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Commitments and Contingencies | 3 Months Ended
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Mar. 31, 2024
Commitments And Contingencies Disclosure [Abstract] |
Commitments and Contingencies | 14. 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 and therefore has not recorded any liability for these indemnities in the condensed consolidated balance sheets. 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. The Company does not anticipate the final disposition of any matters will have a material adverse effect on the results of operations, financial position, or cash flows of the Company. 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. Contingencies — Milestone Rights — In July 2013, the Company entered into the Milestone Rights Agreement with the Original Milestone Purchasers, pursuant to which the Company granted the Milestone Rights to receive payments up to $90.0 million upon the occurrence of specified strategic and sales milestones, $55.0 million of which remains payable to the Milestone Purchasers as of March 31, 2024. The Milestone Rights 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 such agreement. As of March 31, 2024 and December 31, 2023, the remaining Milestone Rights liability balance was $3.9 million and consisted of $0.8 million of current liability, which was presented as accrued expenses and other current liabilities, and $3.1 million of long-term liability, which was presented as milestone liabilities in our condensed consolidated balance sheets. The value of the Milestone Rights liability was based on initial fair value estimates calculated using the income approach and reduced by milestone achievement payments made. Loss Contingencies — Returns Reserve for Acquired Product — During the three months ended March 31, 2024, the Company revised its previously-determined estimates for product returns associated with sales of V-Go that pre-date the Company's acquisition of the product totaling $1.2 million which is included in accrued expenses and other current liabilities in the condensed consolidated balance sheets as of March 31, 2024 and general and administrative expenses in the condensed consolidated statements of operations for three months ended March 31, 2024. Although future returns are probable, the Company cannot reasonably estimate any associated losses as of March 31, 2024. Liability for Sale of Future Royalties — On December 27, 2023 (the “Inception Date”), the Company executed a Purchase and Sale Agreement (the “PSA”) with Sagard Healthcare Partners Funding Borrower SPE 2, LP (“Sagard”). Pursuant to the PSA, Sagard paid the Company $150.0 million (the “Upfront Proceeds”), net of $0.4 million in reimbursements of Sagard’s fees and expenses (the “Reimbursements”), for the purchase of a 1% royalty on future net sales of Tyvaso DPI by UT under the terms of the UT License Agreement (the “Sagard Royalty”). Sagard will also pay the Company a milestone of $50.0 million if net sales of Tyvaso DPI meet or exceed $1.9 billion for any twelve consecutive months on or prior to December 31, 2026 (“Net Sales Threshold A”), or a milestone of $45.0 million if net Sales Threshold A is not met and net sales of Tyvaso DPI meet or exceed $2.3 billion for any twelve consecutive months on or prior to September 30, 2027 (“Net Sales Threshold B”), resulting in a purchase price not to exceed $200.0 million (the “Purchase Price”). If Net Sales Thresholds A and B are not met and net sales of Tyvaso DPI meet or exceed $3.5 billion for any calendar year after September 30, 2027, no royalties will be payable to Sagard for the remainder of that year. The PSA applies to net sales of Tyvaso DPI generated during October 1, 2023 (the “Commencement Date”) through December 31, 2042 (the “Termination Date”) and will automatically terminate upon payment of the final royalty owed to Sagard thereafter. Upon the Termination Date, ownership of the Sagard Royalty will revert to the Company. Given the Company’s continuing involvement with the generation of Tyvaso DPI revenue under the UT License Agreement and CSA, which includes the Company’s supply and manufacture of Tyvaso DPI, and the Company’s retention and associated defense and maintenance obligations of the intellectual property required in the manufacture of Tyvaso DPI, the Upfront Proceeds were recorded as a liability for sale of future royalties (the “Royalty Liability”) on the condensed consolidated balance sheets, and any proceeds from future milestones will be added to the Royalty Liability balance upon receipt. Although the Company is not obligated to repay any portion of the Purchase Price to Sagard, the Royalty Liability under the PSA is secured by a security interest granted to Sagard in the underlying 1% royalty rights and any proceeds therefrom. As a result of the PSA, transaction costs totaling $4.4 million (including the Reimbursements) (the "Transaction Costs") are reported net of the Royalty Liability balance and amortized to interest expense in the condensed consolidated statements of operations over the life of the PSA using the effective interest method. The Company will continue to recognize the full 10% of future royalty revenues in its condensed consolidated statements of operations, with the Sagard Royalty being non-cash revenue for the Company. As royalty payments are remitted to Sagard, the balance of the Royalty Liability will be effectively repaid as it is amortized over the life of the PSA. To amortize the Royalty Liability, the Company estimated the total amount of future royalty payments to be made to Sagard over the life of the PSA. The excess of those future estimated royalty payments over the Purchase Price proceeds received is recognized in the condensed consolidated statements of operations as non-cash interest expense over the life of the PSA utilizing an imputed effective interest rate. The effective interest rate is calculated based on the rate that would enable the debt to be repaid in full over the anticipated life of the arrangement. The interest rate may vary during the term of the agreement depending on a number of factors, including the amount and timing of forecasted royalty payments which affects the timing and ultimate amount of reductions to the liability. The Company will evaluate the effective interest rate periodically based on its forecasted royalty payments utilizing the prospective method. The Company periodically assesses the forecasted royalty payments using a combination of historical results, internal projections and forecasts from external sources. To the extent such payments, or the timing of such payments, are materially different than original estimates, the Company will prospectively adjust the effective interest rate and amortization of the Royalty Liability. The Company’s effective annual interest rate on the Royalty Liability was approximately 11.1% during the three months ended March 31, 2024, during which time the Company recorded $4.2 million in non-cash interest expense and $0.1 million amortization of the Transaction Costs in the condensed consolidated statements of operations. Non-cash revenue recognized by the Company during the period of the Commencement Date through December 31, 2023 of $2.1 million was remitted to Sagard by UT during the three months ended March 31, 2024. Non-cash revenue recognized by the Company during the three months ended March 31, 2024 of $2.3 million will be remitted to Sagard by UT during the second quarter of 2024. The following table shows the activity within the Royalty Liability account as well as the effective interest rate (dollars in millions):
| Three Months Ended March 31, |
| 2024 |
Balance, beginning of period | $ | 145.8 |
Amortization of deferred transaction costs |  | 0.1 |
Non-cash interest expense on liability for sale of future royalties |  | 4.2 |
Royalty revenue remitted to Sagard by UT |  | (2.1 | )
Balance, end of period | $ | 148.0 |
Effective interest rate |  | 11.1 | %
Sale-Leaseback Transaction— In November 2021, the Company sold certain land, building and improvements located in Danbury, CT (the "Property") to an affiliate of Creative Manufacturing Properties (the "Purchaser") for a sales price of $102.3 million, subject to terms and the conditions contained in a purchase and sale agreement. Effective with the closing of the Sale-Leaseback Transaction, the Company and the Purchaser entered into a lease agreement (the “Lease”), pursuant to which the Company leased the Property from the Purchaser for an initial term of 20 years, with four renewal options of five years each. The total annual rent under the Lease starts at approximately $9.5 million per year, subject to a 50% rent abatement during the first year of the Lease, and will increase annually by (i) 2.5% in the second through fifth year of the Lease and (ii) 3% in the sixth and each subsequent year of the Lease, including any renewal term. The Company is responsible for payment of operating expenses, property taxes and insurance for the Property. The Purchaser will hold a security deposit of $2.0 million during the Lease term. Pursuant to the terms of the Lease, the Company has four options to repurchase the Property, in 2026, 2031, 2036 and 2041, for the greater of (i) $102.3 million and (ii) the fair market value of the Property. Effective with the closing of the Sale-Leaseback Transaction, the Company and the Purchaser also entered into a right of first refusal agreement (the “ROFR”), pursuant to which the Company has a right to re-purchase the Property from the Purchaser in accordance with terms and conditions set forth in the ROFR. Specifically, if the Purchaser receives, and is willing to accept, a bona fide purchase offer for the Property from a third-party purchaser, the Company has certain rights of first refusal to purchase the Property on the same material terms as proposed in such bona fide purchase offer. As of March 31, 2024, the related financing liability was $104.1 million, which was recognized in the condensed consolidated balance sheet and of which $94.2 million was long-term and $9.9 million was current. As of December 31, 2023, the related financing liability was $104.1 million, of which $94.3 million was long-term and $9.8 million was current. Cash paid for interest on the financing liability totaled $2.4 million during each of the three months ended March 31, 2024 and 2023. Financing liability information was as follows (dollars in thousands):
|  | March 31, 2024 |  |  | December 31, 2023 |
Weighted average remaining lease term (in years) |  |  | 17.6 |  |  |  | 17.8 |
Weighted average discount rate |  |  | 9.0 | % |  |  | 9.0 | %
|  | Three Months Ended March 31, |
|  | 2024 |  |  | 2023 |
Interest expense on financing liability |  | $ | 2,447 |  |  | $ | 2,424 |
The Company's remaining financing liability payments were as follows (in thousands):
|  | March 31, 2024 |
Remainder of 2024 |  | $ | 7,523 |
2025 |  |  | 10,269 |
2026 |  |  | 10,533 |
2027 |  |  | 10,849 |
2028 |  |  | 11,174 |
Thereafter |  |  | 177,278 |
Total |  |  | 227,626 |
Interest payments |  |  | (120,923 | )
Debt issuance costs |  |  | (2,624 | )
Total financing liability |  | $ | 104,079 |
Commitments — In July 2014, the Company entered into the Insulin Supply Agreement with 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. In December 2023, the Company and Amphastar amended the Insulin Supply Agreement to extend the term, restructure the annual purchase commitments and include a capacity fee for certain future periods. The Company's remaining purchase commitments and estimated capacity fee liability as of March 31, 2024 were as follows (€ in millions):
| March 31, 2024 |
| Remaining Purchase Commitments |  |  | Estimated Capacity Fees |
Remainder of 2024 |  | 2.3 |  |  |  | — |
2025 |  | — |  |  |  | 1.5 |
2026(1) |  | 4.2 |  |  |  | 2.0 |
2027 |  | 6.0 |  |  |  | 1.0 |
2028 |  | 6.0 |  |  |  | 1.0 |
2029 |  | 6.0 |  |  |  | 1.0 |
2030 |  | 6.0 |  |  |  | 1.0 |
2031 |  | 8.0 |  |  |  | 0.5 |
2032 |  | 8.0 |  |  |  | 0.5 |
2033 |  | 8.0 |  |  |  | 0.5 |
2034 |  | 4.4 |  |  |  | 0.5 |
Total |  | 58.9 |  |  |  | 9.5 |
_________________________ (1) If there is a delay in the availability of insulin with FDA approved inclusion bodies and supply does not begin in 2026 as currently expected, the Company will incur a capacity fee of €750,000 per quarter that the product is not available for purchase. Pursuant to the amendment, the term of the Insulin Supply Agreement expires on the later of December 31, 2034 or until the completion of the total remaining purchase commitment quantities, unless terminated earlier, 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 a 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 periodically reviews the terms of the long-term Insulin Supply Agreement and assesses the need for any accrual for estimated losses, such as lower-of-cost or net-realizable-value that will not be recovered by future product sales. The recognized loss on purchase commitments of $62.7 million and $64.8 million is included in our condensed consolidated balance sheets as of March 31, 2024 and December 31, 2023, respectively, and is reduced as inventory items are received or such liability is extinguished. As a result of the increase in future cash flows for the excess capacity fees and extended term included in the amendment of the Insulin Supply Agreement, the Company analyzed the need for additional estimated losses and concluded that an increase in the recognized loss on purchase commitments was not required as the net realizable value of inventory resulting from the purchase commitment was in excess of the carrying value. Increases in costs associated with the amendment will be recognized through inventory as incurred. Vehicle Leases – During the second quarter of 2018, the Company entered into a master lease agreement with Enterprise Fleet Management Inc. The monthly payment inclusive of maintenance fees, insurance and taxes is approximately $0.1 million. The lease expense is included in selling expenses in the condensed consolidated statements of operations. Office Leases — In May 2017, the Company executed an office lease with Russell Ranch Road II LLC for the Company’s corporate offices in Westlake Village, California, which was renewed in April 2022. Pursuant to the renewal, the monthly lease payments of $79,543 began in February 2023 and are subject to 3% annual increases, plus the estimated cost of maintaining the property and common areas by the landlord, and are further subject to a six-month base rent concession beginning February 2023. The Company is also entitled to a one-time allowance up to $0.9 million as reimbursement for tenant improvements or the purchase of furniture, fixtures or equipment. Of the $0.9 million allowance, an amount up to $0.7 million may be applied as an additional base rent concession. The Company has no further right to extend the lease term beyond July 31, 2028. In May 2022, the Company assumed certain leased real property (the “Marlborough Lease”) in connection with the V-Go acquisition. The Marlborough Lease pertains to certain premises in a building located in Marlborough, Massachusetts. The monthly payments of $28,895 began in June 2022, subject to approximately 3% annual increases through February 28, 2026. The Company also acquired rights to a manufacturing service agreement where V-Go is manufactured using Company-owned equipment located at the manufacturing facility. The Company determined that this arrangement results in an embedded lease which granted the Company exclusive use of space within the manufacturing facility. The Company assessed the embedded lease cost to be $14,370 per month through February 28, 2026. Lease information was as follows (dollars in thousands):
|  | March 31, 2024 |  |  | December 31, 2023 |
Operating lease right-of-use assets(1) |  | $ | 4,392 |  |  | $ | 4,685 |
Operating lease liability-current(2) |  | $ | 1,611 |  |  | $ | 1,423 |
Operating lease liability-long-term |  |  | 3,645 |  |  |  | 3,925 |
Total |  | $ | 5,256 |  |  | $ | 5,348 |
Weighted average remaining lease term (in years) |  |  | 3.8 |  |  |  | 3.7 |
Weighted average discount rate |  |  | 7.3 | % |  |  | 7.3 | %
_________________________ (1) Operating right-of-use assets related to vehicles, offices and the manufacturing facility are included in other assets in the condensed consolidated balance sheets. (2) Operating lease liability – current is included in accrued expenses and other current liabilities in the condensed consolidated balance sheets.
|  | Three Months Ended March 31, |
|  | 2024 |  |  | 2023 |
Operating lease costs |  | $ | 348 |  |  | $ | 422 |
Variable lease costs |  |  | 10 |  |  |  | 36 |
Cash paid |  |  | 232 |  |  |  | 323 |
The Company's future minimum office and vehicle lease payments were as follows (in thousands):
|  | March 31, 2024 |
Remainder of 2024 |  | $ | 1,224 |
2025 |  |  | 1,829 |
2026 |  |  | 1,213 |
2027 |  |  | 1,135 |
2028 |  |  | 643 |
Total |  |  | 6,044 |
Interest expense |  |  | (788 | )
Total operating lease liability |  | $ | 5,256 |

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