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Facility Agreement | 12 Months Ended
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Dec. 31, 2014
Facility Agreement | 17. Facility Agreement Under the Facility Agreement, which was initially entered into in 2013 between the Company and Deerfield, the Company borrowed a total of $180.0 million through the issuance of multiple tranches of notes during 2013 and 2014. In addition to the $6.5 million of principal that was converted during 2013, Deerfield elected to convert an additional $93.5 million of principal into shares of the Company’s common stock during 2014 which was recorded net of discount and debt issuance costs of $6.8 million. The Facility Agreement principal repayment schedule is comprised of payments beginning on the third anniversary of each issued tranche commencing on July 1, 2016 and ending December 9, 2019, for a total amount of $80.0 million. There are no principal payments to be made for the year ended December 31, 2015. Future principal payments for the years ended December 31, 2016, 2017, 2018, and 2019 are $5.0 million, $20.0 million, $20.0 million, and $35.0 million, respectively. As of December 31, 2014, the total principal amount outstanding related to the 2019 notes is $60.0 million with a fixed interest rate of 9.75% and $20.0 million debt related to the Tranche B notes at a fixed interest rate of 8.75%. In conjunction with the Facility Agreement, we entered into a Milestone Rights Agreement with Deerfield which requires us to make contingent payments to Deerfield, totaling up to $90.0 million, upon the Company achieving specified commercialization milestones. We calculated a fair value of $16.3 million related to the Milestone Payments and recorded it as a Milestone Rights liability which will be reduced as the various Milestones are met. During 2014, the Milestone Rights liability was reduced by $3.1 million upon the Company achieving the first milestone and as of December 31, 2014, the remaining $13.1 million has been allocated between a $4.2 million current Milestone Rights liability in other current liabilities and an $8.9 million long-term Milestone Rights liability in other liabilities. In addition, as of December 31, 2013, we had a commitment asset balance of $5.2 million. During 2014, the commitment asset fair value increased by $2.9 million due to Deerfield’s commitment to lend additional funds under the Tranche B notes and decreased by $6.3 million due to the issuance of Tranche 4 notes and Tranche B notes. The remaining $1.8 million commitment asset balance was written-off by the Company, upon expiration of access to further borrowings. Accretion of debt issuance cost and debt discount in connection with the Deerfield financing during the year ended December 31, 2014 and 2013 are as follows (in thousands):
|  | December 31, |
|  | 2014 |  |  | 2013 |
Accretion expense- debt issuance cost |  | $ | 326 |  |  | $ | 42 |
Accretion expense- debt discount |  | $ | 7,550 |  |  | $ | 1,113 |
On July 1, 2013, the Company entered into the Facility Agreement providing for the sale of up to $160.0 million of 2019 notes to Deerfield in four equal tranches of $40.0 million principal amount. The 2019 notes accrue interest at a rate of 9.75% per annum until maturity in 2019 or their earlier repayment, repurchase, or conversion. As of December 31, 2014, Deerfield had purchased the four tranches of 2019 notes in the aggregate principal amount of $160.0 million. On February 28, 2014, the Company entered into the First Amendment, which modified the terms of the Facility Agreement to provide for the issuance of Tranche B notes to Deerfield. Pursuant to the terms of the First Amendment and the subsequent occurrence of certain events specified in the First Amendment, prior to December 30, 2014, the Company may request that Deerfield purchase up to $90.0 million aggregate principal amount of Tranche B notes. The Tranche B notes initially accrued interest at the rate of 9.75% per year on the outstanding principal amount, subject to reduction to 8.75% if the Company entered into a collaboration with a third party to commercialize AFREZZA. Pursuant to the terms of the First Amendment, the interest rate was subsequently reduced to 8.75% on September 23, 2014 following completion of the U.S. Federal Trade Commission’s review of the transactions contemplated by the Sanofi License Agreement under the Hart-Scott-Rodino Act and the completion of documentation related to the $175.0 million secured loan facility being provided to the Company. The interest on the outstanding principal amount of notes under the Facility Agreement is payable in cash quarterly in arrears on the last business day of March, June, September and December of each year. The Company is required to repay 25% of the original principal amount of any Tranche B notes on the third, fourth, fifth and sixth anniversaries of the applicable issue dates of such notes, provided that the entire outstanding principal amount of all Tranche B notes will become due and payable no later than December 31, 2019. The Tranche B notes can be prepaid without penalty or premium commencing two years after issuance thereof. On May 6, 2014, Deerfield purchased an aggregate principal amount of $20.0 million in Tranche B notes in accordance with the provisions of the Facility Agreement, as amended. 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 Company’s cash and cash equivalents, which includes available borrowings on the principal stockholder note, on the last day of each fiscal quarter to not be less than $25.0 million. As discussed in Note 1 — Basis of Presentation, 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 have been classified as current liabilities in the accompanying balance sheet as of December 31, 2014. In the event of non-compliance, there can be no assurances that the holders of the 2019 notes will not exercise remedies available to them, which may include, among other things, the issuance of a notice of acceleration. In addition, pursuant to the First Amendment, the outstanding first tranche of 2019 notes (the “Tranche 1 notes”) and third tranche of 2019 notes (the “Tranche 3 notes”) held by Deerfield were amended and restated to permit Deerfield to convert up to an additional $60.0 million principal amount under such 2019 notes into the Company’s common stock after the effective date of the First Amendment. The Company also agreed to register for resale up to 12,000,000 shares of the Company’s common stock issuable upon conversion of the outstanding 2019 notes, as amended and restated, as of the date of the First Amendment. In March 2014, Deerfield elected to convert the full $40.0 million of outstanding principal amount of the Tranche 3 notes and $12.5 million principal amount of the Tranche 1 notes. In April 2014, Deerfield elected to convert the remaining $7.5 million principal amount of the Tranche 1 notes. On August 11, 2014, the Company entered into a second amendment to the Facility Agreement to permit the incurrence of additional secured debt under the Sanofi Loan Facility. In the event of certain future defaults under the foregoing agreements for which we are not able to obtain waivers, the holders of the 2019 notes and Tranche B notes may accelerate all of our repayment obligations, and 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. Milestone Rights In connection with the execution of the Facility Agreement, on July 1, 2013, the Company issued Milestone Rights to the Milestone Purchasers. The Milestone Rights provide the Milestone Purchasers certain rights to receive payments of up to $90.0 million upon the occurrence of specified strategic and sales milestones, including the first commercial sale of an AFREZZA product and the achievement of specified net sales figures. 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 analyzed the Milestone Rights under the provisions of ASC 815 Derivatives and Hedging, and determined that the instruments do not meet the definition of a freestanding derivative. Since the Company has not elected to apply the fair value option to the Milestone Rights, the Company has initially recorded the Milestone Rights at their estimated fair value and accounted for the Milestone Rights as a liability by applying the indexed debt guidance contained in paragraphs ASC 470-10-25-3 and 35-4. 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 discounted to present value using a selected market discount rate. 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 condensed consolidated balance sheet and a long term liability equal to $13.1 million included in Other liabilities. 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 present value using a discount rate of 17.5%. 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 $16.3 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 Company’s lack of product diversification and history of financial losses, which were not captured in other model inputs. As of December 31, 2014, the first milestone triggering event was achieved following the Company’s 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. 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 such milestone event being achieved will be remeasured to the amount of the related milestone payment. The resulting change in the balance of the Milestone Rights liability due to such remeasurement will be recorded in the Company’s Statement of Operations as interest expense. Furthermore, the Milestone Rights liability will be reduced upon each such milestone payment being paid. As a result, each milestone payment would be effectively allocated between a reduction of the initially recorded Milestone Rights liability and an expense representing a return on a portion of the Milestone Rights liability paid to the Milestone Purchasers for the achievement of the related milestone event. The Company identified and evaluated a number of embedded features in the Milestone Rights to determine if they represented embedded derivatives requiring bifurcation and separate accounting pursuant to ASC 815. There were no features in the Milestone Rights that required bifurcation and separate accounting. Commitment Asset In connection with the issuance of the Tranche 1 notes and the Milestone Rights, the Company recorded a commitment asset (the “Commitment Asset”) on July 1, 2013. As a result of the First Amendment, the Company recorded an additional Tranche B notes commitment asset (the “Tranche B Commitment Asset”) with an estimated fair value equal to $2.9 million. The Commitment Asset is derecognized and recorded as a debt discount on the 2019 notes and Tranche B notes when issued and amortized using the effective interest rate method over the life of the respective notes. Prior to derecognition occurring, the Company monitors the Commitment Asset on an ongoing basis to determine whether an impairment indicator is present that would result in a full or partial write down of the Commitment Asset as a result of events that may lead to the subsequent tranches of notes not being issued. On December 30, 2014, the Company elected not to draw on the $70.0 million of funding remaining under the Facility Agreement, as amended, from the sale of the Tranche B notes. Consequently, the remaining carrying value of the Tranche B Commitment Asset of $1.8 million was written off and recorded as interest expense. Amendment to the outstanding Tranche 1 notes and Tranche 3 notes The amendment and restatement of the outstanding Tranche 1 notes and Tranche 3 notes, pursuant to the First Amendment, did not represent a troubled debt restructuring of the 2019 notes because the First Amendment did not result in Deerfield granting a concession to the Company. In addition, the First Amendment did not result in a substantial modification to the terms of the Tranche 1 notes and Tranche 3 notes. The impact of the First Amendment to the Tranche 1 notes and Tranche 3 notes is being accounted for as a prospective yield adjustment. Specifically, the value of the Tranche B Commitment Asset was considered a fee received from the creditor as consideration for the First Amendment and is being amortized as an adjustment of interest expense over the remaining term of the Tranche 1 notes and Tranche 3 notes using the effective interest method. Further, the value of the Tranche B Commitment Asset, which decreased the amount of debt discount in the Tranche 1 notes and Tranche 3 notes, was allocated between the Tranche 1 notes and Tranche 3 notes in a manner that resulted in the Tranche 1 notes and Tranche 3 notes having a new effective interest rate of 11.63%. 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 HS (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 us and MannKind LLC will terminate upon repayment of the 2019 notes and tranche B notes, if applicable, in full. Our obligations under the Facility Agreement and the Milestone Agreement are also secured by certain mortgages on the Company’s facilities in Danbury, Connecticut and Valencia, California. 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 pursuant to ASC 815. In 2013, we analyzed the Tranche 1 notes, Tranche 2 notes, and Tranche 3 notes and identified embedded derivatives in each respective Tranche of notes which required separate accounting under ASC 815; however all of the embedded derivatives were determined to have a de minimis value. In addition, we issued the Tranche B and Tranche 4 notes during 2014 and performed a similar analysis on each respective Tranche of notes. Based on our analysis, we determined that the Tranche B notes contained embedded derivatives that required to be separated from the Tranche 4 notes; however such embedded derivatives were determined to have a de minimis value. At December 31, 2014, all of the embedded derivatives identified in the Tranche 1 notes, Tranche B notes, and Tranche 4 notes were deemed to have a de minimis value. 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 17,323,080 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.

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- Definition The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6928386&loc=d3e21475-112644 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 02 -Paragraph 19, 20, 22 -Article 5 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 210 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.5-02.19,20,22) -URI http://asc.fasb.org/extlink&oid=6877327&loc=d3e13212-122682 + Details
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