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 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 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 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 proceeding and claims as they are incurred.

Following the public announcement of Sanofi’s 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 Sanofi’s 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 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 Company’s 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 Company’s business and the prospects for sales of Afrezza, thereby artificially inflating the price of the Company’s 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 Company’s 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 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.