstances is varied.
If other biotechnology and biopharmaceutical companies or the securities markets in general
encounter problems, the market price of our common stock and other securities could be adversely affected.
Public companies in
general, including companies listed on The NASDAQ Global Market, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. There has been particular volatility
in the market prices of securities of biotechnology and other life sciences companies, and the market prices of these companies have often fluctuated because of problems or successes in a given market segment or because investor interest has shifted
to other segments. These broad market and industry factors may cause the market price of our common stock and other securities to decline, regardless of our operating performance. We have no control over this volatility and can only focus our
efforts on our own operations, and even these may be affected due to the state of the capital markets.
In the past, following periods of
large price declines in the public market price of a companys securities, securities class action litigation has often been initiated against that company. Litigation of this type could result in substantial costs and diversion of
managements attention and resources, which would hurt our business. Any adverse determination in litigation could also subject us to significant liabilities.
The future sale of our common stock, the exchange or conversion of our 2018 notes into common stock or the exercise of our warrants for common stock
could negatively affect the market price of our common stock and other securities.
As of March 10, 2017, we had 95,776,246
shares of common stock outstanding. Substantially all of these shares are available for public sale, subject in some cases to volume and other limitations or delivery of a prospectus. If our common stockholders sell substantial amounts of common
stock in the public market, or the market perceives that such sales may occur, the market price of our common stock and other securities may decline. Likewise the issuance of additional shares of our common stock upon the exchange or conversion of
some or all of our 2018 notes or upon the exercise of outstanding warrants, could adversely affect the market price of our common stock and other securities. In addition, the existence of these notes and warrants may encourage short selling of our
common stock by market participants, which could adversely affect the market price of our common stock and other securities.
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In addition, we will need to raise substantial additional capital in the future to fund our
operations. If we raise additional funds by issuing equity securities or additional convertible debt, the market price of our common stock and other securities may decline.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders,
more difficult and may prevent attempts by our stockholders to replace or remove our current management.
We are incorporated in
Delaware. Certain anti-takeover provisions under Delaware law and in our certificate of incorporation and amended and restated bylaws, as currently in effect, may make a change of control of our company more difficult, even if a change in control
would be beneficial to our stockholders or the holders of our other securities. Our anti-takeover provisions include provisions such as a prohibition on stockholder actions by written consent, the authority of our board of directors to issue
preferred stock without stockholder approval, and supermajority voting requirements for specified actions. In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits
stockholders owning 15% or more of our outstanding voting stock from merging or combining with us in certain circumstances. These provisions may delay or prevent an acquisition of us, even if the acquisition may be considered beneficial by some of
our stockholders. In addition, they may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible
for appointing the members of our management.
Because we do not expect to pay dividends in the foreseeable future, you must rely on stock
appreciation for any return on any investment in our common stock.
We have paid no cash dividends on any of our capital stock to
date, and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future, and payment of cash dividends, if any, will
also depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Pursuant to the Facility Agreement, we are subject to contractual restrictions on the
payment of dividends. There is no guarantee that our common stock will appreciate or maintain its current price. You could lose the entire value of any investment in our common stock.
We have a limited number of unreserved shares available for future issuance, which may impair our ability to conduct future financing and other
transactions.
Our amended and restated certificate of incorporation, as amended on March 1, 2017 to effect the Reverse Stock
Split, currently authorizes us to issue up to 140,000,000 shares of common stock and 10,000,000 shares of preferred stock. As of March 10, 2017, we had a total of 44,223,754 shares of common stock that were authorized but unissued, and we have
currently reserved a significant number of these shares for future issuance pursuant to outstanding equity awards, outstanding warrants, our equity plans and our 2018 notes. As a result, our ability to issue shares of common stock other than
pursuant to existing arrangements will be limited until such time, if ever, that we are able to amend our amended and restated certificate of incorporation to further increase our authorized shares of common stock or shares currently reserved for
issuance otherwise become available (for example, due to the termination of the underlying agreement to issue the shares).
If we are
unable to enter into new arrangements to issue shares of our common stock or securities convertible or exercisable into shares of our common stock, our ability to complete equity-based financings or other transactions that involve the potential
issuance of our common stock or securities convertible or exercisable into our common stock, will be limited. In lieu of issuing common stock or securities convertible into our common stock in any future equity financing transactions, we may need to
issue some or all of our authorized but unissued shares of preferred stock, which would likely have superior rights, preferences and privileges to those of our common stock, or we may need to issue debt that is not convertible into shares of our
common stock, which
45
may require us to grant security interests in our assets and property and/or impose covenants upon us that restrict our business. If we are unable to issue additional shares of common stock or
securities convertible or exercisable into our common stock, our ability to enter into strategic transactions such as acquisitions of companies or technologies, may also be limited. If we propose to amend our amended and restated certificate of
incorporation to increase our authorized shares of common stock, such a proposal would require the approval by the holders of a majority of our outstanding shares of common stock, and we cannot assure you that such a proposal would be adopted. If we
are unable to complete financing, strategic or other transactions due to our inability to issue additional shares of common stock or securities convertible or exercisable into our common stock, our financial condition and business prospects may be
materially harmed.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
In 2001, we acquired a facility in Danbury, Connecticut that included two buildings comprising
approximately 190,000 square feet encompassing 17.5 acres. In September 2008, we completed the construction of approximately 140,000 square feet of new manufacturing space providing us with two buildings totaling approximately 328,000 square feet,
housing our research and development, administrative and manufacturing functions for Afrezza. We believe the Connecticut facility will have sufficient space to satisfy commercial demand for Afrezza.
As of December 31, 2016, we owned approximately 142,000 square feet of laboratory, office and warehouse space in Valencia, California. On
February 17, 2017, we sold certain parcels of real estate in Valencia, California and certain related improvements, personal property, equipment, supplies and fixtures, including the aforementioned space, to Rexford Industrial Realty, L.P. for
$17.3 million.
Our obligations under the Facility Agreement and the Milestone Agreement are secured by certain mortgages on our
facility in Danbury, Connecticut.
We also lease approximately 12,500 square feet of office space in Valencia, California pursuant to a
lease that expires in April 2017. The facility contains our principal executive offices.
Item 3.
Legal
Proceedings
Following the public announcement of Sanofis election to terminate the Sanofi License Agreement and the
subsequent decline in our stock price, several complaints were filed in the U.S. District Court for the Central District of California (the District Court) against MannKind and certain of our officers and directors on behalf of certain
purchasers of our common stock, which were consolidated into a single action. The amended complaint alleged that MannKind and certain of our officers and directors violated federal securities laws by making materially false and misleading statements
regarding the prospects for Afrezza, thereby artificially inflating the price of MannKinds common stock. We and the named defendants brought a motion to dismiss the class action, which the District Court granted in August 2016 without leave to
amend the complaint. The lead plaintiff appealed that decision to the Ninth Circuit Court of Appeals. On March 2, 2017, the lead plaintiff filed a voluntary motion to dismiss his appeal, which the Court of Appeals granted on March 9, 2017.
Following the public announcement of Sanofis election to terminate the Sanofi License Agreement and the subsequent decline in our
stock price, two motions were submitted to the district court at Tel Aviv, Economic Department for the certification of a class action against MannKind and certain of our officers and directors. In general, the complaints allege that MannKind and
certain of our officers and directors violated Israeli and U.S. securities laws by making materially false and misleading statements regarding the prospects for Afrezza,
46
thereby artificially inflating the price of its common stock. The plaintiffs are seeking monetary damages. In November 2016, the district court dismissed one of the actions without prejudice. In
the remaining action, a hearing is scheduled for May 2017 to determine whether Israeli or U.S. law is applicable before the case can be certified as a class action. We will vigorously defend against the claims advanced.
We are also subject to legal proceedings and claims which arise in the ordinary course of our business. As of the date hereof, we believe that
the final disposition of such matters will not have a material adverse effect on our financial position, results of operations or cash flows. We maintain liability insurance coverage to protect our assets from losses arising out of or involving
activities associated with ongoing and normal business operations.
Item 4.
Mine Safety Disclosures
Not applicable.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Business
MannKind Corporation and subsidiaries (the Company) is a biopharmaceutical company focused on the discovery
and development of therapeutic products for diseases such as diabetes. The Companys only approved product, Afrezza, (insulin human [rDNA origin]) inhalation powder, is a rapid-acting inhaled insulin that was approved by the U.S. Food and Drug
Administration (the FDA) on June 27, 2014 to improve glycemic control in adult patients with diabetes.
Basis of
Presentation
On August 11, 2014, the Company entered into 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 Afrezza global commercial, regulatory and development activities for Afrezza.
On January 4, 2016, the Company received written 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, which was when the Company assumed responsibility for worldwide development and commercialization of Afrezza. Under terms of a 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 in late July 2016. The Company began recognizing commercial product sales
revenue when MannKind-branded Afrezza was dispensed from pharmacies to patients in August 2016.
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 (the Sanofi Loan Facility) 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, which includes $0.5 million of previously uncharged costs pursuant to the Sanofi License
Agreement. 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 and Sanofi also
agreed to a general release of potential claims against each other.
During their initial transition of the commercial responsibilities
from Sanofi, the Company utilized a contract sales organization to promote Afrezza while the Company focused its internal resources on establishing a channel strategy, entering into distribution agreements and developing
co-pay
assistance programs, a voucher program, data agreements and payor relationships. In early 2017, the Company recruited their own sales force, which included some of the sales reps that previously were employed
by the contract sales organization. The Company intend to continue the commercialization of Afrezza in the United States through their own commercial organization. The Companys current strategy for the future commercialization of Afrezza
outside of the United States, subject to receipt of the necessary foreign regulatory approvals, is to seek and establish regional partnerships in foreign jurisdictions where there are appropriate commercial opportunities.
It has been costly to develop our therapeutic product, conduct clinical studies, and market and sell Afrezza. As of and for the year ended
December 31, 2016, the Company has reported an accumulated deficit of $2.7 billion and has reported negative cash flow from operations for each year since inception, except for 2014, when the Company received the $150.0 million
upfront payment from Sanofi.
At December 31, 2016, the Companys capital resources consisted of cash and cash equivalents of
$22.9 million. The Company expects to continue to incur significant expenditures to support commercial
87
manufacturing and sales and marketing of Afrezza and the development of other product candidates. The facility agreement (the Facility Agreement) with Deerfield Private Design Fund
II, L.P. (Deerfield Private Design Fund) and Deerfield Private Design International II, L.P. (collectively, Deerfield) and the First Amendment to Facility Agreement and Registration Rights Agreement (the First Amendment) that
resulted in additional sales of an additional tranche of notes (the Tranche B notes) (see Note 7 Borrowings) requires the Company to maintain at least $25.0 million, which can be comprised of cash and cash equivalents and
available borrowings under the loan arrangement, dated as of October 2, 2007, between the Company and The Mann Group LLC (as amended, restated, or otherwise modified as of the date hereof, the Mann Group Loan Arrangement), as of the
last day of each fiscal quarter.
Additional funding sources that are, or in certain circumstances may be available to the Company,
include approximately $30.1 million principal amount of available borrowings under The Mann Group Loan Arrangement. A portion of these available borrowings may be used to capitalize accrued interest into principal, upon mutual agreement of the
parties, as it becomes due and payable under The Mann Group Loan Arrangement (see Note 6 Related-party Arrangements). The Company cannot provide assurances that its plans will not change or that changed circumstances will not result in the
depletion of its capital resources more rapidly than it currently anticipates. The Company will need to raise additional capital, whether through a sale of equity or debt securities, a strategic business collaboration with a pharmaceutical company,
the establishment of other funding facilities, licensing arrangements, asset sales or other means, in order to continue the commercialization of Afrezza and development of other product candidates and to support its other ongoing activities. The
Company cannot provide assurances that such additional capital will be available on acceptable terms or at all. These factors raise substantial doubt about the Companys ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
On September 14, 2016, the Company received notice
from the Listing Qualifications Department of the NASDAQ Stock Market indicating that, for the previous 30 consecutive business days, the bid price for the common stock closed below the minimum $1.00 per share required for continued inclusion on The
NASDAQ Global Market. The notification letter stated that the Company would be afforded 180 calendar days, or until March 13, 2017, to regain compliance with the minimum bid price requirement. In order to regain compliance, shares of the
Companys common stock must maintain a minimum bid closing price of at least $1.00 per share for a minimum of 10 consecutive business days.
Reverse Stock Split
On March 1, 2017, following stockholder approval, the Companys board of directors approved a
reverse stock split ratio of
1-for-5. On
March 1, 2017, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment of
the Companys Amended and Restated Certificate of Incorporation to effect the
1-for-5
reverse stock split of the Companys outstanding common stock and to
reduce the authorized number of shares of the Companys common stock from 700,000,000 to 140,000,000 shares. The Companys common stock began trading on The NASDAQ Global Market on a split-adjusted basis when the market opened on
March 3, 2017. See Note 20 Subsequent Events for further information. As a result, all common stock share amounts included in these consolidated financial statements have been retroactively reduced by a factor of five, and all
common stock per share amounts have been increased by a factor of five, with the exception of the Companys common stock par value.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. Intercompany balances and transactions have been eliminated.
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.
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2. Summary of Significant Accounting Policies
Financial Statement Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America (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. 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. The more
significant estimates reflected in these accompanying consolidated financial statements include revenue recognition, assessing long-lived assets for impairment, accrued expenses, including clinical study expenses, inventory recoverability, valuation
of the facility financing obligation, loss on purchase commitment, warrant liability, milestone rights, stock-based compensation and the determination of the provision for income taxes and corresponding deferred tax assets and liabilities and any
valuation allowance recorded against net deferred tax assets.
Reclassifications
Certain amounts from previous periods have
been reclassified to conform to the 2016 presentation. Specifically, accrued interest note payable to principal stockholder has been reclassified from the previously reported classification of other liabilities in the accompanying
consolidated balance sheets. Additionally, the remaining balance from the previously reported classification of other liabilities is now identified as milestone rights liability, and is disclosed as a separate line item on the consolidated
statements of cash flows. Additionally, on the consolidated statement of operations, product manufacturing has been renamed to cost of goods sold. The Company also reclassified (gain) loss on foreign currency translation from the previously reported
classification of product manufacturing in the accompanying consolidated statements of operations. Additionally, certain balances from prepaid expenses and other current assets were reclassed to (gain) loss on foreign currency translation in the
consolidated statements of cash flows.
Revenue Recognition
Revenue is recognized when the four basic criteria of revenue
recognition are met: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. When the accounting requirements
for revenue recognition are not met, the Company defers the recognition of revenue by recording deferred revenue on the consolidated balance sheets until such time that all criteria are met. To date, the Company has had revenue from collaborations,
commercial sales of Afrezza, and from sales of bulk insulin, which are described more fully below.
Revenue Recognition
Net Revenue Collaborations
The Company enters into collaborations under which we must perform certain obligations and we receive periodic payments. We evaluate the collaborations under the multiple element revenue
recognition accounting guidance. Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered elements have stand-alone value to the customer. When
deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price of each deliverable and the appropriate revenue recognition principles are applied to each unit.
The assessment of multiple element arrangements requires judgment in order to determine the appropriate units of accounting and
the points in time that, or periods over which, revenue should be recognized. The terms of and the accounting for the Companys collaborations are described more fully in Note 8 Collaboration Arrangements.
Revenue Recognition Net Revenue Commercial Product Sales
Between July 1, 2016 and
December 15, 2016, the Company sold Afrezza to Integrated Commercialization Solutions Direct (ICS) and title and risk of loss transferred to ICS upon shipment. After December 15, 2016, ICS became a third party logistics provider and
stopped taking title and risk of loss upon shipment of Afrezza to ICS. The Company sells Afrezza in the United States to wholesale pharmaceutical distributors through ICS, and ultimately to retail pharmacies, which are collectively referred to as
customers.
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The Company provides the right of return to ICS (through December 15, 2016)
and its wholesale distributors and, through them, to its retail pharmacy customers for unopened product for a period beginning six months prior to and ending twelve months after its expiration date. Once the product has been prescribed and dispensed
to the patient, any right of return ceases to exist.
Given the Companys limited sales history for Afrezza, the
Company cannot reliably estimate expected returns of the product at the time of shipment into the distribution channel. Accordingly, the Company defers recognition of revenue on Afrezza product shipments until the right of return no longer exists,
which occurs at the earlier of the time Afrezza is dispensed from pharmacies to patients or expiration of the right of return. The Company recognizes revenue based on Afrezza patient prescriptions dispensed as estimated by syndicated data provided
by a third party. The Company also analyzes 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.
For the year ended December 31, 2016, net revenue from commercial product sales consisted of $1.9 million of net
sales of Afrezza dispensed to patients. As of December 31, 2016, the Company recorded $3.4 million in deferred revenue on its consolidated balance sheet, of which $1.6 million (net of estimated
gross-to-net
adjustments) represents product shipped to the Companys third-party logistics provider and wholesale distributors, but not yet dispensed to patients. The difference represents deferred
revenue from bulk insulin sales, which is described more fully under the heading
Revenue Recognition Revenue Bulk Insulin Sales
below.
Gross-to-net
Adjustments
Estimated
gross-to-net
adjustments for Afrezza include wholesaler distribution fees, prompt pay discounts, estimated rebates and patient discount and
co-pay
assistance programs, and are based on estimated amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of the Companys agreements with its customers and
the levels of inventory within the distribution and retail channels that may result in future rebates or discounts taken. In certain cases, such as patient support programs, the Company recognizes the cost of patient discounts as a reduction of
revenue based on estimated utilization. If actual future results vary, the Company may need to adjust these estimates, which could have an effect on product revenue in the period of adjustment. The Company records product sales deductions in the
consolidated statements of operations at the time product revenue is recognized. At December 31, 2016, year to date total
gross-to-net
adjustments were
approximately $0.8 million, which represents 30% of gross revenue from product sales.
Wholesaler Distribution Fees
The Company pays distribution fees to certain wholesale distributors based on contractually determined rates. The Company accrues the distribution fees on shipment to the respective wholesale distributors and recognizes the distribution
fees as a reduction of revenue in the same period the related revenue is recognized.
Prompt Pay Discounts
The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for prompt payment. The Company accounts for cash discounts by reducing accounts receivable by the prompt pay discount amount and recognizes the
discount as a reduction of revenue in the same period the related revenue is recognized.
Rebates
The Company
participates in federal and state government-managed Medicare and Medicaid rebate programs and intends to pursue participation in certain other qualifying federal and state government programs whereby discounts and rebates are provided to
participating federal and state government entities. Rebates provided through these other qualifying programs are included in the Medicaid and Medicare rebate accrual. The Company accounts for these rebates by establishing an accrual equal to the
estimate of rebate claims attributable to a sale and determines its estimate of the rebates accrual based on historical payor data provided by a third-party vendor along with additional data including a forecasted participation rate for Medicare and
Medicaid. From that data, as well as input received from MannKinds commercial team, an estimated participation rate for Medicare and Medicaid is determined and applied at the mandated rate for those sales. Any new information regarding changes
in the programs regulations and guidelines or any changes in the Companys
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government price reporting calculations that would impact the amount of the rebates will also be taken into account in determining or modifying the appropriate reserve. The time period between
the date the product is sold into the channel and the date such rebates are paid ranges from approximately six to nine months. As such, continuous monitoring of these estimates are performed on a periodic basis and if necessary, adjusted to reflect
new facts and circumstances. Rebates are recognized as a reduction of revenue in the period the related revenue is recognized.
Patient Discount and
Co-Pay
Assistance Programs
The Company offers
discount card programs to patients for Afrezza in which patients receive discounts on their prescriptions or a reduction in their
co-pay
amounts that are reimbursed by the Company. The Company estimates the
total amount that will be redeemed based on levels of inventory in the distribution and retail channels and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized.
Product Returns
The Company does not provide a reserve for product returns of sales of Afrezza due to its revenue
recognition policy of deferring recognition of revenue on product shipments of Afrezza until the right of return no longer exists.
Revenue Recognition Revenue Bulk Insulin Sales
In 2016, revenue from bulk insulin sales was recognized after
delivery and customer acceptance of the bulk insulin. When the accounting requirements for revenue recognition of bulk insulin sales are not met, the Company defers recognition of revenue by recording deferred revenue on the balance sheet until such
time that all criteria are met.
Deferred revenue includes $1.8 million received from a sale of surplus bulk insulin to a third party
that was delivered prior to, but accepted after, December 31, 2016. No deferred cost was recognized related to this sale because the inventory was written off on December 31, 2015.
Deferred Costs from Collaboration
Deferred costs from collaboration represents the costs of product manufactured and sold to
Sanofi, as well as certain direct costs associated with a firm purchase commitment entered into in connection with the collaboration with Sanofi. During the third quarter of 2016, the costs related to the Sanofi product sales were recognized as
costs of revenue collaboration in the consolidated statements of operations, as related revenue was recognized at that time.
Deferred Costs from Commercial Product Sales
Deferred costs from commercial product sales represents the cost of product
(including labor, overhead and costs to ship to third party logistics) shipped to ICS and wholesale distributors, but not yet dispensed by pharmacies to patients.
Cost of Goods Sold
Cost of goods sold includes the costs related to Afrezza product dispensed by pharmacies to patients as well
as under-absorbed labor and overhead and inventory write-offs, which are recorded as expenses in the period in which they are incurred, rather than as a portion of the inventory cost.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original or remaining maturities of 90 days
or less at the time of purchase, that are readily convertible into cash to be cash equivalents. As of December 31, 2016 and 2015, cash equivalents were comprised of money market accounts with maturities less than 90 days from the date of
purchase.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist of cash and cash equivalents. Cash and cash equivalents are held in high credit quality institutions. Cash equivalents consist of interest-bearing money market accounts, which are regularly monitored by management.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and are not
interest bearing. The Company maintains an allowance for doubtful accounts for
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estimated losses resulting from the inability of its customers to make required payments. The Company makes ongoing assumptions relating to the collectability of its accounts receivable in its
calculation of the allowance for doubtful accounts. As of December 31, 2016 and 2015, there was no allowance for doubtful accounts.
Inventories
Inventories are stated at the lower of cost or net realizable value. The Company determines the cost of inventory
using the
first-in,
first-out,
or FIFO, method. The Company capitalizes inventory costs associated with the Companys products based on managements judgment
that future economic benefits are expected to be realized; otherwise, such costs are expensed as cost of goods sold. The Company periodically analyzes its inventory levels to identify inventory that may expire or has a cost basis in excess of its
estimated realizable value, and writes down such inventories as appropriate. In addition, the Companys products are subject to strict quality control and monitoring which the Company performs throughout the manufacturing process. If certain
batches or units of product no longer meet quality specifications or become obsolete due to expiration, the Company will record a charge to write down such unmarketable inventory to its estimated net realizable value.
The Company analyzed its inventory levels to identify inventory that may expire or has a cost basis in excess of its estimated realizable
value. The Company performed an assessment of projected sales and evaluated the lower of cost or net realizable value and the potential excess inventory on hand at December 31, 2016 and 2015. As a result of these assessments, the Company
recorded a $0.2 million charge at December 31, 2016 to
write-off
inventory that will expire prior to sale. At December 31, 2015, the Company recorded a charge of $39.3 million to record the
inventory raw materials on hand at the lower of cost or net realizable value, inventory expiry and
write-off
other inventory related assets.
State Research and Development Credit Exchange Receivable
The State of Connecticut provides certain companies with the
opportunity to exchange certain research and development income tax credit carryforwards for cash in exchange for foregoing the carryforward of the research and development credits. The program provides for an exchange of research and development
income tax credits for cash equal to 65% of the value of corporation tax credit available for exchange. Estimated amounts receivable under the program are recorded as a reduction of research and development expenses. These amounts are included in
prepaid expenses and other current assets on the consolidated balance sheets.
Prepaid Expenses and Other Current Assets
As
of December 31, 2016 and 2015, prepaid expenses and other current assets primarily consist of prepaid expenses for goods and services to be received and includes a certificate of deposit for $350,000 as collateral as required by an agreement
with the bank.
Sale of intellectual property
On July 18, 2014, the Company entered into an assignment agreement with a
third party whereby the third party acquired all proprietary rights, technology and
know-how
that related to a small molecule inhibitor compound and all
pre-clinical
data and results related thereto. Under the terms of the assignment agreement, the Company received total consideration of $9.3 million and accrued $1.4 million in expense for a net amount of $7.9 million recorded as other income. In
2015, the Company recorded other income of $1.4 million related to the relief of the $1.4 million accrual for expenses associated with the sale of intellectual property related to oncology in 2014, which was subsequently resolved without
payment.
Assets Held for Sale
The Company classifies long-lived assets anticipated to be sold within one year as held for
sale at the lower of their carrying value or fair value less estimated selling costs.
Property and Equipment
Property and
equipment are depreciated using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the term of the lease or the service lives of the improvements, whichever is shorter.
Maintenance and repairs are expensed as incurred. Assets under construction are not depreciated until placed into service.
Impairment
of Long-Lived Assets
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
Assets are considered to be impaired if
the carrying value may not be recoverable.
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If the Company believes an asset to be impaired, the impairment recognized is the amount by which
the carrying value of the asset exceeds the fair value of the asset. Fair value is determined using the market, income or cost approaches as appropriate for the asset. Any write-downs are treated as permanent reductions in the carrying amount of the
asset and an operating loss would be recognized.
The Company recorded an asset impairment of $1.3 million and $140.4 million for the
years ended December 31, 2016 and 2015, respectively. No asset impairment was recognized during the year ended December 31, 2014 (see Note 4 Property and Equipment and Note 20
Subsequent Events).
Recognized Loss on Purchase Commitments
The Company assesses whether losses on long term purchase commitments should be accrued.
Losses that are expected to arise from firm,
non-cancellable,
commitments for the future purchases of inventory items are recognized unless recoverable. The recognized loss on purchase commitments is reduced
as inventory items are purchased. Changes in estimates are recorded in the relevant period in (gain) loss on purchase commitments.
During
the year ended December 31, 2015, the Company recorded a loss on purchase commitments amounting to $116.2 million offset by $50 million expected to be recovered from Sanofi, primarily due to a long term purchase commitment for insulin
raw materials. During the year ended December 31, 2016, the balance was adjusted for the recovery received from Sanofi, current purchases on the contracts and a reduction in the recognized loss related to amendments to purchase contracts. No
new contracts were identified in 2016 requiring a new loss on purchase commitment accrual.
Milestone Rights Liability
On
July 1, 2013, in conjunction with the execution of the Facility Agreement, the Company issued Milestone Rights to Deerfield whereby the Company agreed to provide Deerfield with
pre-specified
Milestone
Payments upon the achievement of 13 specific Milestone Events related to the commercial release and future cumulative net sales of Afrezza. The Company analyzed the Milestone Rights and determined that the agreement does not meet the definition of a
freestanding derivative. Since the Company has not elected to apply the fair value option to the Milestone Rights Purchase Agreement, the Company recorded the Milestone Rights at their estimated initial fair value and accounted for the Milestone
Rights as a liability.
The initial fair value estimate of the Milestone Rights was calculated using the income approach in which the cash
flows associated with the specified contractual payments were adjusted for both the expected timing and the probability of achieving the milestones and discounted to present value using a selected market discount rate. The expected timing and
probability of achieving the milestones was developed with consideration given to both internal data, such as progress made to date and assessment of criteria required for achievement, and external data, such as market research studies. The discount
rate was selected based on an estimation of required rate of returns for similar investment opportunities using available market data. The Milestone Rights liability will be remeasured as the specified milestone events are achieved. Specifically, as
each milestone event is achieved, the portion of the initially recorded Milestone Rights liability that pertains to the milestone event being achieved, will be remeasured to the amount of the specified related milestone payment. The resulting change
in the balance of the Milestone Rights liability due to remeasurement will be recorded in the Companys consolidated statements of operations as interest expense. Furthermore, the Milestone Rights liability will be reduced upon the settlement
of each milestone payment. As a result, each milestone payment would be effectively allocated between a reduction of the recorded Milestone Rights liability and an expense representing a return on a portion of the Milestone Rights liability paid to
the investor for the achievement of the related milestone event (see Note 7 Borrowings). As of December 31, 2016, the remaining liability balance is $8.9 million.
Fair Value of Financial Instruments
The Company utilizes fair value measurement guidance to value its financial instruments. The
guidance includes a definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and expands disclosures about the use of fair value measurements. The
valuation techniques utilized are based upon observable and
93
unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the
following fair value hierarchy:
Level 1 Quoted prices for identical instruments in active markets.
Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets
that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level
3 Significant inputs to the valuation model are unobservable.
Income Taxes
The provisions for federal,
foreign, state and local income taxes are calculated on
pre-tax
income based on current tax law and include the cumulative effect of any changes in tax rates from those used previously in determining deferred
tax assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be recovered or settled. A valuation
allowance is recorded to reduce net deferred income tax assets to amounts that are more likely than not to be realized.
Income tax
positions are considered for uncertainty. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position.
Therefore, no liabilities for uncertain income tax positions have been recorded. If a tax position does not meet the minimum statutory threshold to avoid payment of penalties, the Company recognizes an expense for the amount of the penalty in the
period the tax position is claimed in the tax return of the Company. The Company recognizes interest accrued related to unrecognized tax benefits in income tax expense, if any. Penalties, if probable and reasonably estimable, are recognized as a
component of income tax expense.
Significant management judgment is involved in determining the provision for income taxes, deferred tax
assets, deferred tax liabilities, and any valuation allowance recorded against deferred tax assets. Due to uncertainties related to the realization of the Companys deferred tax assets as a result of its history of operating losses, a full
valuation allowance has been established against the total deferred tax asset balance. The valuation allowance is based on managements estimates of taxable income by jurisdiction in which the Company operates and the period over which deferred
tax assets will be recoverable. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods, a change in the valuation allowance may be needed.
Contingencies
The Company records a loss contingency for a liability when it is both probable that a liability has been incurred
and the amount of the loss can be reasonably estimated. These accruals represent managements best estimate of probable loss. Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably
possible that the amount of a loss will exceed the recorded provision. On a quarterly basis, the Company reviews the status of each significant matter and assesses its potential financial exposure. Significant judgment is required in both the
determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information
becomes available, the Company reassesses the potential liability related to pending claims and litigation and may revise its estimates.
Stock-Based Compensation
As of December 31, 2016, the Company had three active stock-based compensation plans, which are
described more fully in Note 12 Stock Award Plans. The Company accounts for all share-based payments to employees, including grants of stock awards and the compensatory elements of the employee stock purchase plan. All share-based payments to
employees, including grants of stock options, restricted stock units, performance-based awards 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
94
grant date. The Company uses the Black-Scholes option valuation model to estimate the grant date fair value of employee stock options and the compensatory elements of employee stock purchase
plans. Option valuation models require the input of assumptions, including the expected life of the stock-based awards, the estimated stock price volatility, the risk-free interest rate and the expected dividend yield. The expected volatility
assumption is based on an assessment of the historical volatility, with consideration of implied volatility, derived from an analysis of historical trade activity. Restricted stock units are valued based on the market price on the grant date. The
Company evaluates stock awards with performance conditions as to the probability that the performance conditions will be met and estimates the date at which the performance conditions will be met in order to properly recognize stock-based
compensation expense over the requisite service period.
Warrants
The Company has issued warrants to purchase shares of its
common stock. The Company accounts for its warrants as either equity or liabilities based upon the characteristics and provisions of each instrument and evaluation of sufficient authorized shares available to satisfy the obligations. Warrants
classified as derivative liabilities are recorded on the Companys consolidated balance sheets at their fair value on the date of issuance and are revalued at each subsequent balance sheet date, with fair value changes recognized in the
consolidated statements of operations. The Company estimates the fair value of its derivative liabilities using a third party valuation analysis that utilizes a Monte Carlo pricing valuation model and assumptions that are based on the individual
characteristics of the warrants or instruments on the valuation date, as well as expected volatility, expected life, yield and a risk-free interest rate. The expected volatility assumption is primarily based on an assessment of the historical
volatility, with consideration of implied volatility, derived from an analysis of historical trade activity. Warrants classified as equity are recorded within additional paid in capital at the issuance date and are not
re-measured
in subsequent periods, unless the underlying assumptions change to trigger liability accounting.
Comprehensive Income (Loss)
Other comprehensive income (loss) requires that all components of comprehensive income (loss) to be
reported in the financial statements in the period in which they are recognized. Other comprehensive income (loss) includes certain changes in stockholders equity that are excluded from net income (loss). Specifically, the Company includes
unrealized gains and losses on foreign exchange translation in accumulated other comprehensive loss on the consolidated balance sheets.
Research and Development Expenses
Research and development expenses consist of costs associated with the clinical trials of the
Companys product candidates, manufacturing supplies and other development materials, compensation and other expenses for research and development personnel, costs for consultants and related contract research, facility costs, and depreciation.
Research and development costs, which are net of any tax credit exchange recognized for the Connecticut state research and development credit exchange program, are expensed as incurred. The Company began commercial manufacturing in the latter part
of the fourth quarter of 2014. Commercial manufacturing costs incurred in the fourth quarter of 2014 were included in research and development expense and were immaterial for the year ended December 31, 2014.
State Research and Development Credit Exchange Receivable
The State of Connecticut provides certain companies with the
opportunity to exchange certain research and development income tax credit carryforwards for cash in exchange for forgoing the carryforward of the research and development income tax credits. The program provides for an exchange of research and
development income tax credits for cash equal to 65% of the value of corporation tax credit available for exchange. Estimated amounts receivable under the program are recorded as a reduction of research and development expenses. During the years
ended December 31, 2016, 2015 and 2014, research and development expenses were offset by research and development tax credits of $246,000, $743,000 and $816,000, respectively.
Clinical Trial Expenses
Clinical trial expenses, which are reflected in research and development expenses in the accompanying
consolidated statements of operations, result from obligations under contracts with vendors, consultants and clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations
which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to the Company under
95
such contracts. The appropriate level of trial expenses are reflected in the Companys consolidated financial statements by matching period expenses with period services and efforts
expended. These expenses are recorded according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial. Clinical trial accrual estimates are determined through discussions with internal
clinical personnel and outside service providers as to the progress or state of completion of trials, or the services completed. Service provider status is then compared to the contractually obligated fee to be paid for such services. During the
course of a clinical trial, the Company may adjust the rate of clinical expense recognized if actual results differ from managements estimates.
Interest Expense
Interest costs are expensed as incurred, except to the extent such interest is related to construction in
progress, in which case interest is capitalized. Interest cost capitalized for the years ended December 31, 2015 and 2014 was $0.1 million and $0.8 million, respectively. There were no capitalized interest costs for the year ended
December 31, 2016.
Net Income (Loss) Per Share of Common Stock
Basic net income (loss) per share excludes dilution for
potentially dilutive securities and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share reflects the potential dilution under the treasury
method that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For periods where the Company has presented a net loss, potentially dilutive securities are excluded from the computation
of diluted net loss per share as they would be antidilutive.
Recently Issued Accounting Standards
From time to time, new
accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the
impact of recently issued standards that are not yet effective will not have a material impact on the Companys consolidated financial position or results of operations upon adoption.
In May 2014, the FASB issued Accounting Standards Update (ASU)
No. 2014-09,
Revenue from
Contracts with Customers (Topic 606)
, which requires an entity to recognize the amount of revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those
goods or services. This new guidance supersedes previous revenue recognition requirements, along with most existing industry-specific guidance. In August 2015, the FASB issued ASU
2015-14,
Revenue from
Contracts with Customers (Topic 606): Deferral of the Effective Date
, which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard
as of the original effective date. In 2016 the FASB has issued additional ASUs which clarify certain aspects of the new guidance.
The
Company will adopt the new guidance for the year beginning January 1, 2018. The Company has the option to either apply the new guidance retrospectively for all prior reporting periods presented (full retrospective) or retrospectively with the
cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective). The Company currently anticipates it will apply the new guidance using the modified retrospective approach with the
cumulative effect of initial application recognized as of January 1, 2018. The Company plans to continue analyzing the potential impacts of the application throughout 2017 and, depending on factors that may impact the results, could elect to
apply the new guidance on a full retrospective basis.
Currently, for commercial sales of Afrezza, the Company has limited sales and
returns history, and as such, is unable to reliably estimate expected returns of the product at the time of shipment into the distribution channel. Accordingly, the Company defers recognition of revenue on Afrezza product shipments until the right
of return no longer exists, which occurs at the earlier of the time Afrezza is dispensed from pharmacies to patients or expiration of the right of return. The Company recognizes revenue based on Afrezza patient prescriptions dispensed, a
sell-through model, as estimated by syndicated data provided by a third party. The Company also analyzes 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.
96
Upon adoption of the new guidance, the Company expects that it will move from its current
sell-through model to a
sell-to
model for revenue related to commercial sales of Afrezza and will record revenue at the time title and risk of loss passes to its distributors (generally at shipment or delivery
to the distributors) along with an estimate of potential returns as variable consideration. The Company also anticipates that its ability to estimate potential returns will improve with an additional 12 months of sales history that it will have
obtained by January 1, 2018.
In addition, the Company has historically entered into collaborative agreements with third-parties
under which periodic payments have been received. Revenue recognition for certain payments received has been deferred until the price is fixed and determinable. Further, revenue for certain payments to be received in the future has been prohibited
from recognition until received. The Company expects that some of these amounts will be considered variable consideration and may be able to be recognized earlier under the new guidance.
The Company has begun its evaluation of the impact of adoption and plans to continue its evaluation throughout 2017. The financial impact upon
adoption will be dependent upon a number of factors including; the amount of revenue that has been deferred under the sell-through model for Afrezza, the amount of the revenue deferred under collaborative arrangements and the Companys
estimates of variable consideration at the date of adoption. At this time, the Company has not completed its evaluation of the inputs, assumptions and methodologies that will be used to recognize revenue related to variable consideration under the
new guidance.
In July 2015, the FASB issued ASU
No. 2015-11,
Inventory (Topic 330):
Simplifying the Measurement of Inventory.
Topic 330 currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal
profit margin. The amendments indicate that after adoption an entity should measure inventory within the scope of this ASU at the lower of cost or net realizable value. The amendments are effective for fiscal years beginning after December 15,
2016, including interim periods within those fiscal years. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of ASU
No. 2015-11
will have no impact on the Companys annual consolidated financial statements because the Company currently measures inventory at the lower of cost or net realizable value.
In August 2014, the FASB issued ASU
No. 2014-15,
Presentation of Financial Statements
Going Concern
, which requires management of an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entitys ability to continue as a going concern within one
year after the date that the financial statements are issued or available to be issued. This update was effective for annual periods ending after December 15, 2016. The adoption of this standard did not have a material impact on its
consolidated financial statements.
In January 2016, the FASB issued ASU
No. 2016-01,
Financial Instruments Overall (Subtopic
825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities.
The update is intended to improve the recognition and measurement of
financial instruments. The update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the impact the adoption of ASU
2016-01
will have on its consolidated financial statements.
In February 2016, the FASB issued ASU
No. 2016-02,
Leases (Topic 842)
. The new standard requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of
financial position a liability to make lease payments (the lease liability) and a
right-of-use
asset representing its right to use the underlying asset for the lease
term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to
recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The new standard will be effective on January 1, 2019. The Company is evaluating the impact the adoption of ASU
No. 2016-02
will have on its consolidated financial statements.
97
In March 2016, the FASB issued ASU
No. 2016-09,
Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The new standard involves several aspects of the accounting for share-based payment transactions, including the income tax
consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. For public business entities, the amendments in this standard are effective for annual periods beginning after
December 15, 2016, and interim periods within those annual periods. The Company has evaluated the effect that this guidance will have on its consolidated financial statements and related disclosures and has determined it will not result in a
material impact.
In August 2016, the FASB issued ASU
No. 2016-15,
Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash Payments
. The new standard seeks to reduce diversity in practice related to the classification of certain transactions in the statement of cash flows. For public business entities,
the amendments in this standard are effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The amendments should be applied using a retrospective transition method to each period
presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is evaluating the impact the adoption
of ASU
No. 2016-15
will have on its consolidated financial statements.
In November 2016, the
FASB issued ASU
No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash.
This ASU requires that the reconciliation of the
beginning-of-period
and
end-of-period
amounts shown in the statement of cash flows
include cash and restricted cash equivalents. ASU
2016-08
is effective for fiscal years beginning after December 15, 2018, including interim periods within those periods, using a retrospective transition
method to each period presented. The Company has evaluated the effect that this guidance will have on its consolidated financial statements and related disclosures and has determined it will not result in a material impact.
3. Inventories
Inventories consist of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials
|
|
$
|
|
|
|
$
|
|
|
Work-in-process
|
|
|
2,120
|
|
|
|
|
|
Finished goods
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Inventory
|
|
$
|
2,331
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015, the Company recorded a write-off of all of its inventory. There were no raw materials
as of December 31, 2016 because purchases of raw materials in 2016 were recorded at zero value because they had been accrued at December 31, 2015 through the loss on purchase commitment. Work-in-process and finished goods as of December 31, 2016
include conversion costs but not materials cost because the materials used in its production were previously written off.
98
4. Property and Equipment
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
(Years)
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
Land
|
|
|
|
|
|
$
|
875
|
|
|
$
|
3,435
|
|
Buildings
|
|
|
39-40
|
|
|
|
17,389
|
|
|
|
21,590
|
|
Building improvements
|
|
|
5-40
|
|
|
|
34,957
|
|
|
|
60,584
|
|
Machinery and equipment
|
|
|
3-15
|
|
|
|
62,992
|
|
|
|
68,434
|
|
Furniture, fixtures and office equipment
|
|
|
5-10
|
|
|
|
3,556
|
|
|
|
4,114
|
|
Computer equipment and software
|
|
|
3
|
|
|
|
8,531
|
|
|
|
9,519
|
|
Construction in progress
|
|
|
|
|
|
|
202
|
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,502
|
|
|
|
168,262
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
(99,575
|
)
|
|
|
(119,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
|
|
|
$
|
28,927
|
|
|
$
|
48,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property and equipment for the years ended December 31,
2016, 2015 and 2014, was $2.4 million, $11.0 million and $9.8 million, respectively.
The December 31, 2016 amounts do
not include the Valencia property because it is classified as held for sale as of that date.
In connection with the Companys
quarterly assessment of impairment indicators, the Company evaluated the continued lower than expected sales of Afrezza as reported by Sanofi throughout the fourth quarter of 2015, revised forecasts for sales of Afrezza provided by Sanofi in the
fourth quarter of 2015 and level of commercial production in the fourth quarter of 2015, as well as the uncertainty associated with Sanofis announcement during the fourth quarter of their intent to reorganize their diabetes business. These
factors indicated potentially significant changes in the timing and extent of cash flows, and the Company therefore determined that an impairment indicator existed in the fourth quarter of 2015 and recorded an impairment for the year ended
December 31, 2015. No such indications were identified in the current year ended December 31, 2016.
The Company identified two
primary asset groups to be evaluated for impairment: the Danbury manufacturing facility, which currently performs all the manufacturing of Afrezza, and the Valencia facility, which was previously the Companys corporate headquarters. The
Danbury manufacturing facility was the primary asset group that was impacted by the impairment indicators noted above but the Company also evaluated the Valencia facility for potential impairment given the circumstances and identified an impairment
charge of $1.8 million based on a valuation utilizing a combination of market, income and cost approaches. Within the Danbury manufacturing facility, the Company identified the machinery and equipment as the primary assets within the asset
group as they are associated with the production of Afrezza. As such, the Company performed the fixed asset impairment test and performed the first step to test for recoverability of the Danbury manufacturing facility by utilizing two undiscounted
cash flow projections and applying a probability weighted average to those cash flow projections. The first undiscounted cash flow projection was developed under a scenario assuming Sanofi would continue to sell and market Afrezza as the termination
of the arrangement by Sanofi was not known as of the balance sheet date. The second undiscounted cash flow projection assumed Sanofi would terminate the Sanofi License Agreement and that the Company would manufacture, sell and market Afrezza
independently.
Based on the evaluation performed, the probabilities assigned to the two undiscounted cash flows were not significant to
the evaluation due to the projected negative cash flows over the estimation period, and it was determined that the probability weighted undiscounted cash flows were not sufficient to recover the carrying
99
value of the Danbury manufacturing facility. As such, the Company was required to determine the fair value of the Danbury manufacturing facility to recognize an impairment loss if the carrying
amount exceeds its fair value. The Company determined the fair value of the Danbury manufacturing facility by applying the highest and best use valuation concept and utilizing the market approach valuation technique to value the machinery and
equipment and a combination of the market approach and cost approach in valuing the land, buildings and building improvements. As a result of this assessment, the Company recorded, as of December 31, 2015, an impairment charge of
$138.6 million for the Danbury manufacturing facility.
The December 31, 2015 balances have been reclassified to the current
year presentation by allocating an impairment of $140.4 million, which was previously disclosed in total, to the individual asset groups. An additional impairment of $0.7 million was charged to the individual asset groups for the year
ended December 31, 2016, which is included in property and equipment impairment in the accompany consolidated statements of operations, additionally with a $0.6 million impairment charge related to assets held for sale.
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Salary and related expenses
|
|
$
|
3,814
|
|
|
$
|
2,634
|
|
Restructuring
|
|
|
1,376
|
|
|
|
3,028
|
|
Sales and marketing services
|
|
|
144
|
|
|
|
|
|
Professional fees
|
|
|
875
|
|
|
|
931
|
|
Discounts and allowances for commercial product sales
|
|
|
754
|
|
|
|
|
|
Accrued interest
|
|
|
619
|
|
|
|
615
|
|
Other
|
|
|
355
|
|
|
|
483
|
|
Construction in progress
|
|
|
|
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
7,937
|
|
|
$
|
7,929
|
|
|
|
|
|
|
|
|
|
|
6. Related-Party Arrangements
In October 2007, the Company entered into The Mann Group Loan Arrangement, which has been amended from time to time. On October 31, 2013,
the promissory note underlying The Mann Group Loan Arrangement was amended to, among other things, extend the maturity date of the loan to January 5, 2020, extend the date through which the Company can borrow under The Mann Group Loan
Arrangement to December 31, 2019, increase the aggregate borrowing amount under The Mann Group Loan Arrangement from $350.0 million to $370.0 million and provide that repayments or cancellations of principal under The Mann Group Loan
Arrangement will not be available for reborrowing.
As of December 31, 2016, the total principal amount outstanding under The Mann
Group Loan Arrangement was $49.5 million, and the amount available for future borrowings is $30.1 million. Interest, at a fixed rate of 5.84%, is due and payable quarterly in arrears on the first day of each calendar quarter for the
preceding quarter, or at such other time as the Company and The Mann Group mutually agree. All or any portion of accrued and unpaid interest that becomes due and payable may be
paid-in-kind
and capitalized as additional borrowings at any time upon mutual agreement of the parties, and has been classified as
non-current.
The Mann Group can require the Company to prepay up to $200.0 million in advances that have been outstanding for at least 12 months, less approximately $105.0 million aggregate principal
amount that has been cancelled in connection with two common stock purchase agreements. If The Mann Group exercises this right, the Company will have 90 days after The Mann Group provides written notice, or the number of days to maturity of the note
if less than 90 days, to prepay such advances. However, pursuant to a letter agreement entered into in August 2010, The Mann Group has agreed to not require the Company to prepay amounts outstanding under the amended and
100
restated promissory note if the prepayment would require the Company to use its working capital resources. In addition, The Mann Group entered into a subordination agreement with Deerfield
pursuant to which The Mann Group agreed with Deerfield not to demand or accept any payment under The Mann Group Loan Arrangement until the Companys payment obligations to Deerfield under the Facility Agreement have been satisfied in full.
Subject to the foregoing, in the event of a default under The Mann Group Loan Arrangement, all unpaid principal and interest either becomes immediately due and payable or may be accelerated at The Mann Group LLCs option, and the interest rate
will increase to the
one-year
LIBOR rate calculated on the date of the initial advance or in effect on the date of default, whichever is greater, plus 5% per annum. All borrowings under The Mann Group
Loan Arrangement are unsecured. The Mann Group Loan Arrangement contains no financial covenants.
As of December 31, 2016 and 2015,
the Company had accrued and unpaid interest related to the above note of $9.3 million and $6.4 million, respectively, and had $30.1 million of available borrowings. Interest expense on the Companys note payable to the
Companys principal stockholder for each of the years ended December 31, 2016, 2015 and 2014 was $2.9 million.
In May
2015, the Company entered into a sublease agreement with the Alfred Mann Foundation for Scientific Research (the Mann Foundation), a California
Not-For-Profit
Corporation. The lease is for approximately 12,500 square feet of office space in Valencia, California and expires in April 2017. The office space
contains the Companys principal executive offices. Lease payments to the Mann Foundation for the year ended December 31, 2016 and 2015 were $268,000 and $175,000, respectively. There were no lease payments to the Mann Foundation for the
year ended December 31, 2014.
In connection with certain meetings of the Companys board of directors and on other occasions
when the Companys business necessitated air travel for the Companys principal stockholder and other Company employees, the Company utilized the principal stockholders private aircraft, and the Company paid the charter company that
manages the aircraft on behalf of the Companys principal stockholder approximately $18,000 and $79,000 for the years ended December 31, 2015 and 2014, respectively, on the basis of the corresponding cost of commercial airfare. There were
no payments to the principal stockholder related to the usage of the aircraft during the year ended December 31, 2016.
The Company
has entered into indemnification agreements with each of its directors and executive officers, in addition to the indemnification provided for in its amended and restated certificate of incorporation and amended and restated bylaws (see Note 13
Commitments and Contingencies).
7. Borrowings
Borrowings consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Facility Financing Obligation (2019 Notes)
|
|
|
|
|
|
|
|
|
Principal amount
|
|
$
|
75,000
|
|
|
$
|
80,000
|
|
Unamortized debt discount
|
|
|
(3,661
|
)
|
|
|
(5,418
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
71,339
|
|
|
$
|
74,582
|
|
|
|
|
|
|
|
|
|
|
Senior Convertible Notes (2018 Notes)
|
|
|
|
|
|
|
|
|
Principal amount
|
|
$
|
27,690
|
|
|
$
|
27,690
|
|
Unamortized premium
|
|
|
426
|
|
|
|
660
|
|
Unaccreted debt issuance costs
|
|
|
(481
|
)
|
|
|
(737
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
27,635
|
|
|
$
|
27,613
|
|
|
|
|
|
|
|
|
|
|
Note payable to principal stockholder net carrying amount
|
|
$
|
49,521
|
|
|
$
|
49,521
|
|
|
|
|
|
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|
101
Facility Financing Obligation (2019 Notes)
As of December 31, 2016, there were
$55.0 million principal amount of 2019 notes and $20.0 million principal amount of Tranche B notes outstanding. As of December 31, 2015, there were $60.0 million principal amount of 2019 notes and $20.0 million principal
amount of Tranche B notes outstanding. The 2019 notes accrue interest at annual rate of 9.75% and the Tranche B notes accrue interest at an annual rate of 8.75%. Interest is paid quarterly in arrears on the last day of each March, June, September
and December. The Facility Financing Obligation principal repayment schedule is comprised of annual payments beginning on July 1, 2016 and ending December 9, 2019. Future principal payments for the years ended December 31, 2017, 2018
and 2019 are $20.0 million, $20.0 million and $35.0 million, respectively.
In conjunction with the Facility Agreement, the
Company entered into a Milestone Rights Agreement with Deerfield which requires the Company to make contingent payments to Deerfield, totaling up to $90.0 million, upon the Company achieving specified commercialization milestones. The Milestone
Rights were initially recorded as a short-term liability equal to $3.2 million included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets and a long-term liability equal to $13.1 million
included in other liabilities. During the first quarter of 2015, a milestone triggering event was achieved following the Companys product launch on February 3, 2015, which resulted in a $5.8 million incremental charge to interest
expense due to the increase in carrying value of the liability to the required $10.0 million payment made in February of 2015. During the year ended December 31, 2014, the first milestone triggering event was achieved following the
Companys entry into the Sanofi License Agreement, which resulted in a $1.9 million incremental charge to interest expense due to the increase in carrying value of the liability to the required $5.0 million payment, which was paid to
Deerfield pursuant to the terms of the Milestone Agreement. As of December 31, 2016 and 2015, the remaining liability balance of $8.9 million is classified as a long-term liability.
As of December 31, 2016, the unamortized debt discount and debt issuance costs were $3.7 million and $0.1 million,
respectively.
Accretion of debt issuance cost and debt discount in connection with the Deerfield financing during the years ended
December 31, 2016, 2015 and 2014 are as follows (in thousands):
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Accretion expense debt issuance cost
|
|
$
|
35
|
|
|
$
|
35
|
|
|
$
|
326
|
|
Accretion expense debt discount
|
|
$
|
1,722
|
|
|
$
|
1,553
|
|
|
$
|
7,550
|
|
The Facility Agreement includes customary representations, warranties and covenants, including, a restriction
on the incurrence of additional indebtedness, and a financial covenant which requires the Companys cash and cash equivalents, which includes available borrowings on the note payable to principal stockholder, on the last day of each fiscal
quarter to not be less than $25.0 million. As discussed in Note 1 Description of Business, the Company will need to raise additional capital to support its current operating plans. Due to the uncertainties related to maintaining
sufficient resources to comply with the aforementioned covenant, the 2019 notes and the Tranche B notes have been classified as current liabilities in the accompanying consolidated balance sheets as of December 31, 2016 and 2015. In the event
of
non-compliance,
Deerfield may declare all or any portion of the 2019 notes and/or Tranche B notes to be immediately due and payable.
Milestone Rights
The Milestone Agreement includes customary representations and warranties and covenants by the Company,
including restrictions on transfers of intellectual property related to Afrezza. The Milestone Rights are subject to acceleration in the event the Company transfers its intellectual property related to Afrezza in violation of the terms of the
Milestone Agreement. The Company has initially recorded the Milestone Rights at their estimated fair value See Note 2 Summary of Significant Accounting Policies under Milestone Rights Liability.
In determining the fair value of the Milestone Rights, the 13 individual milestone payments were adjusted for both (i) the expected
timing and (ii) the probability of achieving the milestones, and then discounted to
102
present value using a discount rate of 14.5%. Once the initial valuation of each specified milestone payment was determined, the individual milestone payments were then aggregated to arrive at a
total fair value of $18.4 million. The discount rate was based on the estimated cost of equity which was derived using the capital asset pricing model. In addition, a 5% risk premium was added to the computation of the cost of equity to adjust
for
non-systemic
risk factors, such as the Companys lack of product diversification and history of financial losses, which were not captured in other model inputs.
Security Agreement
In connection with the Facility Agreement, the Company and its subsidiary, MannKind LLC, entered into a
Guaranty and Security Agreement (the Security Agreement) with Deerfield and Horizon Sante FLML SARL (collectively, the Purchasers), pursuant to which the Company and MannKind LLC each granted the Purchasers a security
interest in substantially all of their respective assets, including respective intellectual property, accounts, receivables, equipment, general intangibles, inventory and investment property, and all of the proceeds and products of the foregoing.
The Security Agreement includes customary covenants by the Company and MannKind LLC, remedies of the Purchasers and representations and warranties by the Company and MannKind LLC. The security interests granted by the Company and MannKind LLC will
terminate upon repayment of the 2019 notes and Tranche B notes, if applicable, in full. The Companys obligations under the Facility Agreement and the Milestone Agreement are also secured by the mortgage on the Companys facilities in
Danbury, Connecticut, which has a carrying value of $28.7 million.
Embedded Derivatives
The Company identified and
evaluated a number of embedded features in the notes issued under the Facility Agreement to determine if they represented embedded derivatives that are required to be separated from the notes and accounted for as freestanding instruments. In 2014,
the Company analyzed the Tranche B notes and identified embedded derivatives which required separate accounting. However, all of the embedded derivatives were determined to have a
de minimis
value at December 31, 2016 and 2015.
Conversion Option
During 2014, Deerfield elected to convert a total of $93.5 million of principal, which consisted of
$20.0 million, $33.5 million, and $40.0 million of Tranche 1 notes, Tranche 2 notes, and Tranche 3 notes, respectively, into an aggregate 3,464,616 shares of common stock. In conjunction with the conversion by Deerfield, we recorded
an aggregate expense of $6.4 million for the difference between the principal amount of the notes converted and their carrying amount (which included unamortized discount and debt issuance costs) which consisted of $1.2 million,
$3.0 million, and $2.2 million related to the Tranche 1 notes, Tranche 2 notes, and Tranche 3 notes, respectively. Further, upon Deerfield converting $40.0 million of Tranche 3 notes and $20.0 million of Tranche 1 notes,
Deerfield has reached the conversion limits (i.e., Applicable Limits) with respect to the Facility Agreement and therefore, no additional amount of the 2019 notes is convertible.
Issuance of new 5.75% Convertible Senior Subordinated Exchange Notes Due 2018 in Exchange for 2015 Notes
On July 28, 2015,
the Company entered into privately-negotiated exchange agreements (the Note Exchange Agreements) with a select holder of the Companys 5.75% Senior Convertible Notes due 2015 (the 2015 notes), pursuant to which the
Company agreed to issue $27.7 million aggregate principal amount of new 5.75% Convertible Senior Subordinated Exchange Notes due 2018 (the 2018 notes) to such holders in exchange for the delivery to the Company of the same principal
amount of 2015 notes. The 2018 notes were issued at the closing of the exchange on August 10, 2015. The Company analyzed this exchange and concluded that the exchange represents an extinguishment of the 2015 notes and a new issuance of 2018
notes and recorded such notes at fair value, which resulted in a premium of $0.7 million.
The 2018 notes are the Companys
general, unsecured, senior obligations, except that the 2018 notes were subordinated to the Sanofi Loan facility prior to the extinguishment of the facility on November 9, 2016. The 2018 notes rank equally in right of payment with the
Companys other unsecured senior debt. The 2018 notes bear interest at the rate of 5.75% per year on the principal amount, payable semiannually in arrears in cash on February 15 and August 15 of each year, beginning
February 15, 2016, with interest accruing from August 15, 2015. The 2018 notes mature on August 15, 2018. Accrued interest related to these notes is recorded in accrued expenses and other current liabilities on the accompanying
consolidated balance sheets.
103
The 2018 notes are convertible, at the option of the holder, at any time on or prior to the close
of business on the business day immediately preceding the stated maturity date, into shares of the Companys common stock at an initial conversion rate of 29 shares per $1,000 principal amount of the 2018 notes, which is equal to a conversion
price of approximately $34.00 per share, the same conversion price as that of the 2015 notes on the date of exchange. The conversion rate is subject to adjustment under certain circumstances described in an indenture governing the 2018 notes dated
August 10, 2015 with Wells Fargo, National Association, including in connection with a make-whole fundamental change.
If certain
fundamental changes occur, the Company will be obligated to pay a fundamental change make-whole premium on any 2018 notes converted in connection with such fundamental change by increasing the conversion rate on such 2018 notes. In such instances,
the amount of the fundamental change make-whole premium will be based on the Companys common stock price and the effective date of the applicable fundamental change. If the Company undergoes certain fundamental changes, except in certain
circumstances, each holder of 2018 notes will have the option to require the Company to repurchase all or any portion of that holders 2018 notes. The fundamental change repurchase price will be 100% of the principal amount of the 2018 notes to
be repurchased plus accrued and unpaid interest, if any.
On or after the date that is one year following the original issue date of the
2018 notes, the Company will have the right to redeem for cash all or part of the 2018 notes if the last reported sale price of its common stock exceeds 130% of the conversion price then in effect for 20 or more trading days during the 30
consecutive trading day period ending on the trading day immediately prior to the date of the redemption notice. The redemption price will equal the sum of 100% of the principal amount of the 2018 notes to be redeemed, plus accrued and unpaid
interest. Under the terms of the 2018 Note Indenture, the conversion option can be
net-share
settled and the maximum number of shares that could be required to be delivered under the indenture, including the
make-whole shares, is fixed and less than the number of authorized and unissued shares less the maximum number of shares that could be required to be delivered during the term of the 2018 notes under existing commitments. Applying the Companys
sequencing policy, the Company performed an analysis at the time of the offering of the 2018 notes and each reporting date since and has concluded that the number of available authorized shares at the time of the offering and each subsequent
reporting date was sufficient to deliver the number of shares that could be required to be delivered during the term of the 2018 notes under existing commitments.
The 2018 notes provide that upon an acceleration of certain indebtedness, including the 9.75% Senior Convertible Notes due in 2019 (the
2019 notes) and the 8.75% Senior Convertible Notes due in 2019 (the Tranche B notes) issued to Deerfield pursuant to the Facility Agreement, the holders may elect to accelerate the Companys repayment obligations under
the notes if such acceleration is not cured, waived, rescinded or annulled. There can be no assurance that the holders would not choose to exercise these rights in the event such events were to occur.
The Company incurred approximately $0.8 million in issuance costs, which are recorded as an offset to the 2018 notes in the accompanying
consolidated balance sheets. These costs are being accreted to interest expense using the effective interest method over the term of the 2018 notes.
Accretion of debt issuance expense in connection with the 2018 notes during the years ended December 31, 2016 and 2015 was $257,000 and
$93,000, respectively. Amortization of the 2018 notes premium during the years ended December 31, 2016 and 2015 was $234,000 and $86,000, respectively.
Issuance of Common Stock in Exchange for the 2015 Notes
On July 28, 2015, the Company entered into separate,
privately-negotiated exchange agreements (the
Stock-for-Note
Exchange Agreements) with certain holders of the 2015 notes pursuant to which the Company agreed
to issue shares of its common stock to such holders in exchange for the delivery to the Company of up to $56.9 million aggregate principal amount of the 2015 notes.
104
Pursuant to the
Stock-for-Note
Exchange Agreements, the parties agreed to price the exchange transactions over a 10 trading day period spanning from July 29, 2015 to and including
August 11, 2015. Between July 28, 2015 and August 10, 2015, the Company issued an aggregate of 380,000 shares of common stock to such holders in exchange for such holders delivery to the Company of $8.0 million aggregate
principal amount of the 2015 notes, resulting in a weighted-average exchange price of $110.00 per share.
Issuance of New 5.75%
Convertible Senior Subordinated Exchange Notes Due 2015 in Exchange for the 2015 Notes
On August 14, 2015, the Company exchanged $32.1 million aggregate principal amount of newly issued, 5.75% Convertible Senior Subordinated
Exchange Notes due 2015 (the Exchange Notes) for the same principal amount of the Companys previously outstanding 2015 notes. The Exchange Notes, payable at maturity on September 30, 2015, were convertible, at the option of
each holder thereof, at any time on or prior to the close of business on the business day immediately preceding the stated maturity date. The holders of the Exchange Notes did not elect to convert any of the outstanding principal amount of the
Exchange Notes into shares of the Companys common stock. As a result, on September 30, 2015, the Company paid $32.1 million to settle the Exchange Notes.
Settlement of 2015 Notes and Exchange Notes
On August 17, 2015, the Company paid $32.2 million to settle the remaining
2015 notes. As of September 30, 2015, all 2015 notes, including the Exchange Notes, have been settled resulting in a total loss on extinguishment of debt equal to $1.0 million. The loss on extinguishment of debt resulted from the
write-off
of debt discount and debt issuance costs associated with the 2015 notes and Exchange Notes and the difference between the principal amounts being exchanged for shares of the Companys common stock,
pursuant to the various
Stock-for-Note
Exchange Agreements, and the fair market value of the Companys common stock issued in exchange for such reduction in
principal.
Accretion of debt issuance costs in connection with the 2015 notes during the years ended December 31, 2015 and 2014 was
$0.6 million and $0.9 million, respectively.
Refer to Note 6 Related-Party Arrangements for information regarding the
Note payable to principal stockholder.
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 MannKinds 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:
|
|
|
Nonrefundable milestone payments upon the completion of certain technology transfer activities and the achievement of specified sales targets.
|
|
|
|
Royalties upon Receptors and its sublicensees sale of the product.
|
|
|
|
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
105
option are separable from the other elements of the agreement and represented payments to offset costs incurred. Therefore, those payments reduced the Companys 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 Companys 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 Sanofis 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 Companys 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 1990s, 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 Companys knowledge, any third-party contract manufacturing organization currently
possesses the capability of manufacturing Afrezza.
In order for revenue to be recognized, the sellers 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
106
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 Companys share of net losses under the Sanofi License Agreement.
The obligations of the Company under the Sanofi Loan Facility were guaranteed by the Companys 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 Companys assets that secure the Companys 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 Companys 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 Companys 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 Companys
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
107
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 Companys expectation that amounts
associated with purchases of insulin were recoverable (see Note 2 Summary of Significant Accounting Policies
Inventories
).
9.
Fair Value of Financial Instruments
The carrying amounts reported in the accompanying consolidated financial statements for cash,
accounts receivable, accounts payable and accrued expenses and other current liabilities approximate their fair value due to their relatively short maturities. The fair value of the cash equivalents, note payable to principal stockholder,
senior convertible notes, the Facility Financing Obligation (as defined below), the Milestone Rights (as defined below) and warrant liability are discussed below.
Cash Equivalents
As of December 31, 2016 and 2015, the Company held $20.5 million and $55.8 million,
respectively, of cash equivalents, consisting of money market funds. The fair value of these money market funds was determined by using quoted prices for identical investments in an active market (Level 1 in the fair value hierarchy).
Note Payable to Principal Stockholder
The fair value of the note payable to the Companys principal stockholder cannot be
reasonably estimated as the Company would not be able to obtain a similar credit arrangement in the current economic environment. Therefore, the fair value is based upon carrying value.
Financial Liabilities
The following tables set forth the fair value of the Companys financial instruments (in millions):
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|
As of December 31, 2016
|
|
|
|
Carrying Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior convertible notes
|
|
$
|
27.6
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
22.9
|
|
|
$
|
22.9
|
|
Facility Financing Obligation
|
|
|
71.3
|
|
|
|
|
|
|
|
|
|
|
|
74.5
|
|
|
|
74.5
|
|
Milestone Rights
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
18.4
|
|
|
|
18.4
|
|
Warrant liability (at recurring fair values)
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
7.4
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
115.2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
123.2
|
|
|
$
|
123.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
Carrying Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior convertible notes
|
|
$
|
27.6
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
21.3
|
|
|
$
|
21.3
|
|
Facility Financing Obligation
|
|
|
74.6
|
|
|
|
|
|
|
|
|
|
|
|
78.4
|
|
|
|
78.4
|
|
Milestone Rights
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
14.4
|
|
|
|
14.4
|
|
Sanofi Loan Facility
|
|
|
44.5
|
|
|
|
|
|
|
|
|
|
|
|
36.5
|
|
|
|
36.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
155.6
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
150.6
|
|
|
$
|
150.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
The following table provides a roll forward of the fair values of financial assets and
liabilities that are carried at fair value (in millions):
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
Assets Held for
Sale
|
|
Fair value, January 1, 2015
|
|
$
|
|
|
|
$
|
|
|
Additions
|
|
|
|
|
|
|
|
|
Changes in fair value
|
|
|
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, December 31, 2015
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
12.8
|
|
|
|
17.3
|
|
Changes in fair value
|
|
|
(5.4
|
)
|
|
|
(0.6
|
)
|
Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, December 31, 2016
|
|
$
|
7.4
|
|
|
$
|
16.7
|
|
|
|
|
|
|
|
|
|
|
Senior Convertible Notes
The estimated fair value of the 2018 notes was calculated based on
model-derived valuations where inputs were observable, such as the Companys stock price and yields on U.S. Treasury notes and actively traded bonds, and
non-observable,
such as the Companys
longer-term historical volatility, and estimated yields implied from any available market trades of the Companys issued debt instruments. As there is no current active and observable market for the 2018 notes, the Company determined the
estimated fair value using a convertible bond valuation model within a lattice framework. The convertible bond valuation model combined expected cash flows based on terms of the notes with market-based assumptions regarding risk-free rate,
risk-adjusted yields (20%), stock price volatility (111%) and recent price quotes and trading information regarding Company issued debt instruments and shares of common stock into which the notes are convertible.
Facility Financing Obligation
As discussed in Note 7 Borrowings, in connection with the Facility Agreement, the Company
issued 2019 notes and subsequently issued Tranche B notes (the Facility Financing Obligation). As there is no current observable market for the Facility Financing Obligation, the Company determined the estimated fair value using a bond
valuation model based on a discounted cash flow methodology. The bond valuation model combined expected cash flows associated with principal repayment and interest based on the contractual terms of the debt agreement discounted to present value
using a selected market discount rate. On December 31, 2016 the market discount rate was recalculated at 12.0% for the Facility Financing Obligation. Under the terms of the Facility Agreement, the Company is restricted from distributing any of
its assets or declaring and distributing a dividend to its stockholders.
Milestone Rights Liability
In addition to the
Facility Financing Obligation, the Company also issued certain rights to receive payments of up to $90.0 million upon occurrence of specified strategic and sales milestones (the Milestone Rights). These rights are not reflected in
the Facility Financing Obligation. The estimated fair value of the Milestone Rights was calculated using the income approach in which the cash flows associated with the specified contractual payments were adjusted for both the expected timing and
the probability of achieving the milestones discounted to present value using a selected market discount rate (Level 3 in the fair value hierarchy). The expected timing and probability of achieving the milestones, starting in 2014, was developed
with consideration given to both internal data, such as the Companys forecast, progress made to date towards meeting the milestones, and assessment of criteria required for achievement, and external data, such as market research studies. The
discount rate (14.5%) was selected based on an estimation of required rate of returns for similar investment opportunities using available market data. As of December 31, 2016, the carrying value of the Milestone Rights is
$8.9 million, classified as a long-term liability and the fair value is estimated at $18.4 million.
Warrant Liability
Warrant liabilities are measured at fair value using a Monte Carlo pricing valuation model and various assumptions. The significant unobservable input used in measuring the fair value of the common stock warrant liabilities is the expected
volatility. Significant increases in volatility would result in a higher fair value measurement (Level 3 in the fair value hierarchy). See Note 16 Warrants for further discussion of the valuation technique and inputs used in the fair value
measurement.
109
Sanofi Loan Facility
As discussed in Note 8 Collaboration Arrangements, the
Sanofi Loan Facility consisted of a senior secured revolving promissory note and a guaranty and 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
Companys share of net losses under the Sanofi License Agreement. The estimated fair value was determined using a discounted cash flow model where time outstanding and discount rate were primary variables. This method considered the key
elements of the contractual terms of the Sanofi Loan Facility, market-based estimated cost of capital, and time value of money, namely the amount of time to settlement and the estimated discount rate (11%) appropriate for the liability (Level 3
in the fair value hierarchy). The Sanofi Loan Facility was forgiven on November 9, 2016.
There were no transfers of assets or
liabilities between the fair value measurement levels during the twelve months ended December 31, 2016, 2015 and 2014.
Assets and
Liabilities Measured at Fair Value on a
Non-recurring
Basis
Land, buildings, and machinery and equipment, with a carrying amount of $189.2 million, were written down to a fair value of
$48.8 million, resulting in an impairment charge of $140.4 million, which is included in our consolidated statements of operations for the year ended December 31, 2015. See Note
4-
Property and
Equipment for further discussion of the valuation technique and inputs used in the fair value measurement.
An additional impairment of
$0.7 million was charged for the year ended December 31, 2016. At that time, an analysis of the lower of carrying value to fair value, which was deemed to be the sales price of the property, less selling costs determined a loss of $0.6
million, which is included in property and equipment impairment on the consolidated statement of operations for 2016.
Our assessment of
the real property includes Level 3 inputs, and was based on a combination of the income, market and cost approaches and the market approach was used for machinery and equipment which required Level 3 inputs.
Embedded Derivatives
The Company identified and evaluated a number of embedded features in the notes issued under the Facility
Agreement to determine if they represented embedded derivatives that are required to be separated from the notes and accounted for as freestanding instruments. The Company analyzed the Tranche B notes and identified embedded derivatives, which
required separate accounting. However, all of the embedded derivatives were determined to have a
de minimis
value at December 31, 2016 and 2015.
10. Common and Preferred Stock
On March
1, 2017, the Company effected a 1-for-5 reverse stock split of the Companys outstanding common stock. As a result, all common stock share amounts included in these consolidated financial statements have been retroactively reduced by a factor
of five, and all common stock per share amounts have been increased by a factor of five, with the exception of the Companys common stock par value. See Note 1 Description of Business.
The Company is authorized to issue 140,000,000 shares of common stock, par value $0.05 per share, and 10,000,000 shares of undesignated
preferred stock, par value $0.01 per share, issuable in one or more series as designated by the Companys board of directors. No other class of capital stock is authorized. As of December 31, 2016 and 2015, 95,680,831 and 85,734,188 shares
of common stock, respectively, were issued and outstanding and no shares of preferred stock were outstanding.
As more fully described in
Note 16 Warrants, in May 2016, the Company sold in a registered offering an aggregate of 9,708,737 shares of common stock together with certain warrants exercisable for up to an aggregate of 7,281,553 shares of common stock (A
Warrants) and certain warrants exercisable for up to an aggregate of 2,427,184 shares of common stock (B Warrants) in a direct offering for proceeds of $50.0 million.
On November 9, 2015, the Company entered into a series of stock purchase agreements to sell up to an aggregate of 10,000,000 shares of
its common stock in a registered direct offering to selected investment funds in Israel that hold securities included within certain stock indexes of the Tel Aviv Stock Exchange (the TASE). Pursuant to the agreements, the shares of
common stock were sold at a price per share equal to 97% of the
110
closing price of the Companys common stock on the TASE on November 12, 2015. During November 2015, the Company sold 2,770,487 shares of common stock for an aggregate price of
approximately $34,710,000, or $13.05 per share, which is net of $1,432,000 of issuance costs.
The Company engaged Sunrise Securities
Corporation as its exclusive placement agent in connection with the offering of the 10,000,000 shares. In connection with the services provided, the Company issued to Sunrise Securities Corporation, or its designee, restricted warrants to purchase a
number of shares of the Companys common stock in an aggregate equal to 1.15% of the aggregate shares sold in the offering, which totaled 31,860 shares on November 16, 2015. The warrants are exercisable for a five year period at an
exercise price of $13.05, the price paid per share in connection with the offering. The Company had an obligation to register the common stock that may be issued pursuant to the exercise of the warrants, which resulted in their initial
classification as liability and were deemed immaterial. On December 15, 2015 the warrants were reclassified to equity as the Company registered the common stock pursuant to a registration statement and continue to be classified in equity as of
December 31, 2016.
Included in the common stock outstanding as of December 31, 2014 is 1,800,000 shares of common stock loaned
to Bank of America under a share lending agreement in connection with the offering of the $100.0 million aggregate principal amount of the 2015 notes. Bank of America was obligated to return the borrowed shares (or, in certain circumstances,
the cash value thereof) to the Company on or about the 45th business day following the date as of which the entire principal amount of the 2015 notes ceases to be outstanding, subject to extension or acceleration in certain circumstances or early
termination at Bank of Americas option. On October 23, 2015, the 1,800,000 shares of common stock loaned to Bank of America were returned, as the Company settled all payments and deliveries in respect of such convertible notes on
August 17, 2015. The Company did not receive any proceeds from the sale of the borrowed shares by Bank of America, but the Company did receive a nominal lending fee of $0.05 per share from Bank of America for the use of borrowed shares.
On February 8, 2012, the Company sold 7,187,500 units in an underwritten public offering, including 937,500 units sold pursuant to the
full exercise of an over-allotment option granted to the underwriters, with each unit consisting of one share of common stock and a warrant to purchase 0.1 of a share of common stock. All of the securities were offered by the Company at a combined
price to the public of $12.00 per unit and the underwriters purchased the units at a price of $11.28 per unit. Net proceeds from this offering were approximately $80.6 million, excluding any warrant exercises. The 4,312,500 shares of common
stock underlying the warrants are exercisable at $12.00 per share and expire four years from the date of the issuance.
For the years
ended December 31, 2015 and 2014, the Company received $10.1 million and $27.8 million in proceeds, respectively, from the exercise of the February 2012 public offering warrants. There were no warrant exercises during the year ended
December 31, 2016 and any unexercised February 2012 public offering warrants expired on February 8, 2016.
11. Net Income (Loss) per Common
Share
On March 1, 2017, the Company effected a 1-for-5 reverse stock split of the Companys outstanding common stock. As a
result, all common stock share amounts included in these consolidated financial statements have been retroactively reduced by a factor of five, and all common stock per share amounts have been increased by a factor of five, with the exception of the
Companys common stock par value. See Note 1 Description of Business.
Basic net income (loss) per share excludes dilution for
potentially dilutive securities and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share reflects the potential dilution under the treasury
method that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For periods where the Company has presented a net loss, potentially dilutive securities are excluded from the computation
of diluted net loss per share as they would be antidilutive. During 2015, 1,800,000 shares of the Companys
111
common stock, which were loaned to Bank of America pursuant to the terms of a share lending agreement, were issued and outstanding, with the holder of the borrowed shares having all the rights of
a holder of the Companys common stock. As the share borrower was required to return all borrowed shares to the Company, the borrowed shares were not considered outstanding for the purpose of computing and reporting basic or diluted loss per
share during the period presented for 2015. These shares were returned to the Company in the third quarter of 2015.
The following tables
summarize the components of the basic and diluted net income (loss) per common share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(In thousands, except per share data)
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (numerator)
|
|
$
|
125,664
|
|
|
$
|
(368,445
|
)
|
|
$
|
(198,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares (denominator)
|
|
|
92,053
|
|
|
|
81,233
|
|
|
|
77,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
1.37
|
|
|
$
|
(4.54
|
)
|
|
$
|
(2.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (numerator)
|
|
$
|
125,664
|
|
|
$
|
(368,445
|
)
|
|
$
|
(198,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
92,053
|
|
|
|
81,233
|
|
|
|
77,045
|
|
Effect of dilutive securities common shares issuable
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares (denominator)
|
|
|
92,085
|
|
|
|
81,233
|
|
|
|
77,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
1.36
|
|
|
$
|
(4.54
|
)
|
|
$
|
(2.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issuable represents incremental shares of common stock which consist of stock options,
restricted stock units, warrants, and shares that could be issued upon conversion of the senior convertible notes.
Potentially dilutive
securities outstanding that are considered antidilutive are summarized as follows (in shares):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Exercise of common stock options
|
|
|
5,530,256
|
|
|
|
3,955,845
|
|
|
|
4,308,332
|
|
Conversion of senior convertible notes into common stock
|
|
|
814,561
|
|
|
|
814,561
|
|
|
|
3,464,616
|
|
Exercise of common stock warrants
|
|
|
9,740,597
|
|
|
|
814,919
|
|
|
|
1,997,575
|
|
Vesting of restricted stock units
|
|
|
702,867
|
|
|
|
360,924
|
|
|
|
522,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,788,281
|
|
|
|
5,946,249
|
|
|
|
10,292,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. Stock Award Plans
On March 1, 2017, the Company effected a 1-for-5 reverse stock split of the Companys outstanding common stock. As a result, all common
stock share amounts included in these consolidated financial statements have been retroactively reduced by a factor of five, and all common stock per share amounts have been increased by a factor of five, with the exception of the Companys
common stock par value. See Note 1 Description of Business.
On May 23, 2013, the Company adopted the 2013 Equity Incentive
Plan (the 2013 Plan) as the successor to and continuation of the 2004 Equity Incentive Plan (the 2004 Plan). The 2013 Plan consists of 4.3 million additional shares and the number of unallocated shares remaining
available for grant for new awards under the
112
2004 Plan. The 2013 Plan provides for the granting of stock awards including stock options and restricted stock units, to employees, directors and consultants. The 2013 Plan also provides for the
automatic,
non-discretionary
grant of options to the Companys
non-employee
directors. No additional awards will be granted under the 2004 Plan or under the 2004
Non-Employee
Directors Stock Option Plan (the NED Plan) as all future awards will be made out of the 2013 Plan.
The following table summarizes information about the Companys stock-based award plans as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Options
|
|
|
Outstanding
Restricted
Stock Units
|
|
|
Shares Available
for Future
Issuance
|
|
2004 Equity Incentive Plan
|
|
|
2,052,345
|
|
|
|
14,203
|
|
|
|
97,574
|
|
2013 Equity Incentive Plan
|
|
|
3,399,245
|
|
|
|
723,763
|
|
|
|
3,743,013
|
|
2004
Non-Employee
Directors Stock Option
Plan
|
|
|
78,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,530,256
|
|
|
|
737,966
|
|
|
|
3,840,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March 2004, as part of the 2004 Plan, the Companys board of directors approved the Employee Stock
Purchase Plan (ESPP), which became effective upon the closing of the Companys initial public offering. Initially, the aggregate number of shares that could be sold under the 2004 Plan was 400,000 shares of common stock. On
January 1 of each year, for a period of ten years beginning January 1, 2005, the share reserve automatically increased by the lesser of: 140,000 shares, 1% of the total number of shares of common stock outstanding on that date, or an
amount as may be determined by the board of directors. However, under no event can the annual increase cause the total number of shares reserved under the ESPP to exceed 10% of the total number of shares of capital stock outstanding on
December 31 of the prior year. On January 1, 2013 and 2014 the ESPP share reserve was increased each year by 140,000 shares. There was no ESPP share reserve increases during 2015 or 2016. As of December 31, 2016, 445,782 shares were
available for issuance under the ESPP. For the years ended December 31, 2016, 2015 and 2014, the Company sold 104,758, 64,245 and 61,015 shares, respectively, of its common stock to employees participating in the ESPP. The ESPP purchase of
43,672 shares for the period ending December 31, 2016 was initiated prior to
year-end
but did not settle until January 5, 2017. As a result, the shares sold are reflected in the ESPP share reserves
but are excluded from common stock outstanding as of December 31, 2016.
The Companys board of directors determines
eligibility, vesting schedules and criteria and exercise prices for stock awards granted under the 2013 Plan. Options and restricted stock unit awards under the 2013 Plan expire not more than ten years from the date of the grant and are exercisable
upon vesting. Stock options that vest over time generally vest over four years. Current time-based vesting stock option grants vest and become exercisable at the rate of 25% after one year and ratably on a monthly basis over a period of 36 months
thereafter. Restricted stock units with time-based vesting generally vest at a rate of 25% per year over four years with consideration satisfied by service to the Company. The Company also issues stock awards with performance conditions. The
2013 Plan provides for full acceleration of vesting if an employee is terminated within three months of a change in control, as defined in the 2013 Plan.
Share-based payment transactions are recognized as compensation cost based on the fair value of the instrument on the date of grant. The
Company accounts for
non-employee
stock-based compensation expense based on the estimated fair value of the options, which is determined using the Black-Scholes option valuation model and amortizes such
expense on a straight-line basis over the service period for time-based awards and over the expected dates of achievement for performance-based awards. These awards are subject to
re-measurement
until service
is complete. As of December 31, 2016, there were options to purchase 100,697 shares of common stock outstanding to consultants.
During the years ended December 31, 2016, 2015 and 2014 the Company recorded stock-based compensation expense of $5.1 million,
$8.7 million and $48.6 million, respectively.
113
Total stock-based compensation expense recognized in the accompanying consolidated statements of
operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Employee-related
|
|
$
|
5,135
|
|
|
$
|
8,407
|
|
|
$
|
48,622
|
|
Consultant-related
|
|
|
|
|
|
|
318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,135
|
|
|
$
|
8,725
|
|
|
$
|
48,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense recognized in the accompanying consolidated statements of operations is
included in the following categories (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cost of goods sold
|
|
$
|
695
|
|
|
$
|
|
|
|
$
|
|
|
Research and development
|
|
|
1,309
|
|
|
|
3,029
|
|
|
|
22,357
|
|
Selling, general and administrative
|
|
|
3,131
|
|
|
|
5,696
|
|
|
|
26,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,135
|
|
|
$
|
8,725
|
|
|
$
|
48,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company uses the Black-Scholes option valuation model to estimate the grant date fair value of employee
stock options. The expected term of an option granted is based on combining historical exercise data with expected weighted time outstanding. Expected weighted time outstanding is calculated by assuming the settlement of outstanding awards is at the
midpoint between the remaining weighted average vesting date and the expiration date.
The expected volatility assumption is based on an
assessment of the historical volatility, with consideration of implied volatility, derived from an analysis of historical trade activity. The Company has selected risk-free interest rates based on U.S. Treasury securities with an equivalent expected
term in effect on the date the options were granted. Additionally, the Company uses historical data and management judgment to estimate stock option exercise behavior and employee turnover rates to estimate the number of stock option awards that
will eventually vest. The Company calculated the fair value of employee stock options granted during the years ended December 31, 2016, 2015 and 2014 using the following assumptions:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Risk-free interest rate
|
|
1.18% 1.80%
|
|
1.61% 1.86%
|
|
1.64% 2.11%
|
Expected lives
|
|
5.13 5.82 years
|
|
5.79 5.86 years
|
|
5.77 6.09 years
|
Volatility
|
|
77.57% 82.75%
|
|
69.76% 71.84%
|
|
73.98% 84.85%
|
Dividends
|
|
|
|
|
|
|
The following table summarizes information about stock options outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average Exercise
Price per Share
|
|
|
Aggregate
Intrinsic
Value ($000)
|
|
Outstanding at January 1, 2016
|
|
|
3,955,845
|
|
|
$
|
22.70
|
|
|
$
|
|
|
Granted
|
|
|
2,236,693
|
|
|
|
4.50
|
|
|
|
|
|
Exercised
|
|
|
(55,231
|
)
|
|
|
8.45
|
|
|
|
|
|
Forfeited
|
|
|
(407,161
|
)
|
|
|
13.60
|
|
|
|
|
|
Expired
|
|
|
(199,890
|
)
|
|
|
23.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
5,530,256
|
|
|
$
|
16.10
|
|
|
$
|
2
|
|
Vested and expected to vest at December 31, 2016
|
|
|
5,399,777
|
|
|
$
|
16.35
|
|
|
$
|
2
|
|
Exercisable at December 31, 2016
|
|
|
3,414,586
|
|
|
$
|
22.50
|
|
|
$
|
|
|
114
The weighted average grant date fair value of the stock options granted during the years ended
December 31, 2016, 2015 and 2014 was $3.05, $12.80 and $23.80 per option, respectively. The total intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 was $0.1 million, $6.2 million and
$14.9 million, respectively. Intrinsic value is measured using the fair market value at the date of exercise for options exercised or at December 31 for outstanding options, less the applicable exercise price.
Cash received from the exercise of options during the years ended December 31, 2016, 2015 and 2014 was approximately $0.5 million,
$3.3 million and $11.0 million, respectively. The weighted-average remaining contractual terms for options outstanding, vested and expected to vest and exercisable at December 31, 2016 was 5.31 years, 5.22 years and 2.93 years,
respectively.
A summary of restricted stock unit activity for the year ended December 31, 2016 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
per Share
|
|
Outstanding at January 1, 2016
|
|
|
360,924
|
|
|
$
|
24.25
|
|
Granted
|
|
|
800,530
|
|
|
|
4.50
|
|
Vested
|
|
|
(131,000
|
)
|
|
|
21.70
|
|
Forfeited
|
|
|
(292,488
|
)
|
|
|
11.60
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
737,966
|
|
|
$
|
8.40
|
|
|
|
|
|
|
|
|
|
|
The total restricted stock units expected to vest as of December 31, 2016 was 629,424 with a weighted
average grant date fair value of $8.60 per share. The total intrinsic value of restricted stock units expected to vest as of December 31, 2016 was $2.0 million. Intrinsic value of restricted stock units expected to vest is measured using
the closing share price at December 31, 2016.
Total intrinsic value of restricted stock units vested during the years ended
December 31, 2016, 2015 and 2014 was $0.6 million, $5.2 million and $62.7 million, respectively. Intrinsic value of restricted stock units vested is measured using the closing share price on the day prior to the vest date. The
total grant date fair value of restricted stock units vested during the years ended December 31, 2016, 2015 and 2014 was $2.6 million, $5.5 million and $36.4 million, respectively.
As of December 31, 2016, there was $4.0 million and $4.8 million of unrecognized compensation expense related to options and
restricted stock units with performance conditions, respectively, which is expected to be recognized over the weighted average vesting period of 2.9 years. The Company evaluates stock awards with performance conditions as to the probability that the
performance conditions will be met and uses that information to estimate the date at which those performance conditions will be met in order to properly recognize stock-based compensation expense over the requisite service period.
As of December 31, 2016, the Company reviewed the probability of achieving the performance conditions for each of the four vesting
tranches of the performance-based stock options and determined that it was probable that the Company would achieve the first vesting tranche in December 2017. Therefore, the Company recorded a
non-material
cumulative catchup of the expense from the grant date through December 31, 2016 and will record the unrecognized compensation cost related to the first tranche in the amount of $0.3 million through December 31, 2017. The Company
further determined that no compensation costs would be recognized for the second, third and fourth vesting tranches as it had not been determined that it was probable that the performance conditions related to these tranches would be achieved.
During the year ended December 31, 2015, there was $1.6 million of stock compensation expense related to certain executives who
entered into severance agreements which resulted in a modification to the terms of their
115
awards. The severance agreements generally allowed for the separated executives to continue to vest under their original award terms for a stated period of time without providing substantive
services. There were no modifications in 2016.
13. Commitments and Contingencies
Operating Leases
The Company leases its executive offices in Valencia, California and certain equipment under various operating
leases, which expire at various dates through 2017 and beyond. Future payments are insignificant.
Rent expense under all operating
leases, including office space and equipment, for the years ended December 31, 2016, 2015 and 2014 was approximately $373,000, $426,000 and $737,000, respectively.
Guarantees and Indemnifications
In the ordinary course of its business, the Company makes certain indemnities, commitments and
guarantees under which it may be required to make payments in relation to certain transactions. The Company, as permitted under Delaware law and in accordance with its Bylaws, indemnifies its officers and directors for certain events or occurrences,
subject to certain limits, while the officer or director is or was serving at the Companys request in such capacity. The term of the indemnification period is for the officers or directors lifetime. The maximum amount of potential
future indemnification is unlimited; however, the Company has a director and officer insurance policy that may enable it to recover a portion of any future amounts paid. The Company believes the fair value of these indemnification agreements is
minimal. The Company has not recorded any liability for these indemnities in the accompanying consolidated balance sheets. However, the Company accrues for losses for any known contingent liability, including those that may arise from
indemnification provisions, when future payment is probable and the amount can be reasonably estimated. No such losses have been recorded to date.
Litigation
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. As of
December 31, 2016, the Company believes that the final disposition of such matters will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company and no accrual has been
recorded. The Company maintains liability insurance coverage to protect the Companys assets from losses arising out of or involving activities associated with ongoing and normal business operations. The Company records a provision for a
liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Companys policy is to accrue for legal expenses in connection with legal proceeding and claims as they are
incurred.
Following the public announcement of Sanofis election to terminate the Sanofi License Agreement and the subsequent
decline of the price of its common stock, several complaints were filed in the U.S. District Court for the Central District of California against the Company and certain of its officers and directors on behalf of certain purchasers of its common
stock, which were consolidated into a single action. The amended complaint alleged that the Company and certain of its officers and directors violated federal securities laws by making materially false and misleading statements regarding the
prospects for Afrezza, thereby artificially inflating the price of its common stock. The Company and the named defendants brought a motion to dismiss the class action that was pending against them, which the District Court granted in August 2016
without leave to amend the complaint. The lead plaintiff appealed that decision to the Ninth Circuit Court of Appeals. On March 2, 2017, the lead plaintiff filed a voluntary motion to dismiss his appeal, which the Court of Appeals granted on
March 9, 2017.
Following the public announcement of Sanofis election to terminate the Sanofi License Agreement and the
subsequent decline of the price of its common stock, two motions were submitted to the District Court at Tel Aviv, Economic Department for the certification of a class action against the Company and certain of its officers and directors. In general,
the complaints allege that the Company and certain of its officers and directors violated Israeli and U.S. securities laws by making materially false and misleading statements regarding the prospects for Afrezza, thereby artificially inflating the
price of its common stock. The plaintiffs are seeking monetary
116
damages. In November 2016, the district court dismissed one of the actions without prejudice. In the remaining action, a hearing is scheduled for May 2017 to determine whether Israeli or U.S. law
is applicable before the case can be certified as a class action. The Company will vigorously defend against these claims.
Subsequent to
the filing of the federal securities class action against the Company, two shareholder derivative complaints were filed in the Superior Court for the State of California, County of Los Angeles against certain of the Companys directors and
officers. The complaints allege breaches of fiduciary duties by the defendants and other violations of law. Among other allegations, the complaints allege that the defendants caused the Company to make false and misleading statements or omissions of
material fact regarding the Companys business and the prospects for sales of Afrezza, thereby artificially inflating the price of the Companys common stock. Following the dismissal of the federal securities class action, each derivative
complaint was voluntarily dismissed by its plaintiff.
Contingencies
In connection with the Facility Agreement, on
July 1, 2013 the Company also entered into a Milestone Rights Purchase Agreement (the Milestone Agreement) with Deerfield Private Design Fund and Horizon Santé FLML SÁRL (collectively, the Milestone
Purchasers), pursuant to which the Company sold the Milestone Purchasers the Milestone Rights to receive payments up to $90.0 million upon the occurrence of specified strategic and sales milestones, including the first commercial sale of
an Afrezza product in the United States and the achievement of specified net sales figures (see Note 7 Borrowings).
Commitment
On July 31, 2014, the Company entered into a supply agreement (the Insulin Supply Agreement) with Amphastar France Pharmaceuticals S.A.S., a French corporation (Amphastar), pursuant to which Amphastar will manufacture for
and supply to the Company certain quantities of recombinant human insulin for use in Afrezza. Under the terms of the Insulin Supply Agreement, Amphastar will be responsible for manufacturing the insulin in accordance with the Companys
specifications and agreed-upon quality standards. The Company had agreed to purchase annual minimum quantities of insulin for calendar years 2015 through 2019 under the Insulin Supply Agreement of an aggregate total of approximately
120.1 million. The Company could have requested to purchase additional quantities of insulin over such annual minimum quantities with a cancellation fee.
On November 9, 2016, the supply agreement with Amphastar was amended to extend the term over which the Company is required to purchase
insulin, without reducing the total amount of insulin to be purchased. Under the amendment, annual minimum quantities of insulin to be purchased for calendar years 2017 through 2023 total an aggregate purchase price of 93.0 million at
December 31, 2016. The Insulin Supply Agreement specifies that Amphastar will be deemed to have satisfied its obligations with respect to quantity, if the actual quantity supplied is within plus or minus ten percent (+/- 10%) of the quantity
set forth in the applicable purchase order. In addition, the aggregate cancellation fees that the Company would incur in the event that the above insulin quantities are not purchased was lowered from $5.3 million for the period October 1,
2016 through 2018 to $3.4 million over the same period. The annual purchase requirements under the contract are as follows:
|
|
|
|
|
2017
|
|
|
2.7 million
|
|
2018
|
|
|
8.9 million
|
|
2019
|
|
|
11.6 million
|
|
2020
|
|
|
15.5 million
|
|
2021
|
|
|
15.5 million
|
|
2022
|
|
|
19.4 million
|
|
2023
|
|
|
19.4 million
|
|
Unless earlier terminated, the term of the Insulin Supply Agreement expires on December 31, 2023 and can
be renewed for additional, successive two year terms upon 12 months written notice given prior to the end of the
117
initial term or any additional two year term. The Company and Amphastar each have normal and customary termination rights, including termination for material breach that is not cured within a
specific time frame or in the event of liquidation, bankruptcy or insolvency of the other party. In addition, the Company may terminate the Insulin Supply Agreement upon two years prior written notice to Amphastar without cause or upon 30
days prior written notice to Amphastar if a controlling regulatory authority withdraws approval for Afrezza, provided, however, in the event of a termination pursuant to either of the latter two scenarios, the provisions of the Insulin Supply
Agreement require the Company to pay the full amount of all unpaid purchase commitments due over the initial term within 60 calendar days of the effective date of such termination.
The Company also has another firm commitment with another supplier for an aggregate of $0.9 million.
14. Employee Benefit Plans
The Company
administers a 401(k) savings retirement plan (the MannKind Retirement Plan) for its employees. For the years ended December 31, 2016, 2015 and 2014, the Company contributed $418,000, $593,000 and $623,000, respectively, to the
MannKind Retirement Plan.
15. Income Taxes
At December 31, 2016, the Company has concluded that it is more likely than not that the Company may not realize the benefit of its
deferred tax assets due to its history of losses. There is no provision for income taxes in 2015 or 2014 because the Company had incurred operating losses since inception. Accordingly, the net deferred tax assets have been fully reserved. The
provision for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
U.S. state
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
(43,814
|
)
|
|
|
109,512
|
|
|
|
57,873
|
|
U.S. state
|
|
|
(4,311
|
)
|
|
|
(29,394
|
)
|
|
|
7,631
|
|
Non-U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(48,125
|
)
|
|
|
80,118
|
|
|
|
65,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
48,125
|
|
|
|
(80,118
|
)
|
|
|
(65,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118
Deferred income taxes reflect the tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established when uncertainty exists as to whether all or a portion of the net deferred tax assets will be realized. Components of the net
deferred tax assets as of December 31, 2016 and 2015, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
712,124
|
|
|
$
|
721,588
|
|
Research and development credits
|
|
|
77,998
|
|
|
|
73,646
|
|
Capitalized research
|
|
|
5,117
|
|
|
|
5,872
|
|
Payments from collaboration
|
|
|
|
|
|
|
52,484
|
|
Milestone Rights
|
|
|
3,242
|
|
|
|
3,242
|
|
Accrued expenses
|
|
|
440
|
|
|
|
251
|
|
Loss on purchase commitment
|
|
|
36,775
|
|
|
|
24,084
|
|
Non-qualified
stock option expense
|
|
|
17,331
|
|
|
|
16,941
|
|
Capitalized patent costs
|
|
|
8,781
|
|
|
|
8,574
|
|
Other
|
|
|
7,380
|
|
|
|
7,186
|
|
Depreciation
|
|
|
45,310
|
|
|
|
48,755
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
|
914,498
|
|
|
|
962,623
|
|
Valuation allowance
|
|
|
(914,498
|
)
|
|
|
(962,623
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The table of deferred tax assets and liabilities does not include certain deferred tax assets as of
December 31, 2016, that arose directly from tax deductions related to equity compensation which are greater than the compensation recognized for financial reporting. Equity would be increased by $11.6 million if and when such deferred tax
assets are ultimately realized. The Company considers certain realization requirements when excess tax benefits have been realized.
The
Companys effective income tax rate differs from the statutory federal income tax rate as follows for the years ended December 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Federal tax benefit rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Permanent items
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
0.9
|
|
Intercompany transfer of intellectual property
|
|
|
0.9
|
|
|
|
(1.0
|
)
|
|
|
(4.1
|
)
|
Valuation allowance
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
|
|
(31.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of
its deferred tax assets. Management has concluded, in accordance with the applicable accounting standards, that it is more likely than not that the Company may not realize the benefit of its deferred tax assets. Accordingly, the net deferred tax
assets have been fully reserved. Management reevaluates the positive and negative evidence on an annual basis. During the years ended December 31, 2016, 2015 and 2014, the change in the valuation allowance was $(48.1) million,
$80.1 million and $65.5 million, respectively, for income taxes.
At December 31, 2016, the Company had federal and state
net operating loss carryforwards of approximately $1.9 billion and $1.3 billion available, respectively, to reduce future taxable income. The federal
119
net operating loss carryforwards will expire at various dates beginning in 2018 and the state net operating loss carryforwards have started expiring, starting in the current year through various
future dates. As a result of the Companys initial public offering, an ownership change within the meaning of Internal Revenue Code Section 382 occurred in August 2004. As a result, federal net operating loss and credit carry forwards of
approximately $216.0 million are subject to an annual use limitation of approximately $13.0 million. The annual limitation is cumulative and therefore, if not fully utilized in a year can be utilized in future years in addition to the
Section 382 limitation for those years. The federal net operating losses generated subsequent to the Companys initial public offering in August 2004 are currently not subject to any such limitation as there have been no ownership changes
since August 2004 within the meaning of Internal Revenue Code Section 382. At December 31, 2016, the Company had research and development credits of $53.0 million and $38.5 million for federal and state purposes, respectively.
The federal credits begin to expire in 2024, and the state credits may be carried forward indefinitely.
The Company has evaluated the
impact of uncertainty related to income taxes on its consolidated financial statements. The evaluation of an uncertain tax position is a
two-step
process. The first step is recognition: the enterprise
determines whether it is
more-likely-than-not
that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the
position. In evaluating whether a tax position has met the
more-likely-than-not
recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that
would have full knowledge of all relevant information. The second step is measurement: a tax position that meets the
more-likely-than-not
recognition threshold is measured to determine the amount of benefit to
recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the
more-likely-than-not
recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the
more-likely-than-not
recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company believes that its income tax filing
positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its consolidated financial position. Therefore, no liabilities for uncertain income tax positions have been
recorded. Tax years since 2012 remain subject to examination by the major tax jurisdictions in which the Company is subject to tax.
16. Warrants
In May 2016, the Company sold in a registered offering an aggregate of 9,708,737 shares of common stock together with A Warrants
exercisable for up to an aggregate of 7,281,553 shares of common stock and B Warrants exercisable for up to an aggregate of 2,427,184 shares of common stock with a total fair value of $44.7 million. Each of the warrants has an exercise price of
$7.50 per share. The A Warrants became exercisable upon issuance and will expire two years thereafter. The B Warrants will become exercisable beginning in May 2017 and will expire 30 months after the date of issuance. The shares of common stock and
the warrants are immediately separable and issued separately. There have been no warrants exercised as of December 31, 2016.
The
Company determined that the A Warrants require liability classification primarily due to a price-protection clause that applies in the event of certain dilutive financings. The fair value of the A Warrants was recorded as warrant liability in the
consolidated balance sheet at issuance and is adjusted to fair value at each reporting period until exercise or expiration. The Company determined that the B Warrants met the criteria for equity classification and has accounted for such warrants in
additional paid in capital.
As of December 31, 2016 and May 12, 2016, the fair value of the A Warrants liability was
$7.4 million and $12.8 million, respectively. As of May 12, 2016, the fair value of the B Warrants at issuance was $5.0 million. The fair value of the A Warrants liability as of December 31, 2016 was estimated using a Monte
Carlo valuation pricing model with the following underlying assumptions: (a) a risk-free interest rate of 1.1%; (b) an assumed dividend yield of zero percent; (c) an expected term of 1.4 years; and (d) an expected volatility of 118%.
The fair
120
value of the A Warrants liability as of May 12, 2016, was estimated using a Monte Carlo valuation pricing model with the following underlying assumptions: (a) a risk-free interest rate
of 0.76%; (b) an assumed dividend yield of zero percent; (c) an expected term of 2.0 years; and (d) an expected volatility of 95%. The Company assumed a probability of a dilutive financing event or an equity event, as defined in the
agreement, of 10% for the each of the measurement periods.
For the year ended December 31, 2016, the Company recognized a change in
fair value of warrant liability of $5.4 million in the consolidated statements of operations to reflect the fair value adjustments of the A Warrant liability from the date of issuance.
17. Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Selling and marketing
|
|
$
|
19,854
|
|
|
$
|
1,587
|
|
|
$
|
3,556
|
|
General and administrative
|
|
|
27,074
|
|
|
|
39,373
|
|
|
|
75,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative
|
|
$
|
46,928
|
|
|
$
|
40,960
|
|
|
$
|
79,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18. Restructuring Charges
In September 2016, the Company initiated a restructuring of its organization in order to conserve resources for commercial sales and
marketing of Afrezza and to align cost of goods sold in support of these commercial efforts (2016 Restructuring). In connection with the 2016 Restructuring, the Company reduced its total workforce by approximately 18% to 155 employees. The Company
recorded charges of approximately $1.5 million, primarily for employee severance as well as other related termination benefits. The $1.5 million of costs associated with the 2016 Restructuring are included in cost of goods sold, research
and development and selling, general and administrative in the consolidated statements of operations as $0.4 million, $0.7 million and $0.4 million, respectively, for the year ended December 31, 2016. The Company substantially
paid out the obligation for the 2016 Restructuring in the fourth quarter of 2016, resulting in a remaining accrual balance for the 2016 Restructuring of $0.2 million at December 31, 2016. The Company expects to substantially pay out the
remainder of this obligation by the first quarter of 2017.
In 2015, the Company initiated a restructuring of the organization as a result
of its shift to commercial production of Afrezza (2015 Restructuring). In connection with the 2015 Restructuring, the Company reduced its total workforce by approximately 26% to 198 employees. The Company recorded charges of
approximately $6.0 million, primarily for employee severance as well as other related termination benefits. The $6.0 million of costs associated with the 2015 Restructuring are included in operating expenses for cost of goods sold,
research and development and selling, general and administrative in the consolidated statements of operations as $1.4 million, $1.3 million and $3.3 million, respectively, for the year ended December 31, 2015. As of December 31,
2016 and 2015, the Company had a remaining accrual balance for the 2015 Restructuring of $1.2 million and $3.0 million, respectively. Certain of the severance arrangements for executives in the 2015 Restructuring were long-term, which the
Company expects to substantially pay out the remainder of this obligation by the third quarter of 2017.
121
A reconciliation of beginning and ending liability balances for the 2016 and 2015 Restructuring
charges, which is included in accrued expenses and other current liabilities, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
2016
Restructuring
|
|
|
2015
Restructuring
|
|
|
Total
|
|
Accrual January 1, 2015
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Costs incurred and charged to expense
|
|
|
|
|
|
|
6,040
|
|
|
|
6,040
|
|
Costs paid or settled
|
|
|
|
|
|
|
(3,012
|
)
|
|
|
(3,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual December 31, 2015
|
|
|
|
|
|
|
3,028
|
|
|
|
3,028
|
|
Costs incurred and charged to expense
|
|
|
1,475
|
|
|
|
560
|
|
|
|
2,035
|
|
Costs paid or settled
|
|
|
(1,266
|
)
|
|
|
(2,421
|
)
|
|
|
(3,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual December 31, 2016
|
|
$
|
209
|
|
|
$
|
1,167
|
|
|
$
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19. Selected quarterly financial data (unaudited)
Summarized quarterly financial data for the years ended December 31, 2016 and 2015, are set forth in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In thousands, except per share data)
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
162,354
|
|
|
$
|
12,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(24,873
|
)
|
|
$
|
(29,959
|
)
|
|
$
|
126,520
|
|
|
|
53,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share basic
|
|
$
|
(0.29
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
1.32
|
|
|
$
|
0.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share diluted
|
|
$
|
(0.29
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
1.31
|
|
|
$
|
0.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used to compute basic net income (loss) per share
|
|
|
85,771
|
|
|
|
91,061
|
|
|
|
95,627
|
|
|
|
95,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used to compute diluted net income (loss) per share
|
|
|
85,771
|
|
|
|
91,061
|
|
|
|
96,548
|
|
|
|
96,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(30,658
|
)
|
|
$
|
(28,910
|
)
|
|
$
|
(31,857
|
)
|
|
$
|
(277,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(0.38
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(3.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used to compute basic and diluted net loss per share
|
|
|
79,783
|
|
|
|
80,203
|
|
|
|
81,039
|
|
|
|
83,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges of $242.7 million were recorded in the fourth quarter of 2015 related to long-lived
assets, inventory and loss on purchase commitments.
In the third quarter of 2016, the Company recognized net revenue-collaboration of
$161.8 million attributable to collaboration with Sanofi (See Note 8 Collaboration Arrangements).
In the fourth quarter of
2016, the Company recognized net revenue-collaboration of $10.2 million attributable to collaboration with Sanofi and $72.0 million gain on extinguishment of debt (See Note 8 Collaboration Arrangements)
20. Subsequent Events
Reverse Stock
Split
On September 14, 2016, NASDAQ notified the Company that the bid price of the Companys common stock had closed below the required $1.00 per share for 30 consecutive trading days, and,
122
accordingly, the Company did not comply with the applicable NASDAQ minimum bid price requirement. The Company was provided 180 calendar days by NASDAQ, or until March 13, 2017, to regain
compliance with this requirement.
On March 1, 2017, the Company held a Special Meeting of Stockholders at which the Companys
stockholders approved a proposal to amend the Companys Amended and Restated Certificate of Incorporation to effect a reverse stock split of the Companys outstanding common stock at a ratio to be determined in the discretion of the
Companys board of directors and with such reverse stock split to be effected at such time and date as determined by the Companys board of directors in its sole discretion, and to reduce the number of authorized shares of the
Companys common stock in a corresponding proportion to the reverse stock split, rounded to the nearest whole share.
On
March 1, 2017, following stockholder approval of the reverse split proposal, the Companys board of directors approved a reverse stock split ratio of
1-for-5. On
March 1, 2017, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment of the Companys Amended and
Restated Certificate of Incorporation to effect the
1-for-5
reverse stock split of the Companys outstanding common stock and to reduce the authorized number of
shares of the Companys common stock from 700,000,000 to 140,000,000 shares. The Companys common stock began trading on The NASDAQ Global Market on a split-adjusted basis when the market opened on March 3, 2017.
As of the date of this filing, the shares of the Companys common stock have maintained a minimum bid closing price of at least $1.00 per
share for 10 consecutive business days. Accordingly, the Company expects to receive a notice from the Listing Qualifications Department of the NASDAQ Stock Market indicating that the Company has regained compliance with the minimum closing bid price
requirement.
Sale of Valencia Facility
On January 6, 2017, the Company and Rexford Industrial Realty, L.P.
(Rexford) entered into an Agreement of Purchase and Sale and Joint Escrow Instructions (the Purchase Agreement), pursuant to which the Company agreed to sell and Rexford agreed to purchase certain parcels of real estate owned
by the Company in Valencia, California and certain related improvements, personal property, equipment, supplies and fixtures (collectively, the Property) for $17.3 million. The sale and purchase of the aforementioned Property for
$17.3 million pursuant to the terms of the Purchase Agreement, as amended, was completed on February 17, 2017. Net proceeds were approximately $16.7 million after deducting brokers commission and other fees of approximately
$624,000 paid by the Company. In the fourth quarter of 2016 the property met the requirements for reclassification from property and equipment, net to asset held for sale when it became probable that the property would be sold within one year.
At that time, an analysis of the lower of carrying value which was deemed to be the sales price of the property, to fair value less selling costs determined a loss of $564,000, which was recorded as a property and equipment impairment on the
consolidated statement of operations for 2016. At December, 31 2016, this property had a carrying value of $16.7 million and was classified as held for sale. The sale of this property will be reflected in the consolidated financial
statements for the quarter ended March 31, 2017.
123