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Borrowings | 3 Months Ended
--- | ---
Mar. 31, 2017
Borrowings | 6. Borrowings Borrowings consist of the following (in thousands):
|  | March 31, 2017 |  |  | December 31, 2016 |
Facility Financing Obligation (2019 Notes) |  |  |  |  |  |  |  |
Principal amount |  | $ | 75,000 |  |  | $ | 75,000 |
Unamortized debt discount |  |  | (3,205 | ) |  |  | (3,661 | )
Net carrying amount |  | $ | 71,795 |  |  | $ | 71,339 |
Senior Convertible Notes (2018 Notes) |  |  |  |  |  |  |  |
Principal amount |  | $ | 27,690 |  |  | $ | 27,690 |
Unamortized premium |  |  | 367 |  |  |  | 426 |
Unaccreted debt issuance costs |  |  | (415 | ) |  |  | (481 | )
Net carrying amount |  | $ | 27,642 |  |  | $ | 27,635 |
Note payable to principal stockholder - net carrying amount |  | $ | 49,521 |  |  | $ | 49,521 |
Facility Financing Obligation (2019 Notes) – As of March 31, 2017, there was $55.0 million principal amount of 2019 notes and $20.0 million principal amount of Tranche B notes outstanding. The 2019 notes accrue interest at an 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. As of March 31, 2017, future payments for the years ended December 31, 2017, 2018, and 2019 are $20.0 million, $20.0 million and $35.0 million, respectively. On April 18, 2017, the Company entered into an Exchange Agreement resulting in the cash repayment of $4.0 million principal under the Tranche B notes and the conversion of $1.0 million and $5.0 million of principal under the Tranche B notes and the 2019 notes, respectively, to common shares (see Note 13, Subsequent Events for disclosure of the Exchange Agreement). 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. As of March 31, 2017 and December 31, 2016, the remaining milestone rights liability balance was $8.9 million. The Company currently estimates that it will make the next milestone payment in the first quarter of 2018. Accordingly, $1.6 million in value related to the next milestone payment was recorded in accrued expenses and other current liabilities as of March 31, 2017, resulting in $7.3 million and $8.9 million being recorded in milestone rights liability and other liabilities, which is non-current, in the accompanying condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016, respectively. Accretion of debt issuance cost and debt discount in connection with the Facility Agreement during the three months ended March 31, 2017 and 2016 are as follows (in thousands):
|  | Three Months Ended March 31, |
|  | 2017 |  |  | 2016 |
Accretion expense - debt issuance cost |  | $ | 9 |  |  | $ | 9 |
Accretion expense - debt discount |  | $ | 447 |  |  | $ | 419 |
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 include available borrowings on the note payable to a 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 and Summary of Significant Accounting Policies, 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 Tranche B notes have been classified as current liabilities in the accompanying condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016. 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. 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 Santé FLML SÁRL (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 Company’s obligations under the Facility Agreement and the Milestone Agreement are also secured by the Company’s facilities in Danbury, Connecticut, which has a carrying value of $28.5 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 as of March 31, 2017 and December 31, 2016. 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. 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 — The 2018 notes are the Company’s 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 Company’s 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 condensed consolidated balance sheets. 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 Company’s common stock at an initial conversion rate of 29 shares per $1,000 principal amount of 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 US Bank (as successor trustee to 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 make-whole premium on any 2018 notes converted in connection with such fundamental change by increasing the conversion rate on such 2018 notes. 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 holder’s 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 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 Company’s 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 2019 notes and the Tranche B notes issued to Deerfield pursuant to the Facility Agreement, the holders may elect to accelerate the Company’s 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 condensed consolidated balance sheets. These costs are being accreted to interest expense using the effective interest method over the term of the 2018 notes. Amortization of the premium related to the 2018 notes was $59,000 and $57,000 during the three months ended March 31, 2017 and 2016, respectively. Accretion of debt issuance costs related to the 2018 notes was $66,000 and $62,000 during the three months ended March 31, 2017 and 2016, respectively.

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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 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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