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Borrowings | 9 Months Ended
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Sep. 30, 2018
Debt Disclosure [Abstract] |
Borrowings | 7. Borrowings Borrowings consist of the following (in thousands):
|  | September 30, 2018 |  |  | December 31, 2017 |
Facility Financing Obligation (2019 Notes and Tranche B Notes) |  |  |  |  |  |  |  |
Principal amount |  | $ | 14,495 |  |  | $ | 54,407 |
Unamortized debt issuance costs and debt discount |  |  | (293 | ) |  |  | (1,662 | )
Net carrying amount |  | $ | 14,202 |  |  | $ | 52,745 |
Senior Convertible Notes (2021 Notes) |  |  |  |  |  |  |  |
Principal amount |  | $ | 18,690 |  |  | $ | 23,690 |
Unamortized debt issuance costs and debt premium |  |  | 443 |  |  |  | 721 |
Net carrying amount |  | $ | 19,133 |  |  | $ | 24,411 |
Note payable to related party - net carrying amount |  | $ | 72,143 |  |  | $ | 79,666 |
Total debt - net carrying amount |  | $ | 105,478 |  |  | $ | 156,822 |
In addition to the Mann Group Loan Arrangement described in Note 6, as of September 30, 2018, the Company’s outstanding borrowings consisted of $18.7 million principal amount of the Senior Convertible Notes due 2021 bearing interest at 5.75% per annum and maturing on October 23, 2021, as well as $14.5 million principal amount of the Facility Financing Obligation, which is comprised of the following:
| • | A principal amount of $12.0 million of 2019 notes bearing interest at 9.75% per annum. Interest is payable in cash quarterly in arrears in the last business day of March, June, September and December of each year. As of September 30, 2018, the principal amounts due and payable were as follows: $3.0 million at the earlier of October 31, 2018 or the first business day following the date the Company receives a specified payment from United Therapeutics Corporation (“United Therapeutics”) as described below and $9.0 million in July 2019, and
| • | A principal amount of $2.5 million of Tranche B notes due and payable in May 2019 and bearing interest at 8.75% per annum. Interest is payable in cash quarterly in arrears on the last business day of March, June, September and December of each year.
These borrowings are further described below: Facility Financing Obligation (2019 Notes and Tranche B notes) – The Facility Financing Obligation was initially entered into in 2013 between the Company and Deerfield through the issuance of multiple tranches of notes that provided for aggregate borrowings of $120.0 million in 2019 notes and $20.0 million in Tranche B notes. As individual tranches have neared their maturity dates, the Company has repaid such tranches in whole or in part or agreed with Deerfield to exchange all or a portion of the outstanding principal for shares of the Company’s common stock as described more fully below. On April 18, 2017, the Company entered into an Exchange Agreement with Deerfield pursuant to which the Company agreed to, among other things, (i) repay $4.0 million principal amount under the Tranche B notes; (ii) exchange $1.0 million principal amount under the Tranche B notes for 869,565 shares of the Company’s common stock (the “Tranche B Exchange Shares”); and (iii) exchange $5.0 million principal amount under the 2019 notes for 4,347,826 shares of the Company’s common stock (together with the “Tranche B Exchange Shares,” the “April Exchange Shares”). The exchange price for the April Exchange Shares was at a discounted price of $1.15 per share. The Company determined that, since the principal amount repaid and exchanged under the Tranche B notes and the principal amount exchanged under the 2019 notes represented the principal amount that would have otherwise become due and payable in May and July of 2017 under the Tranche B notes and 2019 notes, respectively, the extinguishment of the May and July 2017 payments was not considered to be a troubled debt restructuring. Accordingly, the Company accounted for the transaction by recording a loss on extinguishment of debt of $0.3 million at April 18, 2017 which was calculated as the difference between the reacquisition price and the net carrying value of the related debt. The reacquisition price was calculated using the $4.0 million cash repayment and the fair value of the April Exchange Shares on April 18, 2017. The fair value of the April Exchange Shares was determined to be $1.22 per share, which represents the closing price of the Company’s common stock on April 18, 2017. On June 29, 2017, the Company entered into the Third Amendment to the Facility Agreement with Deerfield, pursuant to which the Company agreed to, among other things, (i) exchange $5.0 million principal amount under the Company’s 2019 notes for 3,584,230 shares of the Company’s common stock (the “June Exchange Shares”) at an exchange price of $1.395 per share and (ii) amend the Facility Agreement, to (A) defer the payment of $10.0 million in principal amount of the 2019 notes from the original July 18, 2017 due date to August 31, 2017, which was further deferred to October 31, 2017 upon the Company’s delivery on August 31, 2017 and October 30, 2017 of a written certification to Deerfield that certain conditions had been met, including that no event of default under the Facility Agreement had occurred, Michael E. Castagna remains the Company’s Chief Executive Officer, the Company received the advance from The Mann Group (see Note 6 — Related-Party Arrangements), the Company had at least $10.0 million in cash and cash equivalents on hand, no material adverse effect on the Company had occurred, the engagement letter between the Company and Greenhill & Co., Inc. (“Greenhill”) remained in full force and effect and Greenhill had remained actively engaged in exploring capital structure and financial alternatives on behalf of the Company in accordance with such engagement letter (collectively, the “Extension Conditions”), and (B) amend the Company’s financial covenant under the Facility Agreement to provide that, if the Extension Conditions remain satisfied, the obligation under the Facility Agreement to maintain at least $25.0 million in cash and cash equivalents as of the end of each quarter was reduced to $10.0 million as of August 31, 2017, September 30, 2017, October 31, 2017 and December 31, 2017 if certain conditions were met. We met the conditions at each of these month-ends. The Company determined that the principal amount repaid and exchanged under the 2019 notes represented the principal amount that would have otherwise become due and payable under the 2019 notes. As a result, the $5.0 million prepayment was not considered to be a troubled debt restructuring. Accordingly, the Company accounted for the transaction by recording a loss on extinguishment of debt of $0.5 million on June 29, 2017 which was calculated as the difference between the reacquisition price and the net carrying value of the related debt. The net carrying value of the related debt includes the acceleration of the debt discount and issuance costs amounting to approximately $0.3 million as a result of the transaction. The reacquisition price was calculated using the fair value of the June Exchange Shares on June 29, 2017. The fair value of the June Exchange Shares was determined to be $1.45 per share which represented the closing price of the Company’s common stock on June 29, 2017. On October 23, 2017, the Company entered into a Fourth Amendment to the Facility Agreement with Deerfield, pursuant to which the parties (i) deferred the payment of $10.0 million in principal amount (the “October Payment”) of the Facility Financing Obligation from October 31, 2017 to January 15, 2018, with the Company depositing an amount of cash equal to the October Payment into an escrow account until the October Payment has been satisfied in full (subject to early release to the extent that portions of the October Payment are satisfied through the exchange of principal for shares of the Company’s common stock), and (ii) amended and restated the Facility Financing Obligation and the Tranche B notes to provide that Deerfield may convert the principal amount under such notes from time to time into an aggregate of up to 4,000,000 shares of the Company’s common stock after the effective date of the Fourth Amendment. The conversion price will be the greater of (i) the average of the volume weighted average price per share of the Company’s common stock for the three trading day period immediately preceding the date of any election by Deerfield to convert principal amounts of such notes and (ii) $3.25 per share, subject to adjustment under certain circumstances. Any conversions of principal by Deerfield under such notes will be applied first to reduce the October Payment, and after the October Payment has been satisfied, to reduce other principal payments due. The Company determined that the Fourth Amendment did not include any concessions and that the addition of the conversion option was not substantive and therefore it was not considered to be a troubled debt restructuring. Accordingly, the Company accounted for the transaction as a modification. On November 6, 2017 Deerfield converted 1,720,846 shares under the conversion feature at a price of $3.25 per share, redeeming $5.6 million of principal amount. On January 15, 2018, the Company entered into a Fifth Amendment to the Facility Agreement with Deerfield, pursuant to which the parties deferred the payment date for the $4.4 million remaining October 2017 Tranche 4 Principal Payment from January 15, 2018 to January 19, 2018. Concurrent with this amendment the Company entered into a First Amendment to Escrow Agreement to extend the escrow period to January 19, 2018 to align with the amended payment date under the Fifth Amendment. On January 18, 2018, the Company entered into an Exchange and Sixth Amendment to Facility Agreement with Deerfield, pursuant to which, among other things, the Company agreed to issue to Deerfield an aggregate of 1,267,972 shares of its common stock, in exchange for $3.2 million of the 2019 notes, an exchange rate of $2.49 per share. In addition, the parties deferred the payment date for the $1.3 million remaining principal amount of the 2019 notes (the “Remaining Payment”) from January 19, 2018 to May 6, 2018. The Company and Deerfield also amended the outstanding 2019 notes and Tranche B notes to provide that Deerfield may, subject to the terms of the Sixth Amendment, convert principal amounts of the 2019 notes and Tranche B notes from time to time into an aggregate of up to 10,000,000 shares of the Company’s common stock (excluding the exchange shares issued to Deerfield on January 18, 2018). The conversion price was set at the greater of (i) the average of the volume weighted average price per share of the Company’s common stock for the three trading day period immediately preceding the date of any election by Deerfield to convert principal amounts and (ii) $2.75 per share, subject to adjustment under certain circumstances described in the 2019 notes and Tranche B notes. Any conversions of principal will be applied first to reduce the Remaining Payment, and thereafter to reduce other principal payments. In connection with the Sixth Amendment, the Company also entered into a Second Amendment to Escrow Agreement, dated January 18, 2018, with Deerfield and US Bank, pursuant to which the parties extended the period of the escrow established thereunder to May 6, 2018, corresponding to the extended payment date. The Company determined that the Fifth and Sixth Amendments did not include any concessions and that the change of the conversion option was not substantive and therefore it was not considered to be a troubled debt restructuring. Accordingly, the Company accounted for the transaction as a modification. On March 6, 2018 Deerfield converted the remaining $1.3 million of principal amount due under the 2019 notes for 441,618 shares of the Company’s common stock. The fair value of these exchange shares was determined to be $2.83 per share representing the average of the volume weighted average price per share of the Company’s common stock for the three trading day period immediately preceding the date of the election by Deerfield to convert as reported on the Nasdaq Global Market. The Escrow Agreement with Deerfield and US Bank, was terminated as the required payment was satisfied in full as of March 12, 2018. On March 12, 2018 the Company entered into an Exchange Agreement with Deerfield pursuant to which the Company agreed to, among other things, exchange $5.0 million of principal amount of the Tranche B notes for 1,838,236 shares of the Company’s common stock. The fair value of these exchange shares was determined to be $2.72 per share representing the closing price of the Company’s common stock on March 9, 2018 as reported on the Nasdaq Global Market. The principal amount being exchanged under the Tranche B notes represents the principal amount that would have otherwise become due and payable in May 2018. On June 8, 2018, the Company entered into an Exchange and Seventh Amendment to Facility Agreement with Deerfield, pursuant to which, among other things, (i) the Company issued to Deerfield 3,061,224 shares of the Company’s common stock in exchange for the cancellation of (a) $3.0 million of $5.0 million principal amount of 2019 notes that was due and payable on July 1, 2018 and (b) $3.0 million of $5 million principal amount of Tranche B notes that was due and payable on December 31, 2019, (ii) the Company’s obligation under the Facility Agreement to maintain at least $25.0 million in cash as of the end of each quarter was reduced to $20 million through December 31, 2018, (iii) the minimum price at which the 2019 notes or Tranche B notes may be converted into shares of the Company’s common stock was reduced from $2.75 to $2.01 per share and (iv) the parties agreed that, on or after June 8, 2018, the 2019 notes and Tranche B notes may be converted into a maximum of 9,558,382 shares of the Company’s common stock. The fair value of the exchange shares issued to Deerfield on June 8, 2018 was determined to be $1.96 per share, representing the closing price of the Company’s common stock on June 8, 2018 as reported on the Nasdaq Global Market. On July 12, 2018, the Company entered into an Exchange and Eighth Amendment to Facility Agreement with Deerfield, pursuant to which the parties amended the Facility Agreement to, among other things, (i) issue to Deerfield 7,367,839 shares of the Company’s common stock in exchange for the cancellation of (a) $7.0 million of $10.0 million principal amount of 2019 notes that was due and payable on July 18, 2018, (b) $3.0 million of $5.0 million principal amount of 2019 notes that was due and payable on December 31, 2019 and (c) $2.0 million of $2.0 million principal amount of Tranche B notes that was due and payable on December 31, 2019, (ii) defer the payment of $3.0 million in principal amount of 2019 notes from July 18, 2018 to August 31, 2018, (iii) reduce the minimum price at which the remaining notes issued under the Facility Agreement may be converted into shares of the Company’s common stock from $2.01 to $1.80 per share and (iv) provide that, on or after July 12, 2018, such remaining notes may be converted into a maximum of 5,750,000 shares of the Company’s common stock. On September 5, 2018, the Company entered into a Ninth Amendment to Facility Agreement (the “Ninth Deerfield Amendment”) with Deerfield, pursuant to which the parties amended the Facility Agreement to, among other things, further defer the payment of $3.0 million in principal amount of 2019 notes from August 31, 2018 to September 30, 2018. Following the Ninth Deerfield Amendment, in September 2018 Deerfield converted $8.0 million in principal amount of 2019 notes and $2.5 million in principal amount of Tranche B notes into an aggregate of 5,749,500 shares of the Company’s common stock in two transactions on September 6 and September 7, 2018. Accordingly, the Company accounted for the transactions by recording a loss on extinguishment of debt of $0.7 million for the three and nine months ended September 30, 2018 which was calculated as the difference between the reacquisition price and the net carrying value of the related debt. The net carrying value of the related debt includes the acceleration of the debt discount and issuance costs amounting to approximately $0.3 million as a result of the transaction. The fair value of the Exchange Shares was determined to be $2.04 and $1.78 per share representing the closing trading price of the Company’s common stock on The Nasdaq Global Market on September 6 and September 7, 2018, respectively. On September 26, 2018, the Company entered into a Tenth Amendment to Facility Agreement with Deerfield, pursuant to which the parties amended the Facility Agreement, to, among other things, (i) further defer the payment of $3.0 million in principal amount of 2019 notes from September 30, 2018 until the earlier of October 31, 2018 or the first business day following the date the Company receives an upfront payment of $45.0 million from United Therapeutics (See Note 8 – Collaboration Arrangements), and (ii) provide that the Company shall be obligated to maintain at least $20.0 million in cash and cash equivalents as of October 31, 2018 and December 31, 2018 and $25.0 million in cash and cash equivalents as of the end of each fiscal quarter after December 31, 2018. Subsequently, such payment was made to Deerfield on October 18, 2018. In connection with the Facility Agreement, on July 1, 2013, the Company entered into a Milestone Rights Purchase Agreement (the “Milestone Agreement”) with Deerfield and Horizon Santé FLML SÁRL (collectively, the “Milestone Purchasers”), which requires the Company to make contingent payments to the Milestone Purchasers, totaling up to $90.0 million, of which $75.0 million remain payable, upon the Company achieving specified commercialization milestones (the “Milestone Rights”). As of September 30, 2018 and December 31, 2017, the remaining milestone rights liability balance was $8.8 million. The Company currently estimates that it will reach the next milestone in the first quarter of 2019. Accordingly, $1.6 million in value related to the next milestone payment was recorded in accrued expenses and other current liabilities as of September 30, 2018 and December 31, 2017, resulting in $7.2 million being recorded in milestone rights liability, which is non-current, in the accompanying condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017, respectively. Accretion of debt issuance cost and debt discount during the three and nine months ended September 30, 2018 and 2017, are as follows (in thousands):
|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |
Accretion expense - debt issuance cost |  | $ | 14 |  |  | $ | 7 |  |  | $ | 32 |  |  | $ | 39 |
Accretion expense - debt discount |  | $ | 375 |  |  | $ | 431 |  |  | $ | 1,072 |  |  | $ | 1,564 |
The Facility Agreement includes customary representations, warranties and covenants, including a restriction on the incurrence of additional indebtedness. 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 Facility Financing Obligation has been classified as a current liability in the accompanying condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017. In the event of non-compliance, Deerfield may declare all or any portion of the Facility Financing Obligation to be immediately due and payable. 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. In connection with the Facility Agreement and Milestone 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 Facility Financing Obligation in full, if applicable. 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. All of the embedded derivatives were determined to have a de minimis value as of September 30, 2018 and December 31, 2017. Senior Convertible Notes Due 2021 — On October 23, 2017, the Company entered into exchange agreements with the holders of the Company’s 5.75% Senior Convertible Notes due 2018 (the “2018 notes”), pursuant to which the Company agreed to exchange all of the outstanding 2018 notes in the aggregate principal amount of $27.7 million for (i) $23.7 million aggregate principal amount of new 5.75% Senior Convertible notes due 2021 (the “2021 notes”) and (ii) an aggregate of 973,236 shares of its common stock. In addition, the conversion rate was adjusted from $34 per share to $5.15 per share. The 2021 notes were issued at the closing of the exchange on October 23, 2017. The Company analyzed this exchange and concluded that the exchange represents an extinguishment of the 2018 notes and recorded a $0.8 million loss on extinguishment of debt during the last quarter of fiscal year 2017. In addition, unamortized debt issuance costs of $0.3 million and unamortized debt premium of $0.2 million were also written-off during the last quarter of fiscal year 2017. On May 25, 2018, the Company entered into a privately-negotiated exchange agreement (the “Exchange Agreement”) with certain holders of its 2021 notes, pursuant to which the Company agreed to issue 2,250,000 shares of its common stock in exchange for the cancellation of $5.0 million principal amount of the 2021 notes and unpaid accrued interest thereon. The exchange price for these exchange shares was approximately $2.2567 per share. The exchange was completed on May 31, 2018. As a result, the Company recognized approximately $0.8 million as extinguishment gain which was calculated based on the difference between the reacquisition price and the net carrying amount of the payment on the debt. The 2021 notes are the Company’s general, unsecured, senior obligations, except that they are subordinated in right of payment to the Facility Financing Obligation. The 2021 notes rank equally in right of payment with the Company’s other unsecured senior debt. The 2021 notes bear interest at the rate of 5.75% per year on the principal amount, payable semiannually in arrears in cash or, at the option of the Company if certain conditions are met, in shares of the Company’s common stock (the “Interest Shares”), on February 15 and August 15 of each year, beginning February 15, 2018, with interest accruing from August 15, 2017. To date, the interest on the Company’s 2021 notes have been paid in cash and in converted shares. The Company converted $0.4 million accrued interest for 475,520 shares and the fair value of the exchange was $1.13 per share, representing the closing price of the Company’s common stock on August 14, 2018 per the Nasdaq Global Market. The aggregate number of Interest Shares that the Company may issue may not exceed 13,648,300, unless the Company receives stockholder approval to issue Interest Shares in excess of such a number in accordance with the listing standards of the Nasdaq Global Market. Accrued interest related to these notes is recorded in accrued expenses and other current liabilities on the accompanying condensed consolidated balance sheets. The 2021 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 194.1748 shares per $1,000 principal amount of 2021 notes, which is equal to the conversion price of approximately $5.15 per share. The conversion rate is subject to adjustment under certain circumstances described in an indenture governing the 2021 notes. If the Company undergoes certain fundamental changes, except in certain circumstances, each holder of 2021 notes will have the option to require the Company to repurchase all or any portion of that holder’s 2021 notes. The fundamental change repurchase price will be 100% of the principal amount of the 2021 notes to be repurchased plus accrued and unpaid interest, if any. The Company may elect at its option to cause all or any portion of the 2021 notes to be mandatorily converted in whole or part at any time prior to the close of business on the business day immediately preceding the maturity date, if the last reported sale price of its common stock exceeds 120% of the conversion price then in effect for at least 10 trading days in any 20 consecutive trading day period, ending within five business days prior to the date of the mandatory conversion notice. The redemption price is equal the sum of 100% of the principal amount of the 2021 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 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 2021 notes under existing commitments. Applying the Company’s sequencing policy, the Company performed an analysis at the time of the offering of the 2021 notes and each reporting date since and has concluded that the number of available authorized shares at the time of the offering and each reporting date since was sufficient to deliver the number of shares that could be required to be delivered during the term of the 2021 notes under existing commitments. The 2021 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. As a result of the exchange of the 2021 notes during the last quarter of 2017, the Company recorded approximately $0.8 million in debt premium, which is recorded with the 2021 notes, in the accompanying condensed consolidated balance sheets. The premium is being accreted to interest expense using the effective interest method over the term of the 2021 notes. Amortization of the premium and accretion of debt issuance costs related to the 2021 and 2018 notes for the three and nine months ended September 30, 2018 and 2017 are as follows:
|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |
Amortization of debt premium |  | $ | 35 |  |  | $ | 62 |  |  | $ | 119 |  |  | $ | 182 |
Accretion expense - debt issuance cost |  |  | 2 |  |  | $ | 70 |  |  | $ | 2 |  |  | $ | 204 |
Refer to Note 6 – Related Party Arrangements for information regarding the Note payable to related party.

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -URI http://asc.fasb.org/topic&trid=2208564 + Details
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