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Commitments and contingencies | 6 Months Ended
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Jun. 30, 2016
Commitments and contingencies | 11. Commitments and contingencies 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 Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s 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 condensed 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 June 30, 2016, the Company believes that the final disposition of such matters will not have a material adverse effect on the 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 Company’s 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 Company’s policy is to accrue for legal expenses in connection with legal proceedings and claims as they are incurred. Following the public announcement of Sanofi’s election to terminate the Sanofi License Agreement and the subsequent decline in the Company’s stock price, several complaints were filed in the U.S. District Court for the Central District of California (the “District Court”) against the Company and certain of its officers and directors on behalf of certain purchasers of its common stock. These complaints have now been consolidated into a single action. The amended complaint includes claims asserted under Sections 10(b) and 20(a) of the Exchange Act and has been pled as putative shareholder class actions. In general, the complaints allege 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 plaintiffs are seeking monetary damages and other relief. The Company will vigorously defend against the claims advanced. Following the public announcement of Sanofi’s election to terminate the Sanofi License Agreement and the subsequent decline in the Company’s stock price, 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 damages. The Company will vigorously defend against the claims advanced. Subsequent to the filing of the federal securities class action against the Company, a shareholder derivative complaint was filed in the Superior Court for the State of California, County of Los Angeles against certain of the Company’s directors and officers. The complaint alleges breaches of fiduciary duties by the defendants and other violations of law. Among other allegations, the complaint alleges that the defendants caused the Company to make false and misleading statements or omissions of material fact regarding the Company’s business and the prospects for sales of Afrezza, thereby artificially inflating the price of the Company’s common stock. The plaintiff is seeking unspecified monetary damages and other relief, including reforms to the Company’s corporate governance and internal procedures. The defendants will vigorously defend against the claims advanced. 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 13 – Facility Agreement). Commitments — 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 manufactures for and supplies to the Company certain quantities of recombinant human insulin for use in Afrezza. Under the terms of the Insulin Supply Agreement, Amphastar is responsible for manufacturing the insulin in accordance with the Company’s specifications and agreed-upon quality standards. The Company has agreed to purchase annual minimum quantities of insulin through 2019 under the Insulin Supply Agreement of an aggregate total of approximately €120.1 million, of which €95.1 million is remaining at June 30, 2016. The annual minimum quantity for 2016 is €28.8 million, of which €3.4 has been purchased as of June 30, 2016, and the remaining annual minimum quantities will be €23.3 million for the years ending December 31, 2017 through 2019. The Company may request to purchase additional quantities of insulin over such annual minimum quantities and will incur a cancellation fee of approximately $5.2 million if not purchased (see Note 1 — Summary of Significant accounting policies). The company also has other firm commitments with other suppliers for an aggregate of $1.9 million. Based on the Company’s firm purchase commitments outstanding and lower of cost or market analysis, the Company has recorded a loss on purchase commitments amounting to $74,000 and $66,000 as of June 30, 2016 and December 31, 2015, respectively. These balances include losses in foreign currency at June 30, 2016, the Company recognized a loss on foreign currency translation of $2.0 million for the six months ended June 30, 2016. Unless earlier terminated, the term of the Insulin Supply Agreement expires on December 31, 2019 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. 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. Under the terms of the Sanofi Supply Agreement, in the event that Sanofi terminates the Sanofi License Agreement for various reasons (including the reasons cited in its notice of termination to the Company), then upon written notice from the Company within 30 days following the termination date, Sanofi is obligated to purchase up to $50 million of the Company’s insulin inventory as a percentage of each lot received or receivable by the Company (the “Insulin Put Option”). On April 14, 2016, the Company provided Sanofi with written notice that it was exercising the Insulin Put Option. To date, $9.2 million was received for the sale of insulin inventory in connection with the Insulin Put Option, which was recorded as deferred payments from collaboration. As future insulin purchases are made under the purchase commitment and subject to the terms of the Insulin Put Option, additional amounts will be invoiced to Sanofi.

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