Amendment No. 3
MannKind Corporation
Delaware | 2834 | 13-3607736 | ||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification No.) |
28903 North Avenue Paine
Alfred E. Mann
Copies to:
Frederick T. Muto, Esq. Jeremy D. Glaser, Esq. Cooley Godward LLP 4401 Eastgate Mall San Diego, California 92121 (858) 550-6000 |
Robert M. Smith, Esq. Dewey Ballantine LLP 1950 University Avenue, Suite 500 East Palo Alto, California 94303-2225 (650) 845-7000 |
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: o
If this Form is filed to register additional
securities for an offering pursuant to Rule 462(b) under
the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same offering:
o
If this Form is a post-effective amendment filed
pursuant to Rule 462(c) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same offering:
o
If this Form is a post-effective amendment filed
pursuant to Rule 462(d) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same offering:
o
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: o
Title of Each Class of | Proposed Maximum | Amount of | ||
Securities to be Registered | Aggregate Offering Price(1) | Registration Fee | ||
Common Stock, par value $0.01 per share
|
$94,875,000 | $12,021(2) | ||
(1) | Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes $12,375,000 of shares that the underwriters have the option to purchase to cover over-allotments. |
(2) | Previously paid. |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this
preliminary prospectus is not complete and may be changed. We
may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective.
This preliminary prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted. |
Filed pursuant to Rule 424A
PRELIMINARY PROSPECTUS | Subject to completion | July 26, 2004 |
5,500,000 Shares
MannKind Corporation |
This is the initial public offering of our common stock. No public market currently exists for our common stock. We are offering all of the 5,500,000 shares of our common stock offered by this prospectus. We expect the public offering price to be between $13.00 and $15.00 per share.
We have applied to have our common stock approved for quotation on The Nasdaq National Market under the symbol MNKD.
Investing in our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common stock in Risk factors beginning on page 9 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Per share | Total | |||||||
Public offering price
|
$ | $ | ||||||
Underwriting discounts and commissions
|
$ | $ | ||||||
Proceeds, before expenses, to us
|
$ | $ | ||||||
The underwriters may also purchase up to an additional 825,000 shares of our common stock at the public offering price, less the underwriting discounts and commissions payable by us, to cover over-allotments, if any, within 30 days from the date of this prospectus. If the underwriters exercise this option in full, the total underwriting discounts and commissions will be $ and our total proceeds, before expenses, will be $ .
The underwriters are offering the common stock as set forth under Underwriting. Delivery of the shares will be made on or about , 2004.
UBS Investment Bank
Piper Jaffray |
Wachovia Securities |
Jefferies & Company, Inc. |
The Technosphere Insulin System, including both the Technosphere dry-powder formulation of insulin and the MedTone inhaler, is restricted by United States law to investigational use only and is not approved for commercial sale.
You should rely only on the information provided in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of our common stock.
Through and including , 2004 (the 25th day after the date of this prospectus), federal securities laws may require all dealers that effect transactions in our common stock, whether or not participating in this offering, to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
TABLE OF CONTENTS
Technosphere® is our registered trademark and we have applied to register MedToneTM with the US Patent and Trademark office. We have also applied for or registered company trademarks in other jurisdictions, including Europe and Japan. This prospectus also contains trademarks and service marks of other companies that are the property of their respective owners.
Prospectus summary
This summary highlights selected information appearing elsewhere in this prospectus and may not contain all of the information that is important to you. This prospectus includes information about the shares we are offering as well as information regarding our business and detailed financial data. You should read this prospectus in its entirety. Unless the context requires otherwise, the words MannKind, we, company, us and our refer to MannKind Corporation and its subsidiary.
OVERVIEW
We are a biopharmaceutical company focused on the discovery, development and commercialization of therapeutic products for diseases such as diabetes, cancer, inflammatory and autoimmune diseases. Our lead product, the Technosphere Insulin System, which is currently in late Phase II clinical trials for the treatment of diabetes, consists of our dry powder Technosphere formulation of insulin and our MedTone inhaler through which the powder is inhaled into the deep lung. On the basis of our clinical findings to date and our understanding of current diabetes therapy, we believe the performance characteristics, convenience and ease of use of our proprietary Technosphere Insulin System have the potential to change the way diabetes is treated.
We have discovered and developed the majority of our technology, including the technology associated with our Technosphere Insulin System and our cancer therapy. Currently, our operations encompass research, preclinical and clinical development as well as pharmaceutical manufacturing. We currently outsource the manufacture of our MedTone inhaler. As our products mature, we intend to either enter into sales and marketing collaborations with other companies, if available on commercially reasonable terms, or develop these capabilities ourselves.
According to the American Diabetes Association, in the United States diabetes is estimated to cost society over $132 billion each year and is currently the fifth leading cause of death by disease. The United States Centers for Disease Control, or CDC, estimated that as of 2002 approximately 18.2 million people in the United States, or 6.3% of the population, suffered from type 1 or type 2 diabetes. The CDC further estimated that 13 million cases were diagnosed and under treatment as of 2002 and that 1.3 million new cases would be diagnosed per year beyond that date. According to the CDC, type 2 diabetes is the more prevalent form of the disease, affecting approximately 90% to 95% of people diagnosed with diabetes.
Typically, the treatment of type 2 diabetes starts with management by diet and exercise and progresses to treatment with various non-insulin oral medications and then to treatment with insulin. Treatment through diet and exercise has not been an effective long-term solution for the vast majority of patients with type 2 diabetes. Non-insulin oral medications, which act by increasing the amount of insulin produced by the pancreas or by increasing the sensitivity of insulin-sensitive cells, generally have significant adverse effects and are limited in their ability to manage the disease effectively. Insulin therapy usually involves administering several subcutaneous injections of insulin each day. However, this treatment regimen is inadequate for many reasons, including the inconvenience and pain associated with injections that lead patients not to comply adequately with the prescribed treatment.
Because of the problems associated with the conventional administration of insulin by injection, patients and their physicians have sought alternative methods for the delivery of insulin. One alternative to conventional insulin therapy being pursued by a number of pharmaceutical and biotechnology companies is the inhalation of an insulin formulation into the deep lung, where it can be absorbed directly into the bloodstream. Delivering insulin through the pulmonary route is less invasive than administering it by injection, which, we believe, should increase patient compliance. We anticipate that the first pulmonary insulin product developed by another pharmaceutical company may be ready for commercial sale as early as 2005. However, we believe this product, as well as other pulmonary insulin products in development of which we are aware, will not address a significant shortcoming of conventional insulin therapy. In particular, based on several published reports,
The first-phase insulin release spike occurs when a healthy person begins to eat a meal. At the beginning of the meal, the body responds with a sharp spike of insulin release that acts as a signal to the liver to shut off its release of glucose into the bloodstream. This signal turns off the source of glucose that fuels the body between meals at a time when glucose is being supplied from food. Individuals with diabetes cannot produce a first-phase insulin release spike, so their liver continues to release glucose while they absorb additional glucose from the meal. As a result, these individuals develop abnormally high levels of blood glucose, which predisposes them to serious, adverse health consequences.
In contrast, we have observed in our clinical trials to date that our Technosphere Insulin System produces a profile of insulin levels in the bloodstream that does approximate the natural first-phase insulin release spike. In particular, inhalation of Technosphere Insulin generally produces a rapid increase in blood insulin levels that peaks within 10-14 minutes. As illustrated by the charts on page 52, the time-to-peak blood insulin levels produced by the Technosphere Insulin System approximates the rapid rise that has been demonstrated for first-phase insulin release in healthy individuals, which generally occurs within six minutes after food reaches the digestive system.
To date, we have conducted multiple Phase I and Phase II clinical trials of our Technosphere Insulin System involving more than 200 individuals in Europe and the United States. We are currently conducting late Phase II clinical trials to determine dosage tolerance and optimal dosing, which, when fully-enrolled, will involve approximately 325 individuals with type 2 diabetes in Europe and the United States. We expect results from some of these clinical trials to be available in the fourth quarter of 2004 with additional data to follow in early 2005. We intend to initiate Phase III clinical trials in the United States in the first half of 2005, subject to acceptance of our Phase III protocols by the United States Food and Drug Administration, or FDA. Because our studies involved a fairly small number of participants, we cannot be certain that we will be able to repeat and validate our results until we have completed larger studies of efficacy and longer-term safety.
FEATURES OF OUR DIABETES THERAPY
We believe that our Technosphere Insulin System has a number of attractive performance characteristics, including:
| Approximates natural first-phase insulin release spike. Typically, regular insulin delivered by subcutaneous injection results in peak insulin levels in about 120 to 180 minutes. Insulin suppliers have developed rapid-acting insulin analogs, which are variations of insulin that reach peak blood levels in 30 to 90 minutes. Based on our analysis of published reports, including a 2004 review article in Diabetes Care, we believe that other pulmonary insulin products in development deliver peak insulin levels in 35 to 90 minutes. In contrast, our clinical trials have shown that our Technosphere Insulin System produces peak insulin levels in 10 to 14 minutes, which approximates the timing of the bodys natural first-phase insulin release spike. |
| Ease of use. Our MedTone inhaler is light, is easy to use and fits in the palm of the patients hand. To administer a dose, the patient opens the device, inserts a single-dose cartridge of Technosphere Insulin powder into the inhaler, inserts the mouthpiece into the mouth and takes a deep breath, thereby drawing the powder deep into the lungs. Moreover, the optimal time for taking a dose of Technosphere Insulin appears to be at the start of a meal or shortly thereafter, so we believe there would be no need for a user to try to time an injection 15 to 45 minutes before the expected mealtime. |
| More efficient delivery of pulmonary insulin. Based on our clinical trials of Technosphere Insulin and on our analysis of publicly available information regarding the performance of other |
pulmonary insulin systems in development, we believe that the inhalation of a specified amount of insulin formulated as Technosphere Insulin produces blood insulin levels over a measured period of time that are approximately three times greater than that produced by the same amount of insulin administered via the pulmonary delivery systems being developed by other pharmaceutical companies. | |
| Safety. Based on our clinical trials to date, Technosphere Insulin has not generated any serious, drug-related adverse events in our clinical trials to date, but these results are necessarily preliminary until we have completed long term safety studies. |
Because of these advantages, we believe our Technosphere Insulin System will be beneficial in patients that have advanced to the point of requiring conventional insulin therapy, patients that are being treated with non-insulin oral medications as well as patients currently using diet and exercise therapy but who are having difficulty achieving proper blood glucose control. If further clinical trials confirm our observations to date, we believe that our Technosphere Insulin System has the potential to be indicated for the treatment of type 2 diabetes after a patient has failed to respond adequately to diet and exercise alone. The use of insulin earlier in the progression of diabetes would represent a paradigm shift in the treatment of this disease.
OUR STRATEGY FOR DIABETES THERAPY
| Commercialize our Technosphere Insulin System for the insulin-using diabetes market. We intend to advance our Technosphere Insulin System into and through Phase III clinical trials and then into commercialization, with the goal of establishing a significant presence for Technosphere Insulin in the insulin-using diabetes market. |
| Establish our Technosphere Insulin System as the preferred drug therapy within the broader population of people with type 2 diabetes. Our target markets also include patients with type 2 diabetes who are currently using conventional therapies other than insulin, such as management by diet and exercise and by non-insulin oral medications. Given the potential advantages of our product, we believe our Technosphere Insulin System has the potential to become the preferred drug therapy for the broader type 2 diabetes population. |
| Seek a strategic collaboration for the development, marketing and commercialization of our Technosphere Insulin System. We are actively exploring collaborations with large pharmaceutical companies in the United States, Europe and Japan that would provide marketing, sales and financial resources to develop, commercialize and sell our Technosphere Insulin System. To date, we have not licensed or transferred any of our rights to this product and we believe this will enable us to obtain advantageous terms in potential collaborations. We intend to retain worldwide manufacturing rights for our Technosphere Insulin System. |
We expect that our revenues from our Technosphere Insulin System will come from the sale of Technosphere Insulin cartridges and the MedTone inhaler. We expect that our costs will be the expenses to produce Technosphere Insulin cartridges and the inhalers, selling and marketing expenses if we elect to proceed without a collaborator, research expenses to expand our Technosphere platform technology and develop other potential products, as well as general and administrative expenses.
OUR RESEARCH PROGRAMS
We are developing additional applications for our proprietary Technosphere formulation technology by formulating other drugs for pulmonary delivery, primarily for metabolic and immunological diseases. We believe our proprietary Technosphere formulation technology can also be extended to other forms of local administration, such as gastrointestinal delivery, because of its apparent ability to stabilize drugs and facilitate transport across cellular membranes.
We are also developing therapies for the treatment of solid-tumor cancers. We have conducted initial studies of our cancer therapy in Europe and the United States, including Phase I and II clinical trials in the United States that involved 42 patients who had progressed to late stages of skin cancer. We observed that the delivery of a prototype formulation was well tolerated by patients and produced an appropriate response by their immune system. Although we believe that our clinical data to date have been encouraging, we have continued to refine our cancer therapy program. We have developed several product candidates and expect to begin preclinical safety tests for one of these product candidates later this year, with the goal of commencing clinical trials in 2005.
RISKS ASSOCIATED WITH OUR BUSINESS
We face a number of challenges in bringing the Technosphere Insulin System to market. We have not received regulatory approval for this product, nor do we expect to be the first company to bring a pulmonary insulin product to market. In order to complete the clinical trials for our Technosphere Insulin System and develop the sales and marketing capabilities necessary to commercialize the product, we will need to raise additional capital or enter into a collaborative agreement with a pharmaceutical company or both.
We are subject to a number of risks, which you should be aware of before you decide to buy our common stock. These risks are discussed more fully in Risk factors. We are a development stage company with no commercial products. We have not received commercial revenues from any of our product candidates. It is possible that we may never successfully commercialize any of our product candidates. As of March 31, 2004, we had an accumulated deficit of $383.4 million. We expect to continue to incur losses over at least the next several years, and we may never become profitable. Since our inception, we have funded our operations principally through the sale of equity securities, and we expect that we will need to secure additional funding or raise additional capital to enable us to continue to develop and commercialize our Technosphere Insulin System and other product candidates and for other reasons. We cannot assure you that we will be able to obtain additional financing on acceptable terms, or at all.
CORPORATE INFORMATION
We were incorporated in the State of Delaware on February 14, 1991. Our principal executive offices are located at 28903 North Avenue Paine, Valencia, California 91355, and our telephone number at that address is (661) 775-5300. Our website address is http://www.mannkindcorp.com. The information contained in, and that can be accessed through, our website is not incorporated into and does not form a part of this prospectus.
The offering
Common stock offered by us | 5,500,000 shares | |
Common stock to be outstanding after this offering | 31,641,461 shares | |
Use of proceeds | We estimate that the net proceeds from this offering will be approximately $69.8 million, or approximately $80.6 million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $14.00 per share. We intend to use the net proceeds from this offering to continue the development and prepare for the commercialization of our Technosphere Insulin System, to expand our Technosphere Insulin System manufacturing operations and quality systems, to expand our other product development programs, to fund operations, to provide working capital and for other general corporate purposes. See Use of proceeds. | |
Proposed Nasdaq National Market symbol | MNKD |
The number of shares of our common stock shown in the table above to be outstanding after the closing of this offering is based on approximately 26,141,461 shares of our common stock outstanding as of May 31, 2004 and excludes:
| 2,132,922 shares of our common stock issuable upon exercise of options outstanding as of May 31, 2004, with a weighted average exercise price of $10.18 per share, of which options to purchase 790,250 shares were exercisable as of that date at a weighted average exercise price of $11.09 per share; |
| 175,227 shares of our common stock issuable upon exercise of warrants outstanding as of May 31, 2004, with a weighted average exercise price of $12.54 per share, all of which were exercisable as of that date; |
| 3,659,926 shares of our common stock reserved for future issuance under our 2004 Equity Incentive Plan effective as of the completion of this offering; and |
| 2,800,000 shares of our common stock reserved for future issuance under our 2004 Non-Employee Directors Stock Option Plan and 2004 Employee Stock Purchase Plan, which we have adopted effective upon the completion of this offering. |
Unless otherwise indicated, all information in this prospectus assumes:
| a one-for-three reverse split of our common stock that occurred on July 22, 2004; |
| the conversion, upon the closing of this offering, of all 267,212 shares of our Series A redeemable convertible preferred stock, all 192,618 shares of our Series B convertible preferred stock and all 980,392 shares of our Series C convertible preferred stock, each outstanding as of May 31, 2004, into an aggregate of 6,166,372 shares of our common stock, based on an assumed initial public offering price of $14.00 per share; and |
| that the underwriters do not exercise their option to purchase up to 825,000 shares of our common stock to cover over-allotments, if any. |
Summary financial data
We were incorporated in February 1991 under the laws of the State of Delaware as Pharmaceutical Discovery Corporation, or PDC. On December 12, 2001, AlleCure Corp., or AlleCure, and CTL ImmunoTherapies Corp., or CTL, merged with wholly-owned subsidiaries of PDC. Pursuant to the merger, all of the outstanding shares of capital stock of AlleCure and CTL were exchanged for shares of capital stock of PDC, and AlleCure and CTL became wholly-owned subsidiaries of PDC. In connection with the merger, PDC changed its name to MannKind Corporation. On December 31, 2002, AlleCure and CTL merged with and into MannKind and ceased to be separate entities. For periods prior to January 1, 2002, the results of operations have been presented on a combined basis. For periods subsequent to December 31, 2001, the financial statements of MannKind and its wholly-owned subsidiaries have been presented on a consolidated basis.
The following statements of operations data for the years ended December 31, 1999 and 2000 are unaudited. The following statement of operations data for the years ended December 31, 2001, 2002 and 2003 were derived from our financial statements, which have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, and are included elsewhere in this prospectus. The balance sheet data as of March 31, 2004 and the statement of operation data for each of the three months ended March 31, 2003 and 2004 and for the period from inception (February 14, 1991) through March 31, 2004 have been derived from our unaudited financial statements, which include, in the opinion of management, all adjustments necessary to present fairly the data for such periods. The historical results are not necessarily indicative of results to be expected in any future period. See the notes to the audited financial statements included elsewhere in this prospectus for an explanation of the method used to determine the number of shares used in computing historical and pro forma basic and diluted net loss per share.
The following financial data is only a summary and should be read in conjunction with our financial statements and the related notes included elsewhere in this prospectus and Managements discussion and analysis of financial condition and results of operations. The following selected financial data is not intended to replace our financial statements included elsewhere in this prospectus.
Cumulative | ||||||||||||||||||||||||||||||||||
Three months | period from | |||||||||||||||||||||||||||||||||
Year ended December 31, | ended March 31, | February 14, | ||||||||||||||||||||||||||||||||
1991 (date of | ||||||||||||||||||||||||||||||||||
inception) to | ||||||||||||||||||||||||||||||||||
Statement of operations data: | 1999 | 2000 | 2001 | 2002 | 2003 | 2003 | 2004 | March 31, 2004 | ||||||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||||||||||||
Revenue
|
$ | 74 | $ | 154 | $ | 326 | $ | | $ | | $ | | $ | | $ | 2,858 | ||||||||||||||||||
Operating expenses:
|
||||||||||||||||||||||||||||||||||
Research and development
|
3,994 | 20,542 | 19,763 | 42,724 | 45,613 | 11,564 | 12,799 | 156,446 | ||||||||||||||||||||||||||
General and administrative
|
1,654 | 4,854 | 10,629 | 13,215 | 20,699 | 8,807 | 3,769 | 61,226 | ||||||||||||||||||||||||||
In-process research and development costs
|
| | 19,726 | | | | | 19,726 | ||||||||||||||||||||||||||
Goodwill impairment
|
| | | 151,428 | | | | 151,428 | ||||||||||||||||||||||||||
Total operating expenses
|
5,648 | 25,396 | 50,118 | 207,367 | 66,312 | 20,371 | 16,568 | 388,826 | ||||||||||||||||||||||||||
Loss from operations
|
(5,574 | ) | (25,242 | ) | (49,792 | ) | (207,367 | ) | (66,312 | ) | (20,371 | ) | (16,568 | ) | (385,968 | ) | ||||||||||||||||||
Other income (expense)
|
50 | 204 | 288 | 487 | (25 | ) | (51 | ) | 54 | (2,142 | ) | |||||||||||||||||||||||
Interest income (expense)
|
(155 | ) | 379 | 1,261 | 617 | 459 | 86 | 105 | 4,744 | |||||||||||||||||||||||||
Loss before provision for income taxes
|
(5,679 | ) | (24,659 | ) | (48,243 | ) | (206, 263 | ) | (65,878 | ) | (20,336 | ) | (16,409 | ) | (383,366 | ) | ||||||||||||||||||
Income taxes
|
| (2 | ) | (2 | ) | (2 | ) | (1 | ) | | | (14 | ) | |||||||||||||||||||||
Net loss
|
(5,679 | ) | (24,661 | ) | (48,245 | ) | (206,265 | ) | (65,879 | ) | (20,336 | ) | (16,409 | ) | (383,380 | ) | ||||||||||||||||||
Deemed dividend related to beneficial conversion
feature of convertible preferred stock
|
| | | (1,421 | ) | (1,017 | ) | | (612 | ) | (3,050 | ) | ||||||||||||||||||||||
Accretion on redeemable preferred stock
|
| (149 | ) | (239 | ) | (251 | ) | (253 | ) | (60 | ) | (64 | ) | (956 | ) | |||||||||||||||||||
Net loss applicable to common stockholders
|
$ | (5,679 | ) | $ | (24,810 | ) | $ | (48,484 | ) | $ | (207,937 | ) | $ | (67,149 | ) | $ | (20,396 | ) | $ | (17,085 | ) | $ | (387,386 | ) | ||||||||||
Basic and diluted net loss per share:
|
||||||||||||||||||||||||||||||||||
Historical
|
$ | (1.38 | ) | $ | (3.95 | ) | $ | (4.60 | ) | $ | (15.43 | ) | $ | (3.63 | ) | $ | (1.24 | ) | $ | (0.86 | ) | |||||||||||||
Pro forma(1)
|
$ | (3.34 | ) | $ | (0.71 | ) | ||||||||||||||||||||||||||||
Shares used to compute basic and diluted net loss
per share:
|
||||||||||||||||||||||||||||||||||
Historical
|
4,125 | 6,278 | 10,534 | 13,472 | 18,488 | 16,466 | 19,975 | |||||||||||||||||||||||||||
Pro forma(1)
|
20,107 | 24,218 | ||||||||||||||||||||||||||||||||
(1) | The pro forma basic and diluted net loss per share reflects the weighted effect of the assumed conversion of convertible preferred stock at the conversion prices in effect during the periods presented. See Note 2 to our financial statements for information regarding computation of basic and diluted net loss per share and pro forma basic and diluted net loss per share. |
As of March 31, 2004 | ||||||||||||
Pro forma as | ||||||||||||
Balance sheet data: | Actual | Pro forma(1) | adjusted(2) | |||||||||
(in thousands) | ||||||||||||
Cash, cash equivalents and marketable securities
|
$ | 59,305 | $ | 59,305 | $ | 129,115 | ||||||
Working capital
|
52,586 | 52,586 | 122,396 | |||||||||
Total assets
|
128,766 | 128,766 | 198,576 | |||||||||
Deferred compensation and other liabilities
|
447 | 447 | 447 | |||||||||
Redeemable convertible preferred stock
|
5,252 | | | |||||||||
Deficit accumulated during the development stage
|
(383,380 | ) | (383,380 | ) | (383,380 | ) | ||||||
Total stockholders equity
|
114,431 | 119,683 | 189,493 |
(1) | Pro forma to give effect to the conversion, upon the closing of this offering, of all 267,212 shares of our Series A redeemable convertible preferred stock, all 192,618 shares of our Series B convertible preferred stock and all 980,392 shares of our Series C convertible preferred stock, each outstanding as of March 31, 2004, at an assumed initial public offering price of $14.00 per share, into 6,166,372 shares of our common stock. |
(2) | Pro forma as adjusted to give further effect to the sale of 5,500,000 shares we are offering pursuant to this prospectus and the receipt of the estimated net proceeds therefrom. |
Risk factors
Investing in our common stock involves a high degree of risk. You should consider carefully the risks described below and the other information in this prospectus, including the financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our common stock. If any of the following risks actually occur, they may materially harm our business and our financial condition and results of operations. In this event, the market price of our common stock could decline, and you could lose part or all of your investment.
RISKS RELATED TO OUR BUSINESS
We have a history of operating losses, we expect to continue to incur losses, and we may never become profitable.
We have never been profitable, and, as of March 31, 2004, we had an accumulated deficit of $383.4 million and a net loss of $65.9 million for the year ended December 31, 2003 and $16.4 million for the three months ended March 31, 2004. The accumulated deficit has resulted principally from the write-off of goodwill, costs incurred in our research and development programs and general operating expenses. We expect to make substantial expenditures and to incur additional operating losses in the future in order to further develop and commercialize our product candidates, including costs and expenses to complete clinical trials, seek regulatory approvals and market our product candidates. This accumulated deficit may increase significantly as we expand development and clinical trial efforts. Our losses have had, and are expected to continue to have, an adverse impact on our working capital, total assets and stockholders equity. Our ability to achieve and sustain profitability depends upon obtaining regulatory approvals for and successfully commercializing our Technosphere Insulin System, either alone or with third parties. We do not currently have the required approvals to market any of our product candidates, and we may not receive them. We may not be profitable even if we succeed in commercializing any of our product candidates. As a result, we cannot be sure when we will become profitable, if at all.
If we fail to raise additional capital, our financial condition and business will suffer.
Based upon our current expectations, we believe that our existing capital resources, including the proceeds of this offering, will enable us to continue planned operations into the second quarter of 2005, even if we do not enter into a collaborative agreement. However, we cannot assure you that our plans will not change or that changed circumstances will not result in the depletion of our capital resources more rapidly than we currently anticipate. Accordingly, we expect that we will need to raise additional capital, either through a strategic business collaboration, the sale of equity and/or debt securities or the establishment of other funding facilities, in order to continue the development and commercialization of our Technosphere Insulin System and other product candidates and to support
our other ongoing activities. The amount of additional funds we need will depend on a number of factors, including:
| the rate of progress and costs of our clinical trials and research and development activities, including costs of procuring clinical materials and expanding our own manufacturing facilities; |
| actions taken by the FDA and other regulatory authorities; |
| our success in establishing strategic business collaborations; |
| the timing and amount of milestone or other payments we might receive from potential third parties; |
| the timing and amount of payments we might receive from potential licenses; |
| the costs of discontinuing projects and technologies or decommissioning existing facilities, if we undertake those activities; |
| our degree of success in commercializing our Technosphere Insulin System or our other product candidates; |
| the emergence of competing technologies and products and other adverse market developments; and |
| the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights or defending against claims of infringement by others. |
We have raised capital in the past primarily through the private placement of equity securities. We intend to raise additional capital through strategic business collaborations. In addition, we may in the future pursue the sale of equity and/or debt securities, or the establishment of other funding facilities. Issuances of debt or additional equity could impact your rights as a holder of our common stock, may dilute your ownership percentage and may impose restrictions on our operations. These restrictions could include limitations on additional borrowing, specific restrictions on the use of our assets, as well as prohibitions on our ability to create liens, pay dividends, redeem our stock or make investments.
We also may seek to raise additional capital by pursuing opportunities for the licensing, sale or divestiture of certain intellectual property and other assets, including our Technosphere technology platform. We cannot assure you, however, that any strategic collaborations, sales of securities or sale or license of assets will be available to us on a timely basis or on acceptable terms, if at all. We may be required to enter into relationships with third parties to develop or commercialize products or technologies that we otherwise would have sought to develop independently, and any such relationships may not be on terms as commercially favorable to us as might otherwise be the case.
In the event that sufficient additional funds are not obtained through strategic collaboration opportunities, licensing arrangements, sales of securities and/or asset sales on a timely basis, we may be required to reduce expenses through the delay, reduction or curtailment of our projects, including our Technosphere Insulin System development activities, or further reduction of costs for facilities and administration.
We depend heavily on the successful development and commercialization of our lead product candidate, the Technosphere Insulin System, which is still under development, and our other product candidates, which are in early stages of preclinical development.
generate revenues will depend solely on the successful development and commercialization of our Technosphere Insulin System.
We have expended significant time, money and effort in the development of our lead product candidate, the Technosphere Insulin System, which has not yet received regulatory approval and which may never be commercialized. Before we can market and sell our Technosphere Insulin System, we will need to advance our Technosphere Insulin System to Phase III clinical trials and demonstrate in these trials that our Technosphere Insulin System is safe and effective. We currently anticipate conducting several pivotal Phase III clinical trials as well as several special population studies involving, in total, several thousand patients, which will require the expenditure of additional time and resources. We must also receive the necessary approvals from the FDA and similar foreign regulatory agencies before this product can be marketed in the United States or elsewhere. Even if we were to receive regulatory approval, we ultimately may be unable to gain market acceptance of our Technosphere Insulin System for a variety of reasons, including the treatment and dosage regimen, potential adverse effects, the availability of alternative treatments and cost effectiveness. If we fail to commercialize our Technosphere Insulin System, our business, financial condition and results of operations will be materially and adversely affected.
We are seeking to develop and expand our portfolio of product candidates through our internal research programs and through licensing or otherwise acquiring the rights to therapeutics in the areas of cancer and immunology. All of these product candidates will require additional research and development and significant preclinical, clinical and other testing prior to seeking regulatory approval to market them. Accordingly, these product candidates will not be commercially available for many years, if at all.
A significant portion of the research that we are conducting involves new and unproven compounds and technologies, including our Technosphere Insulin System, Technosphere formulation technology and immunotherapy product candidates. Research programs to identify new product candidates require substantial technical, financial and human resources. Even if our research programs identify candidates that initially show promise, these candidates may fail to progress to clinical development for any number of reasons, including discovery upon further research that these candidates have adverse effects or other characteristics that indicate they are unlikely to be effective drugs or therapeutics. In addition, the clinical results we obtain at one stage are not necessarily indicative of future testing results. If we fail to successfully complete the development and commercialization of our Technosphere Insulin System or develop or expand our other product candidates, or are significantly delayed in doing so, our business and results of operations will be harmed and the value of our stock could decline.
If we fail to enter into a strategic collaboration with respect to our Technosphere Insulin System, our most clinically advanced program, we may not be able to execute on our business model.
If we are not able to enter into collaborations for our products, we could be required to undertake and fund product development, clinical trials, manufacturing and marketing activities solely at our own expense. For example, we are currently seeking to enter into a collaboration with respect to our Technosphere Insulin System. If we are not able to enter into a collaboration prior to the commencement of Phase III clinical trials, upon successful completion of our Phase II clinical trials we
intend to fund the initial Phase III clinical trials ourselves from the proceeds of this offering. We estimate that the cost of a Phase III program over the next 24 to 30 months would be approximately $70 to $80 million. Failure to enter into a collaboration with respect to our Technosphere Insulin System following initial Phase III clinical trials or for any other product candidate would substantially increase our requirements for capital, which might not be available on favorable terms, or at all. Alternatively, we would have to substantially reduce our development efforts, which would delay or otherwise impede the commercialization of our product candidates.
If testing of a particular product candidate does not yield successful results, we will be unable to commercialize that product candidate.
| safety and efficacy results obtained in our preclinical and initial clinical testing may be inconclusive or may not be predictive of results obtained in later-stage clinical trials or following long-term use and we may be forced to stop developing product candidates that we currently believe are important to our future; |
| the data collected from clinical trials of our product candidates may not be sufficient to support FDA or other regulatory approval; |
| after reviewing test results, we or any potential collaborators may abandon projects that we previously believed were promising; and |
| our product candidates may not produce the desired effects or may result in adverse health effects or other characteristics that preclude regulatory approval or limit their commercial use if approved. |
The long-term safety studies of our Technosphere Insulin system are designed to evaluate a number of safety issues, including pulmonary function. Our Technosphere Insulin System is intended for multiple uses per day. Due to the size and time frame over which the clinical trials are conducted, the results of clinical trials may not be indicative of the effects of long-term use. If long-term use of our product results in adverse health effects or reduced efficacy or both, the FDA or other regulatory agencies may terminate our ability to market and sell our Technosphere Insulin System, may narrow the approved indications for use or otherwise require restrictive product labeling, or may require further clinical trials, which may be time-consuming and expensive, and may not produce favorable results.
As a result of any of these events, the FDA, other regulatory authorities, our collaborators or we may suspend or terminate clinical trials or marketing of our Technosphere Insulin System at any time. Any suspension or termination of our clinical trials or marketing activities may harm our business and results of operations and the market price of our common stock may decline.
If third-party payors do not reimburse customers for our products, they might not be used or purchased, which would adversely affect our revenues.
Such reforms may make it difficult to complete the development and testing of our product candidates, and therefore may limit our ability to generate revenues from sales of our product candidates and achieve profitability. Further, to the extent that such reforms have a material adverse effect on the business, financial condition and profitability of other companies that are prospective collaborators for some of our product candidates, our ability to commercialize our product candidates under development may be adversely affected.
In the United States and elsewhere, sales of prescription pharmaceuticals still depend in large part on the availability of reimbursement to the consumer from third-party payors, such as governmental and private insurance plans. Third-party payors are increasingly challenging the prices charged for medical products and services. In addition, because each third-party payor individually approves reimbursement, obtaining these approvals is a time-consuming and costly process that will require us to provide scientific and clinical support for the use of each of our products to each third-party payor separately with no assurance that approval will be obtained. This process could delay the market acceptance of new products and could have a negative effect on our revenues and operating results. Even if we succeed in bringing one or more products to market, we cannot be certain that these products will be considered cost-effective or that reimbursement to the consumer will be available, in which case our business and results of operations will be harmed and the market price of our common stock may decline.
If we do not achieve our projected development goals in the timeframes we announce and expect, the commercialization of our product candidates may be delayed and our business will be harmed.
| the rate of progress, costs and results of our clinical trial and research and development activities; |
| the receipt of approvals by our competitors and by us from the FDA and other regulatory agencies; |
| other actions by regulators; |
| our ability to access sufficient, reliable and affordable supplies of components used in the manufacture of our product candidates, including insulin and other materials for our Technosphere Insulin System; |
| the costs of expanding and maintaining manufacturing operations, as necessary; |
| the extent of scheduling conflicts with participating clinicians and clinical institutions; and |
| our ability to identify and enroll patients who meet clinical trial eligibility criteria. |
In addition, if we do not obtain sufficient additional funds through strategic collaborations, sales of securities or the sale or license of our assets on a timely basis, we may be required to reduce expenses by delaying, reducing or curtailing our Technosphere Insulin System or other product development activities, which may impact our ability to meet milestones. If we fail to commence or complete, or experience delays in or are forced to curtail, our proposed clinical programs or otherwise fail to adhere to our projected development goals in the timeframes we announce and expect, our business and results of operations will be harmed and the market price of our common stock may decline.
If we enter into collaborative agreements and if our third-party collaborators do not perform satisfactorily or if our collaborations fail, development or commercialization of our product candidates may be delayed and our business could be harmed.
If we enter into collaborative arrangements, we will have less control over the timing, planning and other aspects of our clinical trials, and the sale and marketing of our product candidates. We cannot assure you that we will be able to enter into satisfactory arrangements with third parties as contemplated or that any of our existing or future collaborations will be successful.
If we are unable to manage growth in connection with our transition from an early-stage development company to a company that commercializes therapeutics, our operations will suffer.
We have never manufactured any of our product candidates in commercial quantities, and if we fail to develop an effective manufacturing capability for our product candidates or to engage third-party manufacturers with this capability, we may be unable to commercialize these products.
We have never manufactured any of our product candidates in commercial quantities. As our product candidates move through the regulatory process, we will need to either develop the capability of manufacturing on a commercial scale or engage third-party manufacturers with this capability, and we cannot assure you that we will be able to do either successfully. The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, especially in scaling up initial production. These problems include difficulties with production costs and yields, quality control and assurance and shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. In addition, before we would be able to produce commercial quantities of Technosphere Insulin at our Danbury facility, it will have to undergo a pre-approval inspection by the FDA. The expansion process and preparation for the FDAs pre-approval inspection for commercial production at the Danbury
facility could take an additional six months or longer. If we use a third-party supplier to formulate Technosphere Insulin or produce its raw material, the transition could also require significant start-up time to qualify and implement the manufacturing process. If we engage a third-party manufacturer, our third-party manufacturer may not perform as agreed or may terminate its agreement with us.
Any of these factors could cause us to delay or suspend clinical trials, regulatory submissions, required approvals or commercialization of our product candidates, entail higher costs and result in our being unable to effectively commercialize our products. Furthermore, if we or our potential third-party manufacturers fail to deliver the required commercial quantities of our products on a timely basis and at commercially reasonable prices, and we were unable to promptly find one or more replacement manufacturers capable of production at a substantially equivalent cost, in substantially equivalent volume and on a timely basis, we would likely be unable to meet demand for our products and we would lose potential revenues.
If our suppliers fail to deliver materials and services needed for the production of our Technosphere Insulin System in a timely and sufficient manner, or they fail to comply with applicable regulations, our business and results of operations will be harmed and the market price of our common stock may decline.
If we fail to enter into collaborations with third parties, we will be required to establish our own sales, marketing and distribution capabilities, which could delay the commercialization of our products and harm our business.
We face substantial competition in the development of our product candidates and may not be able to compete successfully, and our product candidates may be rendered obsolete by rapid technological change.
Many of our existing or potential competitors have, or have access to, substantially greater financial, research and development, production and sales and marketing resources than we do and have a greater depth and number of experienced managers. As a result, our competitors may be better equipped than we are to develop, manufacture, market and sell competing products.
The rapid rate of scientific discoveries and technological changes could result in one or more of our products becoming obsolete or noncompetitive. Our competitors may develop or introduce new products that would render our technology and our Technosphere Insulin System less competitive, uneconomical or obsolete. The fact that another company will likely be the first to commercialize a pulmonary insulin system may give that company an advantage in terms of being able to gain reputation and market share as well as set parameters for the pulmonary insulin market such as pricing. Our future success will depend not only on our ability to develop our products but to improve them and to keep pace with emerging industry developments. We cannot assure you that we will be able to do so.
We also expect to face increasing competition from universities and other non-profit research organizations. These institutions carry out a significant amount of research and development in the areas of diabetes, cancer and inflammatory and autoimmune diseases. These institutions are becoming increasingly aware of the commercial value of their findings and are more active in seeking patent and other proprietary rights as well as licensing revenues.
If our products do not become widely accepted by physicians, patients, third-party payors and the healthcare community, we may be unable to generate significant revenue, if any.
The degree of market acceptance of our product candidates will depend on many factors, including:
| the willingness and ability of patients and the healthcare community to adopt new technologies; |
| the ability to manufacture the product in sufficient quantities with acceptable quality and at an acceptable cost; |
| the perception of patients and the healthcare community, including third-party payors, regarding the safety, efficacy and benefits of the product compared to those of competing products or therapies; |
| the convenience and ease of administration of the products relative to existing treatment methods; |
| the pricing and reimbursement of our products relative to existing treatment therapeutics and methods; and |
| marketing and distribution support for our products. |
Physicians will not recommend our products until clinical data or other factors demonstrate the safety and efficacy of our products as compared to other treatments. Even if the clinical safety and efficacy of our product candidates is established, physicians may elect not to recommend these product candidates for a variety of factors, including the reimbursement policies of government and third-party payors and the effectiveness of our competitors in marketing their therapies. Because of these and other factors, our products may not gain market acceptance, which would materially harm our business, financial condition and results of operations.
If product liability claims are brought against us, we may incur significant liabilities and suffer damage to our reputation.
We currently carry global liability insurance in the amount of $5 million in the United States and $5 million in Europe. We believe these limits are reasonable to cover us from potential damages arising from current and previous clinical trials of our Technosphere Insulin System. In addition, we carry local policies per trial in each European country in which we conduct clinical trials. We intend to obtain product liability coverage for commercial sales in the future. However, insurance coverage in our industry can be very expensive and difficult to obtain and we cannot assure you that we will be able to obtain sufficient coverage at an acceptable cost, if at all. If we are sued for any injury caused by our technology or products, or by third-party products that we manufacture, our liability could exceed our insurance coverage and total assets.
We deal with hazardous materials and must comply with environmental laws and regulations, which can be expensive and restrict how we do business.
future. Finally, current or future environmental laws and regulations may impair our research, development or production efforts.
When we purchased the facilities located in Danbury, Connecticut, there was a soil cleanup plan in process. As part of the purchase, we obtained an indemnification from the seller related to the remediation of the soil for all known environmental conditions that existed at the time the seller acquired the property. The seller is, in turn, indemnified for these known environmental conditions by the previous owner. We also received an indemnification from the seller for environmental conditions created during its ownership of the property and for environmental problems unknown at the time that the seller acquired the property. These latter indemnities are limited to the purchase price that we paid for the Danbury facilities. We estimate the cost to complete the soil cleanup plan is $500,000 to $1,500,000 over the next 18 to 24 months. In the event that any cleanup costs are imposed on us and we are unable to collect the full amount of these costs and expenses from the seller or the party responsible for the contamination, we may be required to pay these costs and our business and results of operations may be harmed.
If we lose any key employees or scientific advisors, our operations and our ability to execute our business strategy could be materially harmed.
The loss of the services of any principal member of our management and scientific staff, including Messrs. Mann, Edstrom, Burns and Anderson and Drs. Cheatham and Thomson, could significantly delay or prevent the achievement of our scientific and business objectives. All of our employees are at will and we currently do not have employment agreements with any of the principal members of our management or scientific staff, and we do not have key person life insurance to cover the loss of any of these individuals. Replacing key employees may be difficult and time-consuming because of the limited number of individuals in our industry with the skills and experience required to develop, gain regulatory approval of and commercialize our product candidates successfully.
We have relationships with scientific advisors at academic and other institutions to conduct research or assist us in formulating our research, development or clinical strategy. These scientific advisors are not our employees and may have commitments to, and other obligations with, other entities that may limit their availability to us. We have limited control over the activities of these scientific advisors and can generally expect these individuals to devote only limited time to our activities. Failure of any of these persons to devote sufficient time and resources to our programs could harm our business. In addition, these advisors are not prohibited from, and may have arrangements with, other companies to assist those companies in developing technologies that may compete with our product candidates.
If our Chief Executive Officer is unable devote sufficient time and attention to our business, our operations and our ability to execute our business strategy could be materially harmed.
chief executive officers. Mr. Mann typically devotes anywhere between 25 and 50 hours a week to our business. If Mr. Mann is unable to devote the time and attention necessary to running our business, we may not be able to execute our business strategy and our business could be materially harmed.
Our facilities that are located in Southern California may be affected by natural disasters.
RISKS RELATED TO REGULATORY APPROVALS
Our product candidates must undergo rigorous preclinical and clinical testing and regulatory approvals, which could be costly and time-consuming and subject us to unanticipated delays or prevent us from marketing any products.
| product design, development, manufacture and testing; |
| product labeling; |
| product storage and shipping; |
| pre-market clearance or approval; |
| advertising and promotion; and |
| product sales and distribution. |
Clinical testing can be costly and take many years, and the outcome is uncertain and susceptible to varying interpretations. We expect, based on our interactions with the FDA and on our understanding of the interactions between the FDA and other pharmaceutical companies developing pulmonary insulin delivery systems, that we will need safety data covering at least two years from patients treated with our Technosphere Insulin System and that we must conduct a two-year carcinogenicity study of Technosphere Insulin in rodents. We cannot be certain when or under what conditions we will undertake further clinical trials, including a Phase III program for our Technosphere Insulin System. The clinical trials of our product candidates may not be completed on schedule, and the FDA or foreign regulatory agencies may order us to stop or modify our research or these agencies may not ultimately approve any of our product candidates for commercial sale. The data collected from our clinical trials may not be sufficient to support regulatory approval of our various product candidates, including our Technosphere Insulin System. Even if we believe the data collected from our clinical trials are sufficient, the FDA has substantial discretion in the approval process and may disagree with our interpretation of the data. Our failure to adequately demonstrate the safety and efficacy of any of our product candidates would delay or prevent regulatory approval of our product candidates, which could prevent us from achieving profitability.
The requirements governing the conduct of clinical trials and manufacturing and marketing of our product candidates, including our Technosphere Insulin System, outside the United States vary widely from country to country. Foreign approvals may take longer to obtain than FDA approvals and can require, among other things, additional testing and different clinical trial designs. Foreign regulatory approval processes include all of the risks associated with the FDA approval processes. Some of those agencies also must approve prices of the products. Approval of a product by the FDA does not ensure approval of the same product by the health authorities of other countries. In addition, changes in regulatory policy in the United States or in foreign countries for product approval during the period of product development and regulatory agency review of each submitted new application may cause delays or rejections.
The process of obtaining FDA and other required regulatory approvals, including foreign approvals, is expensive, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. To our knowledge, no pulmonary insulin product has yet been approved for marketing and we are not aware of any precedent for the successful commercialization of products based on our technology or technologies similar to ours. The FDA likely will regulate our Technosphere Insulin System as a combination product because of the complex nature of the system that includes the combination of a new drug (Technosphere Insulin) and a new medical device (the MedTone inhaler used to administer the insulin). There have been some indications from the FDA that the review of a future marketing application for our Technosphere Insulin System will involve three separate review groups of the FDA: (1) the Metabolic and Endocrine Drug Products Division; (2) the Pulmonary Drug Products Division; and (3) the Center for Devices and Radiological Health within the FDA that reviews medical devices. We currently understand that the Metabolic and Endocrine Drug Products Division will be the lead group and will obtain consulting reviews from the other two FDA groups. The FDA has not made an official final decision in this regard, however, and we can make no assurances at this time about what impact FDA review by multiple groups will have on the review and approval of our product or whether we are correct in our understanding of how the Technosphere Insulin System will be reviewed.
FDA review of our Technosphere Insulin System as a combination-product therapy may lengthen the product development and regulatory approval process, increase our development costs and delay or prevent the commercialization of our Technosphere Insulin System.
We have only limited experience in filing and pursuing applications necessary to gain regulatory approvals, which may impede our ability to obtain timely approvals from the FDA or foreign regulatory agencies, if at all.
If we do not comply with regulatory requirements at any stage, whether before or after marketing approval is obtained, we may be subject to criminal prosecution, fined or forced to remove a product from the market or experience other adverse consequences, including restrictions or delays in obtaining regulatory marketing approval.
Even if we obtain regulatory approval for our product candidates, we will be subject to stringent, ongoing government regulation.
Our insulin supplier does not yet supply human recombinant insulin for an FDA-approved product and will likely be subject to an FDA preapproval inspection before the agency will approve a future marketing application for our Technosphere Insulin System.
Technosphere Insulin System. At the present time our supplier is certified to the ISO9001:2000 Standard. There can be no assurance, however, that if the FDA were to conduct a preapproval inspection of our supplier, that the agency would find that the supplier substantially complies with the QSR. If we or any potential third-party manufacturer or supplier fail to comply with these cGMP or QSR requirements, regulatory authorities may subject us to regulatory action, including criminal prosecutions, fines and suspension of the manufacture of our products.
Any regulatory approvals that we receive for our product candidates may also be subject to limitations on the indicated uses for which the product candidate may be marketed or contain requirements for potentially costly post-marketing follow-up clinical trials.
Reports of side effects or safety concerns in related technology fields or in other companies clinical trials could delay or prevent us from obtaining regulatory approval or negatively impact public perception of our product candidates.
RISKS RELATED TO INTELLECTUAL PROPERTY
If we are unable to protect our proprietary rights, we may not be able to compete effectively, or operate profitably.
Moreover, the issuance of a patent is not conclusive as to its validity or enforceability and it is uncertain how much protection, if any, will be afforded by our patents if we attempt to enforce them and they are challenged in court or in other proceedings, such as oppositions, which may be brought in US or foreign jurisdictions to challenge the validity of a patent. A third party may challenge the validity or enforceability of a patent after its issuance by the US Patent and Trademark Office, or USPTO.
We also rely on unpatented technology, trade secrets, know-how and confidentiality agreements. We require our officers, employees, consultants and advisors to execute proprietary information and invention and assignment agreements upon commencement of their relationships with us. We also execute confidentiality agreements with outside collaborators. There can be no assurance, however, that these agreements will provide meaningful protection for our inventions, trade secrets or other proprietary information in the event of unauthorized use or disclosure of such information. If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business, results of operations and financial condition could be adversely affected.
If we become involved in lawsuits to protect or enforce our patents or the patents of our collaborators or licensors, we would be required to devote substantial time and resources to prosecute or defend such proceedings.
Interference proceedings brought by the USPTO may be necessary to determine the priority of inventions with respect to our patent applications or those of our collaborators or licensors. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and be a distraction to our management. We may not be able, alone or with our collaborators and licensors, to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States. We may not prevail in any litigation or interference proceeding in which we are involved. Even if we do prevail, these proceedings can be very expensive and distract our management.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, the market price of our common stock may decline.
If our technologies conflict with the proprietary rights of others, we may incur substantial costs as a result of litigation or other proceedings and we could face substantial monetary damages and be precluded from commercializing our products, which would materially harm our business.
A third party may claim that we are using inventions covered by such third partys patents and may go to court to stop us from engaging in our normal operations and activities. These lawsuits can be expensive and would consume time and other resources. There is a risk that a court would decide that we are infringing a third partys patents and would order us to stop the activities covered by the patents, including the commercialization of our products. In addition, there is a risk that we would have to pay the other party damages for having violated the other partys patents (which damages may be increased, as well as attorneys fees ordered paid, if infringement is found to be willful), be required to obtain a license from the other party in order to continue to commercialize the affected products, or design our products in a manner that does not infringe a valid patent. We may not prevail in any legal action, and a required license under the patent may not be available on acceptable terms or at all, requiring cessation of activities that were found to infringe a valid patent. We also may not be able to develop a non-infringing product design on commercially reasonable terms, or at all.
Although we own a number of domestic and foreign patents and patent applications relating to our Technosphere Insulin System and cancer vaccine products under development, we have identified certain third-party patents that a court may interpret to restrict our freedom to operate (that is, to cover our products) in the areas of Technosphere formulations, pulmonary insulin delivery and the treatment of cancer. Specifically, we have identified certain third-party patents having claims relating to chemical compositions of matter and pulmonary insulin delivery that may trigger an allegation of infringement upon the commercial manufacture and sale of our Technosphere Insulin System. We have also identified third-party patents disclosing methods of use and compositions of matter related to DNA-based vaccines that also may trigger an allegation of infringement upon the commercial manufacture and sale of our cancer therapy. If a court were to determine that our insulin products or cancer therapies were infringing any of these patent rights, we would have to establish with the court that these patents were invalid or unenforceable in order to avoid legal liability for infringement of these patents. However, proving patent invalidity or unenforceability can be difficult because issued patents are presumed valid. Therefore, in the event that we are unable to prevail in an infringement or invalidity action we will have to either acquire the third-party patents outright or seek a royalty-bearing license. Royalty-bearing licenses effectively increase production costs and therefore may materially affect product profitability. Furthermore, should the patent holder refuse to either assign or license us the infringed patents, it may be necessary to cease manufacturing the product entirely and/or design around the patents, if possible. In either event, our business would be harmed and our profitability could be materially adversely impacted.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, the market price of our common stock may decline.
Patent litigation is costly and time-consuming. Among other things, such litigation may divert the attention of key personnel and we may not have sufficient resources to bring these actions to a successful conclusion. At the same time, some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Although patent and intellectual property disputes in the pharmaceutical area have often been settled for licensing or similar arrangements, associated costs may be substantial and could include ongoing royalties. An adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our products or result in substantial monetary damages, which would adversely affect our business and results of
operations and cause the market price of our common stock to decline. See Business Intellectual Property and Proprietary Technology.
We may not obtain trademark registrations for our potential trade names.
RISKS RELATED TO THIS OFFERING
Our stock price may be volatile and, as a result, you could lose some or all of your investment.
| the progress and results of our clinical trials; |
| announcements by us or our competitors concerning their clinical trial results, acquisitions, strategic alliances, technological innovations and newly approved commercial products; |
| the availability of critical materials used in developing and manufacturing our Technosphere Insulin System or other product candidates; |
| developments concerning our patents, proprietary rights and potential infringement claims; |
| the expense and time associated with, and the extent of our ultimate success in, securing regulatory approvals; |
| changes in securities analysts estimates of our financial and operating performance; |
| sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders; and |
| discussion of our Technosphere Insulin System, our other product candidates, competitors products, or our stock price by the financial and scientific press, the healthcare community and online investor communities such as chat rooms. |
Any of these risks, as well as other factors, could cause the market price of our common stock to decline and may result in a loss of some or all of your investment.
If other biotechnology and biopharmaceutical companies or the securities markets in general encounter problems, the market price of our common stock could be adversely affected.
prices of these companies have often fluctuated because of problems or successes in a given market segment or because investor interest has shifted to other segments. These broad market and industry factors may cause the market price of our common stock to decline, regardless of our operating performance. We have no control over this volatility and can only focus our efforts on our own operations, and even these may be affected due to the state of the capital markets.
In the past, following periods of large price declines in the public market price of a companys securities, securities class action litigation has often been initiated against that company. Litigation of this type could result in substantial costs and diversion of managements attention and resources, which would hurt our business. Any adverse determination in litigation could also subject us to significant liabilities.
Alfred E. Mann, our Chairman, Chief Executive Officer and principal stockholder, can individually control our direction and policies, and his interests may be adverse to the interests of our other stockholders. After his death, his stock will be left to his funding foundations for distribution to various charities, and we cannot assure you of the manner in which those entities will manage their holdings.
Subject to compliance with federal and state securities laws, Mr. Mann is free to sell the shares of our stock he holds at any time following the expiration of his lock-up agreement with the underwriters. Upon his death, we have been advised by Mr. Mann that his shares of our capital stock will be left to the Alfred E. Mann Medical Research Organization, or AEMMRO, and AEM Foundation for Biomedical Engineering, or AEMFBE, not-for-profit medical research foundations that serve as funding organizations for Mr. Manns various charities, including the Alfred Mann Foundation, or AMF, and the Alfred Mann Institute at the University of Southern California, and that may serve as funding organizations for any other charities that he may establish. The AEMMRO is a membership foundation consisting of six members, including Mr. Mann, four of his children and Dr. Joseph Schulman, the director of AMF. The AEMFBE is a membership foundation consisting of five members, including Mr. Mann and the same four of his children. Although we understand that the members of AEMMRO and AEMFBE have been advised of Mr. Manns objectives for these foundations, once Mr. Manns shares of our capital stock become the property of the foundations, we cannot assure you as to how those shares will be distributed or how they will be voted.
Mr. Mann has agreed to certain provisions regarding the disposition of his shares, including a prohibition on the sale of his shares for a period of 180 days following the date of this prospectus. See Underwriting.
You should not consider Mr. Manns other businesses in deciding whether to purchase our stock.
company focused on diabetes therapy and microinfusion drug delivery that was acquired by Medtronic, Inc. in 2001; Medical Research Group, Inc., a company involved in the development of an artificial pancreas that was also acquired by Medtronic, Inc. in 2001; and Pacesetter Systems and its successor, Siemens Pacesetter, a manufacturer of cardiac pacemakers that is now part of St. Jude Medical. Mr. Mann is also involved in numerous charitable organizations. You should not consider any of these businesses or activities and should only rely on the information provided in this prospectus in deciding whether or not to purchase our stock.
The future sale of our common stock could negatively affect our stock price.
If our common stockholders sell substantial amounts of common stock in the public market, or the market perceives that such sales may occur, the market price of our common stock may decline. After this offering, the holders of approximately 913,015 shares of our common stock and the holders of warrants to purchase 135,328 shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. Furthermore, if we were to include in a company-initiated registration statement shares held by those holders pursuant to the exercise of their registrations rights, the sale of those shares could impair our ability to raise needed capital by depressing the price at which we could sell our common stock.
In addition, we will need to raise substantial additional capital in the future to fund our operations. If we raise additional funds by issuing equity securities, the market price of our common stock may decline and our existing stockholders may experience significant dilution.
If an active, liquid trading market for our common stock does not develop, you may be unable to sell your shares quickly or at the market price.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
considered beneficial by some of our stockholders. In addition, they may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. See Description of capital stock Amended and restated certificate of incorporation and bylaw provisions.
If we do not effectively use our broad discretion in how we use the proceeds of this offering, our results of operations could suffer and the value of our stock could decline.
As a new investor, you will incur substantial dilution as a result of this offering, and as a result, the market price of our common stock may decline.
Because we do not expect to pay dividends in the foreseeable future, you must rely on stock appreciation for any return on your investment.
Special note regarding forward-looking statements
This prospectus contains forward-looking statements. The forward-looking statements are contained principally in, but not limited to, the sections entitled Risk factors, Managements discussion and analysis of financial condition and results of operations and Business. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
| the progress or success of our research, development and clinical programs, the timing of completion of enrollment in our clinical trials, the timing of the interim analyses and the timing or success of the commercialization of our Technosphere Insulin System, or any other products or therapies that we may develop; |
| our ability to market, commercialize and achieve market acceptance for our Technosphere Insulin System, or any other products or therapies that we may develop; |
| our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; |
| our estimates for future performance; and |
| our estimates regarding anticipated operating losses, future revenues, capital requirements and our needs for additional financing. |
In some cases, you can identify forward-looking statements by terms such as anticipates, believes, could, estimates, expects, intends, may, plans, potential, predicts, projects, should, will, would and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. We discuss many of these risks in this prospectus in greater detail under the heading Risk factors. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus forms a part completely and with the understanding that our actual future results may be materially different from what we expect.
Except as required by law, we do not undertake any obligation to update or revise any forward-looking statements contained in this prospectus or incorporated herein by reference, whether as a result of new information, future events or otherwise. Because of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not transpire. Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those described in the Risk factors section and elsewhere in this prospectus.
Use of proceeds
We estimate that we will receive net proceeds from the sale of shares of our common stock in this offering of approximately $69.8 million ($80.6 million if the underwriters exercise their over-allotment option in full), based upon an assumed initial public offering price of $14.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
We estimate that we will use approximately $50 million of the net proceeds of this offering to continue the development of our Technosphere Insulin System, including the continuation of our clinical trial program, and to develop additional applications for our proprietary Technosphere formulation technology. We expect, with these proceeds, to complete Phase II trials on Technosphere Insulin and initiate a Phase III clinical trial. Additionally, our efforts with respect to our Technosphere Insulin System will include expansion of our manufacturing operations and quality systems.
We estimate that we will use approximately $10 million of the net proceeds of this offering to expand our other product development programs, specifically developing therapies for the treatment of solid-tumor cancers and a variety of inflammatory and autoimmune diseases. We expect to begin preclinical safety tests for a cancer product candidate later this year, with the goal of commencing clinical trials in 2005.
We intend to use the balance of the net proceeds of this offering to fund operations, to provide working capital and for other general corporate purposes, which may include in-licensing or acquiring additional technologies. We have no current plans, agreements or commitments with respect to any future acquisitions or in-licensing, and we are not currently engaged in any negotiations with respect to any transactions of that nature.
As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. Accordingly, our management will have broad discretion in the application of the net proceeds, and investors will be relying on the judgment of our management regarding the application of the proceeds of this offering. Pending these uses, we plan to invest the net proceeds in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the United States. The goal with respect to the investment of these net proceeds is capital preservation and liquidity so that funds are readily available to fund our research and development operations. On December 12, 2003, our board of directors adopted our written investment policy. The investment policy imposes restrictions on our investments in order to ensure that we preserve our principal and maintain our liquidity. Any investment of the net proceeds from this offering will be made in accordance with the terms of our investment policy.
Dividend policy
We have never declared or paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business. Accordingly, we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors.
Capitalization
The following table sets forth our capitalization as of March 31, 2004:
| on an actual basis; |
| on a pro forma basis to give effect to the conversion, upon the closing of this offering, of all 267,212 shares of our Series A redeemable convertible preferred stock, all 192,618 shares of our Series B convertible preferred stock and all 980,392 shares of our Series C convertible preferred stock each outstanding as of March 31, 2004, based on an assumed initial public offering price of $14.00 per share, into an aggregate of 6,166,372 shares of our common stock; and |
| on a pro forma as adjusted basis to give further effect to the sale in this offering of 5,500,000 shares of our common stock at an assumed initial public offering price of $14.00 per share and the receipt of the estimated net proceeds therefrom, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. |
As of March 31, 2004 | ||||||||||||||
Pro forma as | ||||||||||||||
Actual | Pro forma | adjusted | ||||||||||||
(in thousands, except share and | ||||||||||||||
per share data) | ||||||||||||||
Cash, cash equivalents and marketable securities
|
$59,305 | $59,305 | $ | 129,115 | ||||||||||
Deferred compensation and other liabilities
|
447 | 447 | 447 | |||||||||||
Series A redeemable convertible preferred
stock, $0.01 par value per share; 267,213 shares
authorized; 267,212 issued and outstanding, actual; no shares
issued and outstanding, pro forma or pro forma as adjusted
|
5,252 | | | |||||||||||
Stockholders equity:
|
||||||||||||||
Series B convertible preferred stock,
$0.01 par value per share; 192,618 shares authorized,
issued and outstanding, actual; no shares issued and
outstanding, pro forma or pro forma as adjusted
|
15,000 | | | |||||||||||
Series C convertible preferred stock, $0.01
par value per share; 980,393 authorized; 980,392 issued and
outstanding, actual; no shares issued and outstanding, pro forma
or pro forma adjusted
|
50,000 | | | |||||||||||
Common stock, $0.01 par value per share;
100,000,000 shares authorized and 19,975,089 shares
issued and outstanding, actual; 90,000,000 shares authorized,
26,141,461 and 31,641,461 shares issued and outstanding,
pro forma and pro forma as adjusted, respectively
|
200 | 261 | 316 | |||||||||||
Additional paid-in capital
|
434,202 | 504,393 | 574,148 | |||||||||||
Notes receivable from stockholders
|
(1,438 | ) | (1,438 | ) | (1,438 | ) | ||||||||
Notes receivable from officers
|
(153 | ) | (153 | ) | (153 | ) | ||||||||
Deficit accumulated during the development stage
|
(383,380 | ) | (383,380 | ) | (383,380 | ) | ||||||||
Total stockholders equity
|
114,431 | 119,683 | 189,493 | |||||||||||
Total capitalization
|
$120,130 | $120,130 | $ | 189,940 | ||||||||||
You should read the information in the table above in conjunction with Managements discussion and analysis of financial condition and results of operations and our financial statements and accompanying notes appearing elsewhere in this prospectus.
The number of shares in the table above excludes:
| 2,149,953 shares of our common stock issuable upon exercise of options outstanding as of March 31, 2004, with a weighted average exercise price of $10.20 per share, of which options to purchase 765,464 shares were exercisable as of that date, with a weighted average exercise price of $10.74 per share; |
| 175,227 shares of our common stock issuable upon exercise of warrants outstanding as of March 31, 2004, with a weighted average exercise price of $12.54 per share, all of which were exercisable as of that date; |
| 3,643,957 shares of our common stock reserved for future issuance under our 2004 Equity Incentive Plan effective as of the completion of this offering; and |
| 2,800,000 shares of our common stock reserved for future issuance under our 2004 Non-Employee Directors Stock Option Plan and 2004 Employee Stock Purchase Plan, which we have adopted effective upon the completion of this offering. |
We effected a one-for-three reverse split of our common stock on July 22, 2004. All share amounts set forth in the table above give effect to this stock split.
Dilution
Our historical net tangible book value as of March 31, 2004 was approximately $119.7 million, or $5.99 per share of common stock, based on 19,975,089 shares of common stock outstanding. Historical net tangible book value per share is equal to our total tangible assets minus total liabilities, all divided by the number of shares of our common stock outstanding as of March 31, 2004. Our pro forma net tangible book value as of March 31, 2004 was approximately $119.7 million, or $4.58 per share of our common stock. Pro forma net tangible book value per share gives effect to the conversion, upon the closing of this offering, of all then outstanding shares of our preferred stock, based on an assumed initial public offering price of $14.00 per share, into an aggregate of 6,166,372 shares of our common stock.
After giving further effect to the sale of the 5,500,000 shares of our common stock offered by this prospectus at an assumed initial public offering price of $14.00 per share, and after deducting underwriting discounts and commissions and our estimated offering expenses, our pro forma as adjusted net tangible book value as of March 31, 2004 would have been approximately $189.5 million, or $5.99 per share of our common stock. This represents an immediate increase in pro forma net tangible book value of $1.41 per share to existing stockholders and an immediate dilution of $8.01 per share to new investors. The following table illustrates this calculation on a per share basis:
Assumed initial public offering price per share
|
$ | 14.00 | |||||||
Net tangible book value per share as of
March 31, 2004
|
$ | 5.99 | |||||||
Decrease per share attributable to the conversion
of our convertible preferred stock and redeemable convertible
preferred stock
|
(1.41 | ) | |||||||
Pro forma net tangible book value as of
March 31, 2004
|
4.58 | ||||||||
Increase per share attributable to the offering
|
1.41 | ||||||||
Pro forma as adjusted net tangible book value per
share after this offering
|
5.99 | ||||||||
Dilution per share to new investors
|
$ | 8.01 | |||||||
If the underwriters exercise their over-allotment option in full, pro forma as adjusted net tangible book value will increase to $6.17 per share, representing an increase to existing stockholders of $1.59 per share, and there will be an immediate dilution of $7.83 per share to new investors.
The following table summarizes, on a pro forma as adjusted basis as of March 31, 2004, after giving effect to this offering and the conversion upon the closing of this offering of all of our shares of convertible preferred stock and redeemable convertible preferred stock outstanding as of that date, the total number of shares of our common stock purchased from us and the total consideration and average price per share paid by existing stockholders and by new investors:
Total shares | Total consideration | ||||||||||||||||||||
Average price | |||||||||||||||||||||
Number | % | Amount | % | per share | |||||||||||||||||
Existing stockholders
|
26,141,461 | 83 | % | $ | 328,500,000 | 81 | % | $ | 12.57 | ||||||||||||
New investors
|
5,500,000 | 17 | 77,000,000 | 19 | 14.00 | ||||||||||||||||
Total
|
31,641,461 | 100 | % | $ | 405,500,000 | 100 | % | ||||||||||||||
If the underwriters exercise their over-allotment option in full, the following will occur:
| the pro forma as adjusted percentage of shares of our common stock held by existing stockholders will decrease to approximately 81% of the pro forma as adjusted total number of shares of our common stock outstanding immediately after this offering; and |
| the pro forma as adjusted number of shares of our common stock held by new investors will increase to 6,325,000, or approximately 19% of the total pro forma as adjusted number of shares of our common stock outstanding immediately after this offering. |
The tables and calculations above are based on 26,141,461 shares of our common stock outstanding as of March 31, 2004 and exclude:
| 2,149,953 shares of our common stock issuable upon exercise of options outstanding as of March 31, 2004, with a weighted average exercise price of $10.20 per share, of which options to purchase 765,464 shares were exercisable as of that date, with a weighted average exercise price of $10.74 per share; |
| 175,227 shares of our common stock issuable upon exercise of warrants outstanding as of March 31, 2004, with a weighted average exercise price of $12.54 per share, all of which were exercisable as of that date; |
| 3,643,957 shares of our common stock reserved for future issuance under our 2004 Equity Incentive Plan effective as of the completion of this offering; and |
| 2,800,000 shares of our common stock reserved for future issuance under our 2004 Non-Employee Directors Stock Option Plan and 2004 Employee Stock Purchase Plan, which we have adopted effective upon the completion of this offering. |
Selected financial data
We were incorporated in February 1991 under the laws of the State of Delaware as Pharmaceutical Discovery Corporation, or PDC. On December 12, 2001, AlleCure and CTL merged with wholly-owned subsidiaries of PDC. Pursuant to the merger, all of the outstanding shares of capital stock of AlleCure and CTL were exchanged for shares of capital stock of PDC, and AlleCure and CTL became wholly-owned subsidiaries of PDC. In connection with the merger, PDC changed its name to MannKind Corporation. On December 31, 2002, AlleCure and CTL merged with and into MannKind and ceased to be separate entities. For periods prior to January 1, 2002, the results of operations have been presented on a combined basis. For periods subsequent to December 31, 2001, the financial statements of MannKind and its wholly-owned subsidiaries have been presented on a consolidated basis.
The following statement of operations data for the years ended December 31, 1999 and 2000 and the balance sheet data as of December 31, 1999 and 2000 are unaudited. The following statement of operations data for the years ended December 31, 2001, 2002 and 2003 and the balance sheet data as of December 31, 2001, 2002 and 2003, are derived from our audited financial statements. The statement of operations data for each of the three years in the period ended December 31, 2003 and the balance sheet data at December 31, 2002 and 2003 were derived from our financial statements, which have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, and are included elsewhere in this prospectus. The balance sheet data at December 31, 2001 were derived from our financial statements, which have been audited by Deloitte & Touche LLP and are not included in this prospectus. The balance sheet data as of March 31, 2004 and the statement of operation data for each of the three months ended March 31, 2003 and 2004 and for the period from inception (February 14, 1991) through March 31, 2004 have been derived from our unaudited financial statements, which include, in the opinion of management, all adjustments necessary to present fairly the data for such periods. The historical results are not necessarily indicative of results to be expected in any future period. See the notes to the audited financial statements included elsewhere in this prospectus for an explanation of the method used to determine the number of shares used in computing historical and pro forma basic and diluted net loss per share.
The following financial data is only a summary and should be read in conjunction with our financial statements and the related notes included elsewhere in this prospectus, and Managements discussion and analysis of financial condition and results of operations. The following selected financial data is not intended to replace our financial statements included elsewhere in this prospectus.
Cumulative | ||||||||||||||||||||||||||||||||||
period from | ||||||||||||||||||||||||||||||||||
Three months | February 14, | |||||||||||||||||||||||||||||||||
Year ended December 31, | ended March 31, | 1991 (date of | ||||||||||||||||||||||||||||||||
inception) to | ||||||||||||||||||||||||||||||||||
Statement of operations data: | 1999 | 2000 | 2001 | 2002 | 2003 | 2003 | 2004 | March 31, 2004 | ||||||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||||||||||||
Revenue
|
$ | 74 | $ | 154 | $ | 326 | $ | | $ | | $ | | $ | | $ | 2,858 | ||||||||||||||||||
Operating expenses:
|
||||||||||||||||||||||||||||||||||
Research and development
|
3,994 | 20,542 | 19,763 | 42,724 | 45,613 | 11,564 | 12,799 | 156,446 | ||||||||||||||||||||||||||
General and administrative
|
1,654 | 4,854 | 10,629 | 13,215 | 20,699 | 8,807 | 3,769 | 61,226 | ||||||||||||||||||||||||||
In-process research and development costs
|
| | 19,726 | | | | | 19,726 | ||||||||||||||||||||||||||
Goodwill impairment
|
| | | 151,428 | | | | 151,428 | ||||||||||||||||||||||||||
Total operating expenses
|
5,648 | 25,396 | 50,118 | 207,367 | 66,312 | 20,371 | 16,568 | 388,826 | ||||||||||||||||||||||||||
Loss from operations
|
(5,574 | ) | (25,242 | ) | (49,792 | ) | (207,367 | ) | (66,312 | ) | (20,371 | ) | (16,568 | ) | (385,968 | ) | ||||||||||||||||||
Other income (expense)
|
50 | 204 | 288 | 487 | (25 | ) | (51 | ) | 54 | (2,142 | ) | |||||||||||||||||||||||
Interest income (expense)
|
(155 | ) | 379 | 1,261 | 617 | 459 | 86 | 105 | 4,744 | |||||||||||||||||||||||||
Loss before provision for income taxes
|
(5,679 | ) | (24,659 | ) | (48,243 | ) | (206,263 | ) | (65,878 | ) | (20,336 | ) | (16,409 | ) | (383,366 | ) | ||||||||||||||||||
Income taxes
|
| (2 | ) | (2 | ) | (2 | ) | (1 | ) | | | (14 | ) | |||||||||||||||||||||
Net loss
|
(5,679 | ) | (24,661 | ) | (48,245 | ) | (206,265 | ) | (65,879 | ) | (20,336 | ) | (16,409 | ) | (383,380 | ) | ||||||||||||||||||
Deemed dividend related to beneficial conversion
of convertible preferred stock
|
| | | (1,421 | ) | (1,017 | ) | | (612 | ) | (3,050 | ) | ||||||||||||||||||||||
Accretion on redeemable preferred stock
|
| (149 | ) | (239 | ) | (251 | ) | (253 | ) | (60 | ) | (64 | ) | (956 | ) | |||||||||||||||||||
Net loss applicable to common stockholders
|
$ | (5,679 | ) | $ | (24,810 | ) | $ | (48,484 | ) | $ | (207,937 | ) | $ | (67,149 | ) | $ | (20,396 | ) | $ | (17,085 | ) | $ | (387,386 | ) | ||||||||||
Basic and diluted net loss per share:
|
||||||||||||||||||||||||||||||||||
Historical
|
$ | (1.38 | ) | $ | (3.95 | ) | $ | (4.60 | ) | $ | (15.43 | ) | $ | (3.63 | ) | $ | (1.24 | ) | $ | (0.86 | ) | |||||||||||||
Pro forma(1)
|
$ | (3.34 | ) | $ | (0.71 | ) | ||||||||||||||||||||||||||||
Shares used to compute basic and diluted net loss
per share:
|
||||||||||||||||||||||||||||||||||
Historical
|
4,125 | 6,278 | 10,534 | 13,472 | 18,488 | 16,466 | 19,975 | |||||||||||||||||||||||||||
Pro forma(1)
|
20,107 | 24,218 | ||||||||||||||||||||||||||||||||
(1) | The pro forma basic and diluted net loss per share reflects the weighted effect of the assumed conversion of convertible preferred stock at the conversion prices in effect during the periods presented. See Note 2 to our financial statements for information regarding computation of basic and diluted net loss per share and pro forma basic and diluted net loss per share. |
As of December 31, | As of | |||||||||||||||||||||||
March 31, | ||||||||||||||||||||||||
Balance sheet data: | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Cash, cash equivalents and marketable securities
|
$2,226 | $35,053 | $53,730 | $31,052 | $55,945 | $59,305 | ||||||||||||||||||
Working capital
|
5,450 | 29,081 | 47,477 | 24,171 | 49,097 | 52,586 | ||||||||||||||||||
Total assets
|
9,296 | 42,645 | 251,487 | 104,773 | 125,876 | 128,766 | ||||||||||||||||||
Deferred compensation and other liabilities
|
7,500 | 132 | 231 | 207 | 404 | 447 | ||||||||||||||||||
Redeemable convertible preferred stock
|
| 4,445 | 4,684 | 4,935 | 5,188 | 5,252 | ||||||||||||||||||
Deficit accumulated during the development stage
|
(21,921 | ) | (46,582 | ) | (94,827 | ) | (301,092 | ) | (366,971 | ) | (383,380 | ) | ||||||||||||
Total stockholders equity (deficit)
|
(745 | ) | 31,890 | 235,017 | 90,773 | 111,577 | 114,431 |
Managements discussion and analysis of financial condition
You should read the following discussion of our financial condition and results of operations in conjunction with our financial statements and the notes to those statements included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, including those set forth under Risk factors and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.
OVERVIEW
We are a biopharmaceutical company focused on the discovery, development and commercialization of therapeutic products for diseases such as diabetes, cancer, inflammatory and autoimmune diseases. Our lead product, the Technosphere Insulin System, which is currently in late Phase II clinical trials for the treatment of diabetes, consists of our dry powder Technosphere formulation of insulin and our MedTone inhaler through which the powder is inhaled into the deep lung. We believe the performance characteristics, convenience and ease of use of our proprietary Technosphere Insulin System have the potential to change the way diabetes is treated.
We were incorporated in February 1991 under the laws of the State of Delaware as Pharmaceutical Discovery Corporation. On December 12, 2001, AlleCure and CTL merged with wholly-owned subsidiaries of PDC. Pursuant to the merger, all of the outstanding shares of capital stock of AlleCure and CTL were exchanged for shares of capital stock of PDC, and AlleCure and CTL became wholly-owned subsidiaries of PDC. In connection with the merger, PDC changed its name to MannKind Corporation. On December 31, 2002, AlleCure and CTL merged with and into MannKind and ceased to be separate entities.
Since our inception in 1991 through March 31, 2004, we have incurred a cumulative net loss of $383.4 million. We do not anticipate receiving revenues from the sales of any product prior to regulatory approval and commercialization of our Technosphere Insulin System. We expect to make substantial expenditures and to incur additional operating losses for at least the next several years as we:
| continue the development and commercialization of our Technosphere Insulin System for the treatment of type 2 diabetes, currently in late Phase II clinical trials; |
| expand our proprietary Technosphere formulation technology and develop additional applications for the delivery of other drugs; |
| expand our other research, discovery and development programs focused on the development of therapies for cancer, inflammation and autoimmune disorders; |
| expand our manufacturing operations and quality systems to meet our currently anticipated commercial production needs as we advance the Technosphere Insulin System through Phase III clinical trials and into commercialization; and |
| enter into sales and marketing collaborations with other companies, if available on commercially reasonable terms, or develop these capabilities ourselves. |
We have a limited history of operations with our current management team and, to date, we have not generated any revenues from sales of any product. We currently do not have the required approvals to
market any of our product candidates, and we may not receive them. We may not be profitable even if we succeed in commercializing any of our product candidates.
We have funded our operations primarily through private placements of equity securities. In 2003, we raised $100.0 million through private placements of our equity securities, comprised of 3,493,194 shares of common stock sold at a weighted average price of $14.31 per share and 980,392 shares of Series C convertible preferred stock that were subscribed for in 2003 at a price of $51.00 per share. Of the $50.0 million of Series C convertible preferred stock subscribed for in 2003, $31.8 million, representing the purchase price for 624,449 shares of Series C convertible preferred stock, was received in 2003 and $18.2 million, representing the purchase price of the remaining 355,943 shares of Series C convertible preferred stock, was received in the first quarter of 2004. All of the shares of our Series C convertible preferred stock were issued in the first quarter of 2004.
Our business is subject to significant risks, including but not limited to the risks inherent in our ongoing clinical trials and the regulatory approval process, the results of our research and development efforts, competition from other products and technologies and uncertainties associated with obtaining and enforcing patent rights.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses consist mainly of costs associated with the clinical trials of our product candidates, the salaries, benefits and stock-based compensation of research and development personnel, laboratory supplies and materials, facility costs, costs for consultants and related contract research, licensing fees, and depreciation of laboratory equipment. We track research and development costs by the type of cost incurred.
Our research and development staff conducts our internal research and development activities, which include research, product development, clinical development and manufacturing and related activities. This staff is divided between our facilities in Valencia, California and Danbury, Connecticut. We expense research and development costs as we incur them.
At this time, due to the risks inherent in the clinical trial process and given the early stage of development of our product candidates other than the Technosphere Insulin System, we are unable to estimate with any certainty the costs we will incur in the continued development of our product candidates for commercialization. The costs required to complete the development of our Technosphere Insulin System will be largely dependent on the results of our current Phase II trials, discussions with the FDA on their requirements, the length of our clinical trials and the cost and efficiency of our manufacturing process. However, we expect our research and development costs to increase as we continue to develop new applications for our proprietary therapeutics and drug-delivery technologies, refine our manufacturing processes and move our other product candidates through preclinical and clinical trials.
Clinical development timelines, likelihood of success and total costs vary widely. We are currently focused primarily on advancing the Technosphere Insulin System through continuing Phase II and into and through Phase III clinical trials. We plan to commercialize our lead product as a treatment for type 2 diabetes. Based on the results of preclinical studies, we plan to develop additional applications of our Technosphere technology. Additionally, we anticipate that we will continue to determine which research and development projects to pursue, and how much funding to direct to each project, on an ongoing basis, in response to the scientific and clinical success of each product candidate. We cannot be certain when any revenues from the commercialization of our products will commence.
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses consist primarily of salaries, benefits and stock-based compensation for administrative, finance, business development, human resources, legal and information systems support personnel. In addition, general and administrative expenses include business insurance and professional services costs.
CRITICAL ACCOUNTING POLICIES
We have based our discussion and analysis of our financial condition and results of operations on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis we evaluate our estimates and judgments. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making estimates of expenses such as stock option expenses and judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. The significant accounting policies that are critical to the judgments and estimates used in the preparation of our financial statements are described in more detail below.
Goodwill, intangibles and other long-lived assets
| significant changes in our strategic business objectives and utilization of the assets; |
| a determination that the carrying value of such assets can not be recovered through undiscounted cash flows; |
| loss of legal ownership or title to the assets; or |
| the impact of significant negative industry or economic trends. |
If we believe our assets to be impaired, the impairment we recognize is the amount by which the carrying value of the assets exceeds the fair value of the assets. Any write-downs would be treated as permanent reductions in the carrying amount of the asset and an operating loss would be recognized. In addition, we base the useful lives and related amortization or depreciation expense on our estimate of the useful lives of the assets. If a change were to occur in any of the above-mentioned factors or estimates, our reported results could materially change. For example, as described in Results of Operations for the years ended December 31, 2003 and 2002, near the end of the third quarter of 2002, we initiated an internal study to assess whether the product development programs acquired in the merger with AlleCure and CTL were meeting their objectives. As a result of this study, our management concluded in December 2002 that the major AlleCure product development program should be terminated and that the clinical trials of the CTL product should be halted and returned to the research stage. As a result of this determination, during the first quarter of 2003, we closed the CTL facility and reduced headcount for AlleCure and CTL by approximately 50%. In connection with
our annual test for impairment of goodwill as of December 31, 2002, we determined that on the basis of the internal study, the goodwill recorded for the AlleCure and CTL units was potentially impaired. We performed the second step of our annual impairment test as of December 31, 2002 for both the potentially impaired reporting units and estimated the fair value of the AlleCure and CTL programs, as acquired in the merger, using the expected present value of future cash flows which are now expected to be negligible. Accordingly, the goodwill balance of $151,428,000 was determined to be fully impaired and an impairment loss was recorded in the fourth quarter of 2002.
To date, we have had recurring operating losses and the recoverability of our long-lived assets is contingent upon executing our business plan. If we are unable to execute our business plan, we may be required to write down the value of our long-lived assets in future periods.
Stock-based compensation
The measurement date for stock-based compensation, if any, in connection with an employee stock option is generally the option grant date. However, modifying option terms subsequent to the grant date can result in a re-measurement of stock-option compensation on the modification date and thereafter under certain circumstances. On October 7, 2003, our board of directors approved a re-pricing program for certain outstanding options to purchase shares of our common stock granted under each of our stock plans. Under the re-pricing program, each holder of outstanding options granted under the stock plans who was our employee on November 5, 2003 could elect to exchange up to all of their outstanding options that had an exercise price greater than $7.95 for re-priced stock options with an exercise price of $7.95 per share and a term of four years. The option re-pricing became effective on November 5, 2003. Each replacement option vests 50% in November 2004 and the remaining 50% vests monthly until fully vested in November 2005. Employees who voluntarily resign in the 12-month period beginning November 5, 2003 will forfeit their re-priced options. Employees who are involuntarily terminated in the 12-month period beginning November 5, 2003 will vest 50% upon termination. Compensation cost for all options re-priced under the re-pricing program will be re-measured on a quarterly basis until the options are exercised, canceled or expire.
Stock options issued to consultants are accounted for in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Under SFAS No. 123, stock-based compensation for stock options granted to consultants is equal to the fair value of the stock options rather than the intrinsic value under APB No. 25. We determine the fair value of options granted to consultants using the Black-Scholes option valuation model, which was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. The Black-Scholes option valuation model requires the input of highly subjective assumptions, including the estimated fair value of our common stock and
expected stock price volatility. Stock-based compensation related to options granted to consultants is generally re-measured periodically as the underlying options vest.
We recognized stock-based compensation expense of $1.6 million in 2001, $352,000 in 2002 and $4.5 million in 2003. Stock-based compensation expense includes amounts attributable to certain issuances of common stock for notes receivable that we have accounted for as in-substance stock options and are further described in the notes to our financial statements. Stock-based compensation expense for 2002 includes the reversal of approximately $815,000 of stock-based compensation attributable to an in-substance stock option because the intrinsic value of the in-substance stock option was zero at December 31, 2003. Stock-based compensation expense is assigned to operating expense categories in our statements of operations according to nature of the services rendered by the employee or consultant to whom the expense applies.
Because there has been no public market for our common stock, we have estimated the fair value of our equity instruments. If future market conditions dictate significant changes in the estimates of fair value, or if a public market establishes a value for our common stock that is significantly higher than our estimated value, our results of operations could be materially impacted. In future periods, we are required to re-measure stock-based compensation cost for all employee options re-priced under the re-pricing program that remain outstanding and to periodically re-measure the stock-based compensation cost of options we have granted to consultants. Since the amount of compensation cost attributable to the re-priced options and consultant options is dependent on the fair value of our common stock underlying the options on the future re-measurement dates, the amount of stock-based compensation recognized in any given future period cannot be predicted and may have a material impact on our results of operations.
Accounting for income taxes
RESULTS OF OPERATIONS
Three months ended March 31, 2004 and 2003
Revenues
Research and development expenses
validation of our manufacturing system. These increased costs were offset by a decrease of $3.3 million in research and development costs resulting from the termination of AlleCure product development programs and the redesign of CTL product development programs. We anticipate that our research and development expenses will increase significantly with the continuation of existing, and initiation of new, clinical trials and the resulting manufacturing costs associated with producing materials for these clinical trials. Additionally, we continue to advance our efforts in developing additional applications for our proprietary Technosphere formulation technology and developing therapies for the treatment of solid-tumor cancers.
General and administrative expenses
Other income (expense)
Interest income
Years ended December 31, 2003 and 2002
Revenues
Research and development expenses
General and administrative expenses
Other income (expense)
Interest income
Years ended December 31, 2002 and 2001
Revenues
Research and development expenses
General and administrative expenses
In-process research and development costs
Goodwill and impairment
any related impairment losses are recognized in earnings when identified. Toward the end of the third quarter of 2002, we initiated an internal study to assess whether the product development programs acquired in the merger with AlleCure and CTL were meeting their objectives. As a result of this study, our management concluded in December 2002 that the major AlleCure product development program should be terminated and that the clinical trials of the CTL product should be halted and returned to the research stage. As a result of this determination, during the first quarter of 2003, we closed the CTL facility and reduced headcount for AlleCure and CTL by approximately 50%. In connection with our annual test for impairment of goodwill as of December 31, 2002, we determined that on the basis of the internal study, the goodwill recorded for the AlleCure and CTL units was potentially impaired. We performed the second step of our annual impairment test as of December 31, 2002 for each of the potentially impaired reporting units and estimated the fair value of the AlleCure and CTL programs, as acquired in the merger, using the expected present value of future cash flows which are now expected to be negligible. Accordingly, the goodwill balance of $151,428,000 was determined to be fully impaired and an impairment loss was recorded in fourth quarter of 2002.
Other income (expense)
Interest income
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through the private placement of equity securities with our majority stockholder and his affiliated entities, who have invested approximately $228.5 million of the approximately $328.5 million that we have raised as of March 31, 2004. In 2003, we raised $100.0 million through private placements of our equity securities, comprising 3,493,194 shares of common stock sold at an average price of $14.31 per share, and 980,392 shares of Series C convertible preferred stock that were subscribed for in 2003 at a price of $51.00 per share. Of the $50.0 million of Series C convertible preferred stock subscribed for in 2003, $31.8 million, representing the purchase price of 624,449 shares of Series C convertible preferred stock, was received in 2003 and $18.2 million, representing the purchase price of the remaining 355,943 shares of Series C convertible preferred stock, was received in the first quarter of 2004. All of the shares of our Series C convertible preferred stock were issued in the first quarter of 2004.
As of March 31, 2004, we had $59.3 million in cash, cash equivalents and marketable securities. We estimate that the net proceeds from this offering will be approximately $69.8 million, assuming no exercise by the underwriters of their over-allotment option and an assumed initial public offering price of $14.00 per share and after deducting underwriting discounts and estimated offering expenses. Following this offering, we will have approximately $129.1 million in cash, cash equivalents and marketable securities. We believe that our available cash, cash equivalents, and marketable securities, together with the net proceeds of this offering, will be sufficient to fund anticipated levels of operations into the second quarter of 2005.
We intend to use our capital resources to continue the development of our Technosphere Insulin System and to develop additional applications for our proprietary Technosphere formulation
technology. In addition, portions of our capital resources will be devoted to expanding our other product development programs for the treatment of solid-tumor cancers and a variety of inflammatory and autoimmune diseases. We also intend to use our capital resources for general corporate purposes, which may include in-licensing or acquiring additional technologies.
We intend to raise additional capital through strategic business collaborations. In addition, we may in the future pursue the sale of equity and/or debt securities, or the establishment of other funding facilities. Issuances of debt or additional equity could impact your rights as a holder of our common stock, may dilute your ownership percentage and may impose restrictions on our operations. These restrictions could include limitations on additional borrowing, specific restrictions on the use of our assets as well as prohibitions on our ability to create liens, pay dividends, redeem our stock or make investments. We also may seek to raise additional capital by pursuing opportunities for the licensing, sale or divestiture of certain intellectual property and other assets, including our Technosphere technology platform. We cannot assure you, however, that any strategic collaborations, sales of securities or sale or license of assets will be available to us on a timely basis or on acceptable terms, if at all. If we are unable to raise additional capital, we may be required to enter into agreements with third parties to develop or commercialize products or technologies that we otherwise would have sought to develop independently, and any such agreements may not be on terms as commercially favorable to us.
In the event that sufficient additional funds are not obtained through strategic collaboration opportunities, licensing arrangements, sales of securities and/or asset sales on a timely basis, we may be required to reduce expenses through the delay, reduction or curtailment of our projects, including our Technosphere Insulin System development activities, or further reduction of costs for facilities and administration.
For the quarter ended March 31, 2004, we used net cash of $12.0 million in operating activities. This consisted primarily of a net loss for the period of $16.4 million, which included non-cash stock-based compensation of $1.2 million and depreciation of $1.8 million. Additionally, accounts payable and accrued expenses increased by an aggregate of $1.3 million. We used $2.8 million for investing activities for the quarter ended March 31, 2004, which consisted of $1.4 million in net purchases of marketable securities and $1.4 million in manufacturing equipment acquisitions. We received cash of $16.8 million from financing activities during the quarter ended March 31, 2004 consisting of $18.2 million of the remaining proceeds due from the sale of Series C convertible preferred stock offset by $1.4 million returned to a stockholder due to the oversubscribed sale of Series C convertible preferred stock.
Our operating activities used net cash of $52.8 million in 2003, $48.7 million in 2002 and $21.2 million in 2001. During these periods, we recorded increasing expenses caused principally by increases in research and development, expanded clinical trials, business planning and recruitment of management and technical staff, which resulted in increasing operating cash outflows. We expect our negative operating cash flow to continue for several years.
Our investing activities generated $4.1 million in 2003, principally from the proceeds from the net sales and purchases of marketable securities of $9.2 million, offset by the purchase of property and equipment of $5.2 million. Our investing activities used $45.3 million in 2002 and $39.7 million in 2001. In 2002, purchases of property and equipment used $34.1 million and net purchases and sales of marketable securities used $11.2 million. In 2001, investing activities consisted entirely of the purchase of property and equipment.
Our financing activities provided cash of $82.8 million in 2003, generated primarily from the collection of $31.8 million of stock subscriptions for 624,449 shares of Series C convertible preferred stock and $50.0 million from the sale of 3,493,194 shares of common stock. In 2002, financing
activities generated $60.2 million primarily from the sale of 4,155,757 shares of common stock, which provided $58.9 million in proceeds. In 2001, financing activities generated $79.5 million primarily from the sale of 3,052,078 shares of common stock, which provided $78.0 million in proceeds.
As of March 31, 2004, we did not have any off balance sheet financing arrangements.
COMMITMENTS AND CONTINGENCIES
Our contractual obligations consist of operating leases, purchase obligations, capital lease commitments and deferred compensation. Certain stockholders and officers elected to defer part or all of their compensation from 1991 through 1998, resulting in total deferred compensation of $1.6 million at March 31, 2004. The amounts due for deferred compensation are non-interest-bearing with no repayment terms. Our other obligations are included in the table below.
At March 31, 2004, our total capital lease commitments were not material. Future payments under our operating lease obligations and open purchase commitments consist of the following at March 31, 2004 (in thousands):
Payments due in | ||||||||||||||||||||
After | ||||||||||||||||||||
Contractual obligations | Total | 2004 | 2005 | 2006 | 2006 | |||||||||||||||
Open purchase order commitments(1)
|
$ | 6,399 | $ | 4,749 | $ | 1,100 | $ | 550 | | |||||||||||
Operating lease obligations
|
419 | 322 | 61 | 36 | | |||||||||||||||
Total contractual obligations
|
$ | 6,818 | $ | 5,071 | $ | 1,161 | $ | 586 | | |||||||||||
(1) | The amounts included in open purchase order commitments are subject to performance under the purchase order by the supplier of the goods or services and do not become our obligation until such performance is rendered. The amount shown is principally for the purchase of materials for our clinical trials and the acquisition of manufacturing equipment. |
RELATED PARTY TRANSACTIONS
For a description of our related party transactions see Certain relationships and related party transactions.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued Financial Interpretation Number 46, Consolidation of Variable Interest Entities (FIN 46) with the objective of improving financial reporting by companies involved with variable interest entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51 to certain entities, defined as variable interest entities, in which equity investors do not have characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. In December 2003, the FASB issued a revision to FIN 46, or FIN 46R, to clarify some of the provisions of FIN 46. We currently have no entities that have the characteristics of a variable interest entity. Furthermore, our adoption of the remaining provisions of FIN 46R in the quarter ended March 31, 2004 did not have an impact on our financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This statement establishes how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity, including redeemable preferred stock. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the interim period
commencing July 1, 2003, except for mandatory redeemable financial instruments of nonpublic companies, which is effective for fiscal periods beginning after December 31, 2004. The adoption did not have a material impact on our financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have not used derivative financial instruments for speculation or trading purposes. However, we are exposed to market risk related to changes in interest rates. Our investment policy is designed to preserve capital and provide liquidity to meet projected cash requirements. Our investment portfolio currently consists of US government securities, bank obligations and corporate debt instruments for which the maturity dates average less than twelve months. We currently do not hedge against interest rate exposure. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest-sensitive financial instruments at March 31, 2004. The modeling technique that we used measures the change in fair values arising from an immediate, hypothetical shift in market interest rates and assumes that ending fair values include principal and accrued interest. Declines in interest rates over time will, however, reduce our interest income while increases in interest rates over time will increase our interest expense. Due to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure. We do not have any foreign currency or other derivative financial instruments.
Business
OVERVIEW
We are a biopharmaceutical company focused on the discovery, development and commercialization of therapeutic products for diseases such as diabetes, cancer, inflammatory and autoimmune diseases. Our lead product, the Technosphere Insulin System, which is currently in late Phase II clinical trials for the treatment of diabetes, consists of our dry powder Technosphere formulation of insulin and our MedTone inhaler through which the powder is inhaled into the deep lung. On the basis of our clinical findings to date and our understanding of current diabetes therapy, we believe the performance characteristics, convenience and ease of use of our proprietary Technosphere Insulin System have the potential to change the way diabetes is treated.
In our clinical trials to date, we have observed that our Technosphere Insulin System produces a profile of insulin levels in the bloodstream that approximates the insulin profile normally seen in healthy individuals immediately following the beginning of a meal. As a result, we believe that our Technosphere Insulin System will be beneficial not only for insulin-using diabetes patients but also for patients with type 2 diabetes who are currently using conventional therapies other than insulin. The results of our earlier studies may not be confirmed by the results of later studies. However, if further clinical trials support our initial observations, we believe the Technosphere Insulin System has the potential to be indicated for the treatment of type 2 diabetes after a patient has failed to respond adequately to diet and exercise alone. The use of insulin earlier in the progression of diabetes would represent a paradigm shift in the treatment of this disease.
To date, we have conducted multiple Phase I and Phase II clinical trials of our Technosphere Insulin System involving more than 200 individuals in Europe and the United States. Our Technosphere Insulin System has had a favorable safety profile in our clinical trials to date. We are currently conducting late Phase II clinical trials to determine dosage tolerance and optimal dosing, which, when fully-enrolled, will involve approximately 325 individuals with diabetes in Europe and the United States. At this time, we expect results from some of these clinical trials to be available in the fourth quarter of 2004 with additional data to follow in early 2005. We intend to initiate Phase III clinical trials in the United States in the first half of 2005, subject to acceptance of our Phase III protocols by the FDA.
Our Technosphere Insulin System utilizes our proprietary Technosphere formulation technology, which is based on a class of organic molecules that are designed to self-assemble into small particles onto which drug molecules can be loaded. We are in the process of developing additional Technosphere-based products for the delivery of other drugs. We also have research programs focused on the development of therapies for cancer, inflammation and autoimmune disorders.
OVERVIEW OF DIABETES
Diabetes is a major disease characterized by the bodys inability to properly regulate levels of blood glucose, or blood sugar. The cells of the body utilize glucose as fuel, which is consumed 24 hours a day. Between meals, when glucose is not being supplied from food, the liver releases glucose into the blood to sustain adequate levels. Insulin is a hormone produced by the pancreas that regulates the bodys blood glucose levels. Patients with diabetes develop abnormally high levels of glucose, a state known as hyperglycemia, either because they produce insufficient levels of insulin or because they fail to respond adequately to insulin produced by the body. Over time, poorly controlled levels of blood glucose can lead to major complications, including significant weight gain, blindness, loss of circulation, kidney failure, impotence, heart attack, stroke and death.
According to the American Diabetes Association, or ADA, in the United States diabetes is estimated to cost society over $132 billion each year and is currently the fifth leading cause of death by disease. Data from the United States Centers for Disease Control, or CDC, and the National Institutes of Health indicate that the risk of death due to heart disease and the risk of stroke are up to four times higher in adults with diabetes than in those without the disease. Diabetes is the leading cause of new cases of blindness among adults, kidney disease and non-traumatic lower-limb amputations. The CDC estimated that, as of 2002, approximately 18.2 million people in the United States, or 6.3% of the population, suffered from diabetes. The CDC further estimated that 13 million cases were diagnosed and under treatment as of 2002 and that 1.3 million new cases would be diagnosed per year beyond that date. The ADA estimated that, in 2002, the direct costs for required drug treatment of diabetes in the United States were approximately $12 billion, of which approximately $7 billion were for insulin and delivery supplies and approximately $5 billion were for non-insulin oral medications.
There are two major forms of diabetes, type 1 and type 2. Type 1 diabetes is characterized by a complete lack of insulin secretion by the pancreas, so insulin must be supplied from outside the body in order to sustain life. In type 2 diabetes, the pancreas continues to produce insulin; however, over time it becomes increasingly unable to secrete adequate amounts of insulin to support metabolism. According to the CDC, type 2 diabetes is the more prevalent form of the disease, affecting approximately 90% to 95% of people diagnosed with diabetes.
The illustration below summarizes reports published in the New England Journal of Medicine and the American Journal of Medicine of the insulin-secretion profiles at meal time of healthy individuals and of patients with type 2 diabetes. When a healthy person begins to eat a meal, the pancreas responds with the two phases of insulin release into the bloodstream that are depicted by the solid line in the illustration below. The first phase of insulin release takes the form of a sharp spike in insulin that acts as a signal to the liver to shut off its release of glucose into the bloodstream. In the second phase of insulin release, the pancreas secretes an extended wave of insulin that acts on cells throughout the body, enabling them to absorb the glucose ingested from the meal.
Insulin-secretion profiles at meal time
As depicted by the dashed line in the illustration, individuals with early type 2 diabetes cannot produce the first-phase insulin release spike and, as a result, their liver continues to release glucose while they absorb additional glucose from the meal. This can worsen high blood sugar levels. This state forces the pancreas to compensate by secreting excessive amounts of insulin during the second phase. Over time, this repeated cycle of inadequate early release followed by over-insulinization is correlated with
subsequent exhaustion of the overall ability of the pancreas to secrete additional amounts of insulin at any point following a meal, which is depicted by the dotted line in the illustration. This situation is further complicated by a decline in the ability of insulin-sensitive cells throughout the body to respond to insulin a state known as insulin resistance. The inability to maintain control over blood glucose levels predisposes the patient with diabetes to serious, adverse health consequences.
Challenges of treating type 2 diabetes
Insulin therapy usually involves administering several subcutaneous injections of insulin each day. However, this treatment regimen is inadequate for many reasons, including:
| Patients dislike injecting themselves with insulin due to inconvenience and pain, and so tend not to comply adequately with prescribed treatment regimens. As a result, they do not properly medicate themselves. |
| Even when properly administered, subcutaneous injections of insulin do not replicate the natural first-phase insulin spike. Instead, injected insulin enters the bloodstream over a period of several hours. The consequence is for patients with diabetes to have inadequate levels of insulin present at the initiation of a meal and to be over-insulinized between meals. This results in high blood glucose levels early after meal onset followed by a tendency for glucose to fall to abnormally low levels, a state known as hypoglycemia, during the period between meals. Hypoglycemia can result in loss of mental acuity, confusion, increased heart rate, hunger, sweating and faintness and, at very low glucose levels, loss of consciousness, coma and death. |
Because of the problems associated with the conventional administration of insulin by injection, patients and their physicians have sought alternative methods for the delivery of insulin, including insulin pumps and oral delivery of insulin. Insulin pumps are generally considered appropriate only for a small segment of the diabetes population. The development of an effective oral insulin formulation has been hampered by problems of delivering a sufficient supply of insulin to the body at the time when it is needed. Because insulin is largely broken down in the digestive system, much of the insulin delivered orally does not enter the bloodstream and there is an undesirable variability in the rate of insulin absorption.
One alternative to conventional insulin therapy being pursued by a number of pharmaceutical and biotechnology companies is the inhalation of an insulin formulation into the deep lung, where it can be absorbed directly into the bloodstream. Delivering insulin through the pulmonary route is less invasive than administering it by injection and, according to a 2001 study reported in Diabetes Care, is associated with greater patient satisfaction, which should increase patient compliance and lead to better glucose control.
We anticipate that the first pulmonary insulin product developed by another pharmaceutical company may be approved for commercial sale as early as 2005. Although this product should be an important development for diabetes care, we believe that it will only partially address the shortcomings of conventional insulin therapy. A long sought-after goal in the treatment of diabetes has been to produce a profile of insulin levels in the bloodstream that approximates the first-phase insulin release spike normally seen in healthy individuals following the beginning of a meal. Based on several published reports including a 2004 review article published in Diabetes Care, it would appear that the first
pulmonary insulin products, if and when approved, may not deliver insulin to the bloodstream rapidly enough to approximate the natural first-phase insulin release spike.
THE MANNKIND SOLUTION
Based upon our clinical data, we believe our Technosphere Insulin System will be the first commercially available therapy to produce a profile of insulin levels in the bloodstream that approximates the natural first-phase insulin release spike normally seen in healthy individuals following the beginning of a meal. To date, we have conducted Phase I and Phase II clinical trials involving more than 200 individuals in Europe and the United States; however, until we have completed larger studies of efficacy and long-term safety, we cannot be certain that we will be able to repeat and validate our findings from studies that involved fairly small numbers of participants.
The clinical data below show the approximation of first-phase insulin release in more detail. The chart on the left shows the mean changes in blood insulin levels of 12 patients with type 1 diabetes who inhaled a dose of our Technosphere Insulin prior to eating a standardized meal. For illustration purposes, we have shown data from a study of patients with type 1 diabetes, whom we studied in order to observe the response to administration of Technosphere Insulin without interference from the natural production of insulin. These results are typical of our observations recorded in the other clinical trials that we have completed, including trials involving patients with type 2 diabetes. Because different protocols are used for each clinical trial, it is not possible, nor would it be scientifically valid, for us to present blood insulin data aggregated across multiple trials. Moreover, not all of the clinical trials provided the kind of data presented in the chart below. However, the data presented below is consistent with the data obtained from each of our other clinical trials where comparable data was collected.
The key feature of the response shown on the left is the time taken for blood insulin levels to peak, which was approximately ten minutes in this study. The magnitude of the response is related to the dose of Technosphere Insulin administered; we have observed in our clinical trials that the timing of the response is consistent across a range of doses. For comparison purposes, these data are presented next to a chart that shows data published in 1981 in the American Journal of Medicine from nine healthy individuals who were rapidly administered a glucose solution intravenously an experimental protocol that allowed investigators to evaluate the characteristics of the normal first-phase insulin release. These charts show that the rapid time-to-peak blood insulin levels produced by the Technosphere Insulin System in this study approximates the timing that has been demonstrated for first-phase insulin release in healthy individuals, which generally occurs within six minutes after food reaches the digestive system.
Technosphere Insulin approximation | First-phase insulin release | |
of first-phase insulin release | in healthy individuals | |
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By approximating the first-phase insulin release spike, our Technosphere Insulin System may allow patients with some pancreatic function to achieve greater control over their glucose levels, which we expect may reduce exhaustion of insulin-secreting cells in the pancreas and possibly also reduce the degree of insulin resistance. This effect would be beneficial in patients with type 2 diabetes that have advanced to the point of requiring conventional insulin therapy, patients that are being treated with non-insulin oral medications as well as patients currently using diet and exercise therapy but who are having difficulty achieving proper glucose control. If further clinical trials confirm our observations to date, we believe our Technosphere Insulin System has the potential to be indicated for the treatment of type 2 diabetes after a patient has failed to respond adequately to diet and exercise alone. The use of insulin earlier in the progression of diabetes would represent a paradigm shift in the treatment of the disease.
Our proprietary pulmonary delivery platform consists of our dry powder Technosphere formulation and our MedTone inhaler through which the powder is delivered into the deep lung. Our Technosphere formulation technology is centered on a class of organic molecules that are designed to self-assemble into small particles. Certain drugs, such as insulin, can be loaded onto these particles. The structural characteristics of loaded Technosphere particles (particle size and surface topography) impart aerodynamic properties that we believe make them particularly well suited for inhalation delivery.
In order to formulate Technosphere Insulin, we combine solutions of insulin and the Technosphere material to form a mixture, which is then dried to form the insulin-loaded powder. In our preclinical studies, we have observed that the Technosphere Insulin formulation is able to pass through the surface cells of the lung more rapidly than insulin alone. We believe this attribute is largely why our Technosphere Insulin System can approximate the natural first-phase insulin release spike.
We have developed a proprietary, palm-sized and easy-to-use dry powder inhaler for use with proprietary, single-use, disposable, plastic cartridges containing Technosphere-formulated drugs. The inhaler has been used in multiple Phase I and Phase II clinical trials with Technosphere Insulin. We believe that the compact size and design of our MedTone inhaler, shown below, make it simple to use and unobtrusive, which we believe should facilitate patient compliance. It also incorporates several features designed to ensure that the drug is delivered appropriately to the deep lung, including:
| breath actuation, which means that the patient does not need to coordinate a breath with any manipulation of the device, such as priming or pumping; and |
| an airflow regulator that is intended to deliver a consistent airflow from patient to patient and from use to use, even in patients with restricted airflow capacity. |
The MedTone inhaler in the closed position
We believe that our Technosphere Insulin System has advantages over other competitive pulmonary insulin delivery systems, principally due to our proprietary technology. These advantages include:
| Approximates natural first-phase insulin release spike. A major advantage of our Technosphere Insulin System is the speed with which the insulin is delivered to the patients bloodstream. Typically, regular insulin delivered by subcutaneous injection is delivered to the bloodstream slowly, resulting in peak insulin levels in about 120 to 180 minutes. Insulin suppliers have developed rapid-acting insulin analogs, which are variations of insulin that reach peak blood levels in 30 to 90 minutes. Based on our analysis of published reports, including a 2004 review article published in Diabetes Care, we believe that other pulmonary insulin products in development deliver peak insulin levels in 35 to 90 minutes. This timing does not approximate the natural first-phase insulin release spike, which generally occurs within six minutes after food reaches the digestive system. In contrast, our clinical trials have shown that our Technosphere Insulin System produces peak insulin levels in 10 to 14 minutes, which approximates the timing of the bodys natural first-phase insulin release spike. Because our product produces an early insulin profile that resembles that seen in healthy individuals, we anticipate that our insulin therapy may be able to achieve better control over the patients glucose levels throughout the day, especially following a meal. |
| Ease of use. Our MedTone inhaler is light, is easy to use and fits in the palm of the patients hand. To administer a dose, the patient opens the device, inserts a single-dose cartridge of Technosphere Insulin powder into the inhaler, inserts the mouthpiece into the mouth and takes a deep breath, thereby drawing the powder deep into the lungs. Moreover, we believe the timing for administering Technosphere Insulin is more convenient than subcutaneous injection. In our clinical trials, the optimal time for taking a dose of Technosphere Insulin has been found to be at the start of a meal or shortly thereafter. With subcutaneous injection, it is recommended that the user try to time a dose 15 to 45 minutes before the expected mealtime. |
| More efficient delivery of pulmonary insulin. Based on our clinical trials of Technosphere Insulin and on our analysis of publicly available information regarding the performance of other pulmonary insulin systems in development, we believe that the inhalation of a specified amount of insulin formulated as Technosphere Insulin produces blood insulin levels over a measured period of time that are approximately three times greater than that produced by the same amount of insulin administered via the pulmonary delivery systems being developed by other pharmaceutical companies. |
| Safety. Based on our clinical trials to date, Technosphere Insulin appears to cross lung tissue rapidly, with no observed accumulation of either insulin or the carrier particles in the lung. In addition, our preclinical studies have shown that the Technosphere material does not need to be metabolized to be eliminated and is rapidly excreted in the urine. Technosphere Insulin has not generated any serious, drug-related adverse events in our clinical trials to date, but these results are necessarily preliminary until we have completed long-term safety studies. |
OUR CLINICAL TRIAL RESULTS
We have conducted multiple Phase I and Phase II clinical trials of the Technosphere Insulin System in more than 200 individuals in Europe and the United States. We are currently conducting two late Phase II multi-center clinical trials: one in the United States involving approximately 125 individuals with diabetes and one in Europe, which, when fully-enrolled, will involve approximately 200 individuals with diabetes. This section describes the results of our completed studies; later stage clinical trials might not confirm the findings from these earlier stage trials.
The first of our completed clinical trials were performed in Europe as Phase I trials in healthy volunteers. These clinical trials produced the first evidence in humans that inhalation of Technosphere Insulin was accompanied by a rapid rise in blood insulin levels. The chart below shows the mean profiles of insulin delivery into the bloodstream in five healthy volunteers following administration of Technosphere Insulin and following administration of insulin by subcutaneous injection. These data indicated that the administration of Technosphere Insulin could produce peak insulin levels in a much shorter period of time than could subcutaneous injection, fast enough to suggest that our product might be used to approximate the first-phase insulin release spike.
Rapid changes in blood insulin levels after Technosphere Insulin
We performed additional clinical trials in Europe and the United States as Phase II investigations in patients with type 1 and type 2 diabetes. These clinical trials evaluated various measures of the performance and safety of the Technosphere Insulin System, including the variability of insulin delivered to the bloodstream following inhalation as well as the variability of the effect of our Technosphere Insulin System on blood glucose levels. The results indicated that our Technosphere Insulin System produced no greater variability than that obtained with traditional subcutaneous insulin administration. In fact, a specified dose of Technosphere Insulin appeared to be able to maintain consistent blood glucose levels despite differences in the caloric content of a meal. This is unlike the situation with conventional subcutaneous injection of insulin, which has to be closely tied to the amount of food eaten in order to avoid the risk of hyper- or hypoglycemia. Another finding that emerged from our completed Phase II clinical trials was that the optimal time for individuals with diabetes to inhale Technosphere Insulin is immediately before the first mouthful of food or within 15 minutes thereafter. We believe this highly convenient treatment regimen should lend itself to compliant and reliable self-administration by patients, given that other forms of insulin delivery that are currently marketed recommend dosing up to 15 to 45 minutes before a meal begins, raising issues such as miscalculation of time or unanticipated change in meal availability.
Our Phase I and II clinical trials have indicated that use of the Technosphere Insulin System is associated with high insulin bioavailability, which is a measure of the amount of insulin that is transferred to the bloodstream from the dosage form of the product. Bioavailability is typically expressed as a relative measure, compared to the amount of insulin that enters the bloodstream over the same period of time following the subcutaneous administration of the same quantity of regular human insulin. Based on the results of our clinical trials and on our analysis of published reports of the performance of other pulmonary insulin systems in development, we believe that the relative
bioavailability associated with our Technosphere Insulin System is up to three times greater than that reported for the other inhaled insulin platforms.
We are currently conducting two late Phase II clinical trials, one in the United States and the other in Europe. These clinical trials will provide further information on safety of the Technosphere Insulin System and its efficacy in maintaining blood glucose control. These clinical trials will also assist with the selection of appropriate doses of Technosphere Insulin for use in subsequent Phase III clinical trials. Twenty-seven clinical research centers are participating in the US study and thirty centers are participating in the European trial. These sites include major university research centers as well as well-known diabetes specialty clinics. Our clinical trials in Europe are monitored by a clinical research organization.
We plan to conduct multiple Phase III safety and efficacy clinical trials in different regions of the world, including the United States and Europe. We anticipate that the first US-based Phase III clinical trials will start in the first half of 2005, although our current plans allow for the initiation of the Phase III program in other countries as early as the last quarter of 2004, subject to the regulatory approval process of the relevant jurisdictions. We anticipate that the total clinical trial program will involve more than three thousand patients using the Technosphere Insulin System alone or in combination with other therapies. In the United States, we have initiated the first of several long-term safety clinical trials, which will follow the safety experience of the individuals who participate in our Phase II and Phase III clinical trials.
To date, we have not observed any serious side effects in our clinical trials that can be directly attributed to the use of Technosphere Insulin. In some patients, we have observed mild coughing and some hypoglycemic events, all classified as mild to moderate. Other adverse events reported in our clinical trials including backache, common cold, pneumonia, anemia and diarrhea were either found to be unrelated to the administration of Technosphere Insulin or could not be conclusively linked to its usage. We have an ongoing program of safety surveillance and adverse event reporting for the purpose of evaluating the ongoing safety data concerning the use of our Technosphere Insulin System. Our safety data are necessarily preliminary until we have completed longer-term safety studies.
OUR RESEARCH PROGRAMS
Additional applications of our proprietary technosphere formulation technology
We are developing additional applications for our proprietary Technosphere formulation technology by formulating other drugs for pulmonary delivery, primarily for metabolic and immunological diseases.
Immunology research programs
The immune system is a network of cells and organs that defends the body against infection and abnormal cells, such as cancer and transplanted cells. A key element of the immune system is its ability to distinguish between healthy cells and foreign or diseased cells that do not belong in the body. The
immune system accomplishes this task by recognizing distinctive molecules found on the surface of each cell as either normal or abnormal, and responding to them appropriately.
Any substance capable of triggering an immune response is known as an antigen. An antigen can be all or part of a pathogenic organism or it can be a by-product of diseased cells. Certain specialized cells of the immune system sample antigens present in the body and present small fragments, known as epitopes, of foreign antigens to other cells of the immune system whose function is to destroy any cell that expresses the same epitope; this is known as cell-mediated immunity. In this way, the immune system can launch a very specific response to infection or disease.
We are developing therapies for the treatment of solid-tumor cancers using our proprietary technologies for discovering critical tumor-related antigens, for designing DNA- and peptide-based compounds that evoke a cell-mediated immune response to those antigens and for delivering the compounds in vivo to the immune system in a manner that stimulates a potent response.
We believe that our therapeutic approach addresses several deficiencies inherent in earlier approaches to cancer immunotherapy, including:
| Specificity. We target cancer epitopes to which the immune system has not developed a tolerance, instead of targeting the dominant epitopes expressed by cancerous cells, many of which are tolerated by the immune system. We have developed technology to identify the non-tolerated epitopes on the cancer cell surface and we have developed a method of modifying these epitopes that is designed to activate an immune response. Through this process, we believe that the bodys tolerance of the cancer cells can be broken, leading to the destruction of the cancer by the immune system. |
| Administration. Our compounds are delivered directly into the patients lymph nodes, where studies have shown they will have the greatest impact. In contrast to the conventional subcutaneous or intramuscular route of administration, we believe that the direct delivery of our compounds will bring local high concentrations of the active components of our compounds into contact with high concentrations of the cells needed to generate a potent cell-mediated immune response. |
| Selectivity, potency and duration of response. We deliver our therapeutic compounds in a manner that we believe primes the immune system to respond to cancer cells expressing specific epitopes, in much the same way that a chronic infection evokes a progressively increased immune response to an invading bacteria. Our administrative regimen is designed to boost the immune response over the course of a treatment cycle so that it becomes increasingly potent and long acting. |
We have conducted initial studies of our cancer therapy in Europe and the United States, including Phase I and II clinical trials in the United States that involved 42 patients who had progressed to late stages of skin cancer. We observed that the delivery of a prototype formulation, targeting a single cancer epitope, was well tolerated by melanoma patients and produced a response by their immune system against that specific epitope. In late stages of such diseases, there are usually multiple generations of such cells, expressing multiple epitopes. Although we believe that our clinical data to date have been encouraging, we did not observe a strong correlation between the evoked immune response and clinical responses. As a result, we have continued to refine our cancer therapy program. We have developed several product candidates and expect to begin preclinical safety tests for one of these product candidates later this year, with the goal of commencing clinical trials in 2005. The results of these subsequent clinical trials may differ from the findings of our earlier trials.
To complement our cancer products and to broaden our addressable market, we are also developing drugs targeted toward inflammatory and autoimmune diseases. Several common diseases, including multiple myeloma, rheumatoid arthritis, lupus and multiple sclerosis, are characterized by the
dysfunction of key cells in the immune system, called B-cells and T-cells, which are agents of the immune system that the body uses to destroy infectious and aberrant materials. We have focused our attention on certain proteins that govern the development and function of B-cells and T-cells. By changing the activity of these proteins, we believe we can modify the immune response associated with a variety of immune system diseases. We have identified a number of molecules that are effective at changing the activity of these proteins in vitro and are in the process of optimizing these molecules.
OUR STRATEGY
Our objective is to develop products in the major therapeutic areas of diabetes, cancer, inflammatory and autoimmune diseases. Our strategy is to achieve this objective by doing the following:
| Commercialize our Technosphere Insulin System for the insulin-using diabetes market. We intend to advance our Technosphere Insulin System into and through Phase III clinical trials and then into commercialization, with the goal of establishing a significant presence for Technosphere Insulin in the insulin-using diabetes market. We believe that the market for insulin products will expand significantly among patients with type 2 diabetes as a result of the entry of other pulmonary insulin products, primarily due to the non-invasive nature of pulmonary insulin delivery. We believe the advantages of the Technosphere Insulin System, as compared to other pulmonary insulin products, will enable us to capture a significant portion of the existing and expanded insulin-using diabetes market. |
| Establish our Technosphere Insulin System as the preferred drug therapy within the broader population of people with type 2 diabetes. Our target markets also include patients with type 2 diabetes who are currently using conventional therapies other than insulin, including: |
| Patients currently using diet and exercise therapy but who are having difficulty achieving proper blood glucose control; |
| Patients for whom diet and exercise therapy has failed but who otherwise would have started non-insulin oral medications; and |
| Patients currently using non-insulin oral medications. |
We believe our Technosphere Insulin System will be the first commercially available therapy to produce a profile of insulin levels in the bloodstream that approximates the first-phase insulin release spike normally seen in healthy individuals following the beginning of a meal. We believe that no other conventional therapy has demonstrated that it can approximate the first-phase insulin release spike, and we are not aware of any other therapy in development that makes this claim. As a result, we believe that our Technosphere Insulin System has the potential to become the preferred drug therapy for the broader population of people with type 2 diabetes. |
| Seek a strategic collaboration for the development, marketing and commercialization of our Technosphere Insulin System. We are actively exploring collaborations with large pharmaceutical companies in the United States, Europe and Japan that would provide marketing, sales and financial resources to commercialize and sell our Technosphere Insulin System. We have not licensed or transferred any of our rights to this product and we believe this will enable us to obtain advantageous terms in potential collaborations. We intend to retain worldwide manufacturing rights for our Technosphere Insulin System. |
| Expand our proprietary Technosphere formulation technology for the delivery of other drugs. We are developing additional applications for our proprietary Technosphere formulation technology by formulating other drugs for pulmonary delivery, primarily for metabolic and immunological diseases. We believe our proprietary Technosphere formulation technology can also be extended to |
other forms of local administration, such as gastrointestinal delivery, because of its apparent ability to stabilize drugs and facilitate transport across cellular membranes. | |
| Build upon our expertise in immune system diseases to develop new drugs. We intend to build upon our expertise and intellectual property portfolio to develop new treatments for diseases other than diabetes. We are conducting research programs focused on the development of therapeutic compounds for the active immunological treatment of cancer as well as inflammatory and autoimmune diseases. |
SALES AND MARKETING
We currently have no sales, marketing or distribution capabilities and have no experience as a company in marketing or selling pharmaceutical products. Our efforts have primarily been directed at developing products for a number of different markets. Assuming that we receive regulatory approval for our product candidates, we anticipate that we will have to pursue different sales and marketing strategies tailored to each particular product and market segment. In order to commercially market any of our products, we will also need either to develop a sales and marketing infrastructure ourselves or collaborate with third parties who have greater sales and marketing capabilities and have access to potentially large markets.
Although we believe that establishing our own sales and marketing organizations in North America would have substantial advantages, we recognize that this will not be practical for some of our products and that collaborating with companies with established sales and marketing capabilities in a particular market or markets may be a more effective alternative for some products. To date, we have retained worldwide commercialization rights for all of our products, including our lead product, the Technosphere Insulin System. We believe that this will give us the flexibility to enter into favorable collaborations to provide the necessary sales and marketing support.
Our goal is to have our partners fund the clinical development and commercial launch of the Technosphere Insulin System in their respective countries. We are currently seeking to enter into collaborations to assist us in the development and commercialization of our Technosphere Insulin System in the United States, Europe and Japan, and we may also create in-house sales and marketing operations in certain key markets, particularly in the United States.
MANUFACTURING AND SUPPLY
We are in the process of negotiating a long-term supply agreement with the independent third party that is currently manufacturing and supplying our MedTone inhaler and the cartridges that are inserted into it. We rely on this manufacturer to comply with relevant regulatory requirements, including compliance with QSRs. We believe our manufacturer has the capacity to meet our Phase III clinical and initial commercial requirements and that it complies with relevant regulatory requirements. We purchase human recombinant insulin under a long-term contract with Diosynth B.V., a global producer of insulin. This agreement has no specified termination date, but generally may be terminated upon two-years advance notice by either party. In addition, Diosynth has agreed to support our regulatory filings relating to the Technosphere Insulin System in the United States and abroad. We believe Diosynth has sufficient capacity to provide us with sufficient quantities of insulin to support our needs through the initial stages of commercialization.
We must rely on our insulin supplier to maintain compliance with relevant regulatory requirements including cGMP. Currently, we manufacture the raw Technosphere material, but we are in the process of developing a relationship with a secondary manufacturer to supply us with commercial quantities of this raw material. Like us, our third-party manufacturers are subject to extensive governmental regulation.
We formulate and fill the Technosphere Insulin powder into plastic cartridges and blister package the cartridges in a manufacturing suite in our Danbury facility. We believe that our Danbury facility has adequate capacity to meet our currently anticipated clinical trial needs. We are continuing to increase our filling and packaging capacity through the acquisition of new equipment and the construction of new clean rooms and other manufacturing facilities. We believe that these building improvements have been adequately validated to date and that the facility continues to conform with cGMP. We recently initiated the design and construction of a modular filling and packaging system that will increase our filling and packaging capacity. The new system is designed to operate in a very small space and can be expanded using multiple units to meet our currently anticipated commercial production needs.
INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY
Our success will depend in large measure on our ability to obtain and enforce our intellectual property rights, effectively maintain our trade secrets and avoid infringing the proprietary rights of third parties. Our policy is to file patent applications on what we deem to be important technological developments that might relate to our product candidates or methods of using our product candidates and to seek intellectual property protection in the United States, Europe, Japan and selected other jurisdictions for all significant inventions. We have obtained, are seeking and will continue to seek patent protection on the compositions of matter, methods and devices flowing from our research and development efforts. We have also in-licensed certain technology.
With respect to our Technosphere Insulin System, our core patents claim the composition of matter of the Technosphere material as well as methods for manufacturing unloaded Technosphere particles and Technosphere particles that incorporate drugs. The first of these patents expires in 2012, but subsequent patents provide additional coverage of the composition of matter of the current product until 2020. We also hold patents that claim methods of using Technosphere particles for the pulmonary delivery of drugs. These patents relating to Technosphere Insulin do not expire until 2015. In addition, we are prosecuting patent applications related to the MedTone inhaler device and the capsules that contain the dry powder. We have filed and intend to continue to file additional patent applications on improvements to the Technosphere technology and its manufacture, as well as on specific compositions of matter formed using this technology in combination with drugs. To date, we have been issued nine US and foreign Technosphere-related patents and have filed 25 applications in different jurisdictions claiming inventions related to the Technosphere technology and the dry powder inhaler.
Our cancer immunotherapy program is built on proprietary methods for the selection, design and administration of epitopes. We have filed 54 patent applications relating to this technology, both as methods of use and compositions of matter. We are pursuing patents on the use of our administration method to induce and maintain a cell-mediated immune response. The prosecution is ongoing in many jurisdictions; however, we have been granted patents for this method in Australia and New Zealand, which do not expire until 2018. We also have patent applications related to differential antigen processing and product designs. One patent from this group has issued in the United States, which provides us with protection until at least 2020. In addition to applications of these broad technologies, we have filed and will continue to file patent applications on specific compounds and the protocols for administering them.
In the area of immune modulation, we have obtained an exclusive license from Harvard University for two patent applications and licenses from the Dana Farber Cancer Institute and from the National Institutes of Health to five patents, all of which cover compositions of matter or methods for modulating the activity of B-cells and T-cells. These licenses are worldwide and include the right to sublicense. The issued patents have terms that expire beginning in 2010 and ending in 2020. We have
also filed and expect to continue to file additional patent applications on improvements to these technologies.
The fields of pulmonary drug delivery and cancer therapies are crowded and a substantial number of patents have been issued in these fields. In addition, because patent positions can be highly uncertain and frequently involve complex legal and factual questions, the breadth of claims obtained in any application or the enforceability of issued patents cannot be predicted. Further, there can be substantial delays in commercializing pharmaceutical products, which can partially consume the statutory period of exclusivity through patents.
In addition, the coverage claimed in a patent application can be significantly reduced before a patent is issued, either in the United States or abroad. Statutory differences in patentable subject matter may limit the protection we can obtain on some of our inventions outside of the United States. For example, methods of treating humans are not patentable in many countries outside of the United States. These and other issues may limit the patent protection we will be able to secure internationally. Consequently, we do not know whether any of our pending or future patent applications will result in the issuance of patents or, to the extent patents have been issued or will be issued, whether these patents will be subjected to further proceedings limiting their scope, will provide significant proprietary protection or competitive advantage, or will be circumvented or invalidated. Furthermore, patents already issued to us or our pending applications may become subject to disputes that could be resolved against us. In addition, patent applications in the United States filed before November 29, 2000 are currently maintained in secrecy until the patent issues, although in certain countries, including the United States for applications filed after November 29, 2000, applications are generally published 18 months after the applications priority date. In any event, because publication of discoveries in scientific or patent literature often trails behind actual discoveries, we cannot be certain that we were the first creator of inventions covered by our pending patent applications or that we were the first to file patent applications on such inventions.
Although we own a number of domestic and foreign patents and patent applications relating to our Technosphere Insulin System and cancer vaccine products under development, we have identified certain third-party patents that a court may interpret to restrict our freedom to operate (that is, to cover our products) in the areas of Technosphere formulations, pulmonary insulin delivery and the treatment of cancer. Specifically, we have identified certain third-party patents having claims relating to chemical compositions of matter and pulmonary insulin delivery that may trigger an allegation of infringement upon the commercial manufacture and sale of our Technosphere Insulin System. We have also identified third-party patents disclosing methods and compositions of matter related to DNA-based vaccines that also may trigger an allegation of infringement upon the commercial manufacture and sale of cancer therapy. We believe, based in part on advice of counsel, that we are not infringing any valid claims of any patent owned by a third party. However, if a court were to determine that our inhaled insulin products or cancer therapies were infringing any of these patent rights, we would have to establish with the court that these patents were invalid in order to avoid legal liability for infringement of these patents. Proving patent invalidity can be difficult because issued patents are presumed valid. Therefore, in the event that we are unable to prevail in an infringement or invalidity action we will either have to acquire the third-party patents outright or seek a royalty-bearing license. Royalty-bearing licenses effectively increase production costs and therefore may materially affect product profitability. Furthermore, should the patent holder refuse to either assign or license us the infringed patents, it may be necessary to cease manufacturing the product entirely and/or design around the patents. In either event, our business would be harmed and our profitability could be materially adversely impacted. If third parties file patent applications, or are issued patents claiming technology also claimed by us in pending applications, we may be required to participate in
interference proceedings in the USPTO to determine priority of invention. We may be required to participate in interference proceedings involving our issued patents and pending applications.
We also rely on trade secrets and know-how, which are not protected by patents, to maintain our competitive position. We require our officers, employees, consultants and advisors to execute proprietary information and invention and assignment agreements upon commencement of their relationships with us. These agreements provide that all confidential information developed or made known to the individual during the course of our relationship must be kept confidential, except in specified circumstances. These agreements also provide that all inventions developed by the individual on behalf of us must be assigned to us and that the individual will cooperate with us in connection with securing patent protection on the invention if we wish to pursue such protection. There can be no assurance, however, that these agreements will provide meaningful protection for our inventions, trade secrets or other proprietary information in the event of unauthorized use or disclosure of such information.
We also execute confidentiality agreements with outside collaborators. However, disputes may arise as to the ownership of proprietary rights to the extent that outside collaborators apply technological information developed independently by them or others to our projects, or apply our technology to outside projects, and there can be no assurance that any such disputes would be resolved in our favor. In addition, any of these parties may breach the agreements and disclose our confidential information or our competitors might learn of the information in some other way. If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business, results of operations and financial condition could be adversely affected.
COMPETITION
The pharmaceutical and biotechnology industries are intensely competitive and characterized by rapidly evolving technology and intense research and development efforts. We expect to compete with companies, including the major international pharmaceutical companies, and other institutions that have substantially greater financial, research and development, marketing and sales capabilities and have substantially greater experience in undertaking preclinical and clinical testing of products, obtaining regulatory approvals and marketing and selling biopharmaceutical products. We will face competition based on, among other things, product efficacy and safety, the timing and scope of regulatory approvals, ease of use and cost.
We believe our Technosphere Insulin System provides us with important competitive advantages in the delivery of insulin when compared with currently known alternatives. However, new drugs or further developments in alternative drug delivery methods may provide greater therapeutic benefits, or comparable benefits at lower cost, than our Technosphere Insulin System. There can be no assurance that existing or new competitors will not introduce products or processes competitive with or superior to our product candidates.
We have set forth below more detailed information about certain of our competitors. The following is based on information currently available to us.
Pulmonary and oral insulin delivery systems
basis of published reports, we believe that the performance characteristics of our Technosphere Insulin System will have an advantage over these other pulmonary insulin products, particularly with respect to time-to-peak blood insulin levels and relative bioavailability.
There are also several companies, including Nobex Corporation, Generex Biotechnology Corporation and Emisphere Technologies, Inc., that are pursuing development of products for the oral delivery of insulin. We believe these products are currently in relatively early clinical trials.
Non-insulin oral medications
Injected insulin
Immunotherapy
GOVERNMENT REGULATION AND PRODUCT APPROVAL
The FDA and comparable regulatory agencies in state, local and foreign jurisdictions impose substantial requirements upon the clinical development, manufacture and marketing of medical devices and drug products. These agencies, through regulations that implement the Food, Drug and Cosmetic Act, as amended, or FDCA, and other regulation, regulate research and development activities and the development, testing, manufacture, labeling, storage, shipping, approval, advertising, promotion, sale and distribution of such products. In addition, if our products are marketed abroad, they also are subject to export requirements and to regulation by foreign governments. The regulatory clearance process is generally lengthy, expensive and uncertain. Failure to comply with applicable FDA and other regulatory requirements can result in sanctions being imposed on us or the manufacturers of our products, including hold letters, civil or criminal fines or other penalties, product recalls, or seizures, or total or partial suspension of production or injunctions, refusals to permit products to be imported into or exported out of the United States, refusals of the FDA to grant approval of drugs or to allow us to enter into government supply contracts, withdrawals of previously approved marketing applications and criminal prosecutions.
The steps typically required before a new pharmaceutical product for use in humans may be marketed in the United States include:
| Preclinical studies that include laboratory evaluation of product chemistry and formulation, as well as animal studies to assess the potential safety and efficacy of the product. Certain preclinical tests must be conducted in compliance with good laboratory practice regulations. Violations of these regulations can, in some cases, lead to invalidation of the studies, requiring such studies to be replicated. In some cases, long-term preclinical studies are conducted while clinical studies are ongoing. |
| Submission to the FDA of an investigational new drug application, or IND, which must become effective before human clinical trials may commence. The results of the preclinical studies are submitted to the FDA as part of the IND. Unless the FDA objects, the IND becomes effective 30 days following receipt by the FDA. |
| Approval of clinical protocols by independent investigational review boards, or IRBs, at each of the participating clinical centers conducting a study. The IRBs consider, among other things, ethical factors, the potential risks to individuals participating in the trials and the potential liability of the institution. The IRB also approves the consent form signed by the trial participants. |
| Adequate and well-controlled human clinical trials to establish the safety and efficacy of the product. Clinical trials involve the administration of the drug to healthy volunteers or to patients under the supervision of a qualified medical investigator according to an approved protocol. The clinical trials are conducted in accordance with protocols that detail the objectives of the study, the parameters to be used to monitor participant safety and efficacy or other criteria to be evaluated. Each protocol is submitted to the FDA as part of the IND. Companies also must generally determine the details of properly treating pediatric patients with a drug and this can sometimes mean that specific pediatric studies must be performed. Human clinical trials are typically conducted in the following four sequential phases that may overlap or be combined: |
| In Phase I, the drug is initially introduced into a small number of individuals and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. Phase I clinical trials are often conducted in healthy human volunteers and such cases do not provide evidence of efficacy. In case of severe or life-threatening diseases, the initial human testing is often conducted in patients rather than healthy volunteers. Because these patients already have the target disease, these studies may provide initial evidence of efficacy traditionally obtained in Phase II clinical trials. Consequently, these types of trials are frequently referred to as Phase I/ II clinical trials. The FDA receives reports on the progress of each phase of clinical testing and it may require the modification, suspension or termination of clinical trials if it concludes that an unwarranted risk is presented to patients or healthy volunteers. | |
| Phase II involves clinical trials in a limited patient population to further identify any possible adverse effects and safety risks, to determine the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. | |
| Phase III clinical trials are undertaken to further evaluate dosage, clinical efficacy and to further test for safety in an expanded patient population at geographically dispersed clinical study sites. Phase III clinical trials usually include a broader patient population so that safety and efficacy can be substantially established. Phase III clinical trials begin once Phase II evaluations demonstrate that a dosage range of the product is effective and has an acceptable safety profile. | |
| Phase IV clinical trials are performed if the FDA requires, or a company pursues, additional clinical trials after a product is approved. These clinical trials may be made a condition to be |
satisfied after a drug receives approval. The results of Phase IV clinical trials can confirm the effectiveness of a product candidate and can provide important safety information to augment the FDAs voluntary adverse drug reaction reporting system. |
| Concurrent with clinical trials and preclinical studies, companies also must develop information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing the product in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product and the manufacturer must develop methods for testing the quality, purity, and potency of the final products. Additionally, appropriate packaging must be selected and tested and chemistry stability studies must be conducted to demonstrate that the product does not undergo unacceptable deterioration over its shelf-life. |
| Submission to the FDA of a new drug application, or NDA, for non-biological drugs such as insulin, based on the clinical trials. The results of pharmaceutical development, preclinical studies, and clinical trials are submitted to the FDA in the form of an NDA for approval of the marketing and commercial shipment of the product. |
| The FDA reviews all NDAs submitted before it accepts them for filing. It may request additional information rather than accepting an application for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. The FDA has substantial discretion in the approval process and may disagree with an applicants interpretation of the data submitted in its NDA and information. Also, as part of this review, the FDA may refer the application to an appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation. The FDA is not bound by the recommendation of an advisory committee. Manufacturing establishments often also are subject to inspections prior to NDA approval to assure compliance with cGMP and with manufacturing commitments made in the relevant marketing application. Under the Prescription Drug User Fee Act, or PDUFA, submission of an NDA with clinical data requires payment of a fee. In fiscal year 2004 the required fee is $573,500. In return, the FDA assigns a goal for standard applications of 10 months from acceptance of the application to return of a first complete response, in which the FDA may approve the product or request additional information. There can be no assurance that an application will be approved within the performance goal timeframe established under PDUFA. |
| FDA approval of the NDA must be granted prior to any commercial sale or shipment of the product. The FDA may deny an NDA approval if safety, efficacy or other regulatory requirements are not satisfied. The FDA may also require additional testing or information before approving the NDA. If regulatory approval of the product is granted, such approval may require post-marketing testing and surveillance to monitor the safety of the product or may entail limitations on the indicated uses for which the product may be marketed or advertised. The FDA may require additional testing or information before approving the NDA. In addition, product approval may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following the commencement of marketing. |
Clinical trials are designed and conducted in a variety of ways. A placebo-controlled trial is one in which the trial tests the results of a group of patients, referred to as an arm of the trial, receiving the drug being tested against those of an arm that receives a placebo, which is a substance of identical appearance that is not therapeutic in a medical or chemical sense. In a double-blind study, neither the researcher nor the patient knows into which arm of the trial the patient has been placed, or whether the patient is receiving the drug or the placebo. Randomized means that upon enrollment,
patients are placed into one arm or the other at random by computer. Parallel control trials generally involve a study arm with a patient population that is not exposed to the study medication (i.e., is either on placebo or standard treatment protocols) for comparison to the drug being tested and groups are assigned upon patient admission to the study and remain in those groups for the duration of the study. An open label study is one where the researcher and the patient know that the patient is receiving the drug. A trial is said to be pivotal if it is designed to meet statistical criteria with respect to pre-determined endpoints, or clinical objectives, that the sponsor believes, based usually on its interactions with the relevant regulatory authority, will be sufficient for regulatory approval. In most cases, at least two pivotal Phase III clinical trials are necessary for approval. Under the Pediatric Research Equity Act of 2003, an NDA also must include an assessment, generally based on clinical study data, on the safety and efficacy of a drug for all relevant pediatric populations. The statute provides for waivers or deferrals in certain situations but we can make no assurances that such situations will apply to us or our products.
Medical products containing a combination of new drugs, biological products, or medical devices may be regulated as combination products in the United States. A combination product generally is defined as a product comprised of components from two or more regulatory categories (e.g., drug/device, device/biologic, drug/biologic). Each component of a combination product is subject to the requirements established by the FDA for that type of component, whether a new drug, biologic, or device. In order to facilitate premarket review of combination products, the FDA designates one of its centers to have primary jurisdiction for the premarket review and regulation of both components. The determination whether a product is a combination product or two separate products is made by the FDA on a case-be-case basis. We have had discussions with the FDA about the status of our Technosphere Insulin System as a combination product and we have been told that the FDA considers our product a combination drug/device. There have been some indications from the FDA that the review of a future marketing application for our Technosphere Insulin System will involve three separate review groups of the FDA: (1) the Metabolism and Endocrine Drug Products Division; (2) the Pulmonary Drug Products Division; and (3) the Center for Devices and Radiological Health within the FDA that reviews Medical Devices. Although the FDA has not made an official final decision in this regard, we currently understand that the Metabolic and Endocrine Drug Products Division will be the lead group and obtain consulting reviews from the other two FDA groups.
The testing and approval process requires substantial time, effort and financial resources. We cannot be certain that any approval of our products will be granted on a timely basis, if at all. If any of our products are approved for marketing by the FDA, we will be subject to continuing regulation by the FDA, including record-keeping requirements, reporting of adverse experiences with the product, submitting other periodic reports, drug sampling and distribution requirements, notifying the FDA and gaining its approval of certain manufacturing or labeling changes, and complying with certain electronic records and signature requirements. Prior to and following approval, if granted, all manufacturing sites are subject to inspection by the FDA and other national regulatory bodies and must comply with cGMP, QSR and other requirements enforced by the FDA and other national regulatory bodies through their facilities inspection program. Foreign manufacturing establishments must comply with similar regulations. In addition, our drug-manufacturing facilities located in Connecticut and the facilities of our insulin supplier and the supplier of our MedTone inhaler and cartridges are subject to federal registration and listing requirements and, if applicable, to state licensing requirements. Facilities are subject to inspection by the FDA and similar national agencies, as well as state and local authorities at any time. Failure, including those of our insulin and MedTone inhaler suppliers, to obtain and maintain applicable federal registration or state license, or to meet the inspection criteria of the FDA or the other national regulatory bodies, would disrupt our manufacturing processes and would harm our business. In complying with standards set forth in these regulations, manufacturers must continue to expend time, money and effort in the area of production
and quality control to ensure full compliance. Currently, we believe we are operating under all of the necessary guidelines and permits.
It is not yet clear to what extent we will be subject to regulations governing medical devices separate from those governing drugs. After the FDA permits a device to enter commercial distribution, however, numerous regulatory requirements apply. These include:
| product labeling regulations; |
| general prohibition against promoting products for unapproved or off-label uses; |
| corrections and removals (e.g., recalls); |
| establishment registration and device listing; |
| general prohibitions against the manufacture and distribution of adulterated and misbranded devices; and |
| the Medical Device Reporting regulation, which requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur. Failure to comply with these regulatory requirements could result in civil fines, product seizures, injunctions, and/or criminal prosecution of responsible individuals and us. Further, the company we have contracted to manufacture our MedTone inhaler and cartridges will be subject to the QSRs, which require manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures during the manufacturing process of medical devices, among other requirements. |
Failure to adhere to regulatory requirements at any stage of development, including the preclinical and clinical testing process, the review process, or at any time afterward, including after approval, may result in various adverse consequences. These consequences include action by the FDA or other national regulatory body that has the affect of delaying approval or refusing to approve a product; suspending or withdrawing an approved product from the market; seizing or recalling a product; or imposing criminal penalties against the manufacturer. In addition, later discovery of previously unknown problems may result in restrictions on a product, its manufacturer, or the NDA holder, or market restrictions through labeling changes or product withdrawal. Also, new government requirements may be established or they may change at any time that could delay or prevent regulatory approval of our products under development. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the United States or abroad.
In addition, the FDA imposes a number of complex regulations on entities that advertise and promote drugs, which include, among others, standards for and regulations of direct-to-consumer advertising, off-label promotion, industry sponsored scientific and educational activities, and promotional activities involving the Internet. The FDA has very broad enforcement authority under the FDCA, and failure to comply with these regulations can result in penalties, including the issuance of a warning letter directing us to correct deviations from FDA standards, a requirement that future advertising and promotional materials be pre-cleared by the FDA, and state and federal civil and criminal investigations and prosecutions.
Products manufactured in the United States and marketed outside the United States are subject to certain FDA regulations, as well as regulation by the country in which the products are to be sold. We also would be subject to foreign regulatory requirements governing clinical trials and drug product sales if products are marketed abroad. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries usually must be obtained prior
to the marketing of the product in those countries. The approval process varies from jurisdiction to jurisdiction and the time required may be longer or shorter than that required for FDA approval.
Product development and approval within this regulatory framework take a number of years, involve the expenditure of substantial resources and are uncertain. Many drug products ultimately do not reach the market because they are not found to be safe or effective or cannot meet the FDAs other regulatory requirements. In addition, there can be no assurance that the current regulatory framework will not change or that additional regulation will not arise at any stage of our product development that may affect approval, delay the submission or review of an application or require additional expenditures by us. There can be no assurance that we will be able to obtain necessary regulatory clearances or approvals on a timely basis, if at all, for any of our product candidates under development, and delays in receipt or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or failure to comply with existing or future regulatory requirements could have a material adverse effect on our business and results of operations.
Under European Union regulatory systems, marketing authorizations may be submitted either under a centralized or decentralized procedure. The centralized procedure provides for the grant of a single marketing authorization that is valid for all European Union member states. The decentralized procedure provides for mutual recognition of national approval decisions. Under this latter procedure, the holder of a national marketing authorization may submit an application to the remaining member states. Within 90 days of receiving the application and assessment report, each member state must decide whether to recognize approval. We plan to choose the appropriate route of European regulatory filing in an attempt to accomplish the most rapid regulatory approvals. However, the chosen regulatory strategy may not secure regulatory approvals or approvals of the chosen product indications. In addition, these approvals, if obtained, may take longer than anticipated.
We cannot assure you that any of our product candidates will prove to be safe or effective, will receive regulatory approvals, or will be successfully commercialized.
In addition to the foregoing, we are subject to numerous federal, state and local laws relating to such matters as laboratory practices, the experimental use of animals, the use and disposal of hazardous or potentially hazardous substances, controlled drug substances, safe working conditions, manufacturing practices, environmental protection and fire hazard control. We may incur significant costs to comply with those laws and regulations now or in the future.
Patent restoration and marketing exclusivity
Hatch-Waxman requires a competitor that submits an ANDA for a copy of one of our drugs or otherwise relies in part on data from one of our drugs regarding its safety and efficacy, to notify us of their application and potential infringement of our patent rights. Hatch-Waxman Act places certain timing requirements on us with respect to filing an infringement action against such an ANDA applicant, if we choose to do so.
While Hatch-Waxman Act provides competitors the ability to market copies of innovator products with the submission of significantly less clinical data, the Act also provides for the restoration of a portion of a products patent term that is lost during a drugs clinical development and NDA review by the FDA. Hatch-Waxman also provides for a statutory protection, known as market exclusivity, which prohibits the FDAs approval or acceptance of certain competitor drug applications. Patent term restoration can return up to five years of patent term for a patent that covers a new product or its use to compensate for time lost during product development and the regulatory review process. This period is generally one-half the time between the effective date of an IND and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application, subject to a maximum extension of five years and no extension can extend the total patent life beyond 14 years after the drug approval date. The application for patent term extension is subject to approval by the USPTO, in conjunction with the FDA. It takes at least six months to obtain approval of the application for patent term extension, and there can be no guarantee that the application will be granted.
Hatch-Waxman also provides for differing periods of statutory protection for new drugs approved under an NDA. Among the types of exclusivity are those for a new molecular entity and those for a new formulation or a new indication for a previously approved drug. Our lead product, the Technosphere Insulin System, is an innovative change to a previously approved product with the same active ingredient, insulin. Marketing exclusivity for the Technosphere Insulin System, if granted by the FDA, likely would prohibit the agency from approving another drug that relies, at least in part, on data regarding the safety and efficacy of our new formulation for that same active ingredient for three years. This three-year exclusivity, however, only covers the innovation associated with the NDA to which it attaches. Thus, the three-year exclusivity would not prohibit the FDA from approving applications for drugs containing the same active ingredient but without our new innovative change.
The FDA Modernization Act of 1997 included a pediatric exclusivity provision that was extended by the Best Pharmaceuticals for Children Act of 2002. Pediatric exclusivity is designed to provide an incentive to manufacturers for conducting research about the safety and efficacy of their products in children. Pediatric exclusivity, if granted, provides an additional six months of market exclusivity in the United States for new or currently marketed drugs, if certain pediatric studies requested by the FDA are completed by the applicant. To obtain this additional six months of exclusivity, it would be necessary for us to first receive a written request from the FDA to conduct pediatric studies and then to conduct the requested studies according to a previously agreed timeframe and submit the report of the study. There can be no assurances that we would receive a written request from the FDA and if so that we would complete the studies in accordance with the requirements for this six-month exclusivity. The current pediatric exclusivity provision is scheduled to end on October 1, 2007, and there can be no assurances that it will be reauthorized.
EMPLOYEES
As of March 31, 2004, we had 223 full-time employees, all of whom are employed at-will. Seventy-three of these employees were engaged in research and development, 81 in manufacturing, 31 in clinical, regulatory affairs and quality assurance and 38 in administration, finance, management, information systems, corporate development and human resources. Thirty of our employees have a Ph.D. degree and/or M.D. degree and are engaged in activities relating to research and development, manufacturing, quality assurance and business development. None of our employees is subject to a collective bargaining agreement. We believe our relations with our employees are good.
SCIENTIFIC ADVISORS
We seek advice from a number of leading scientists and physicians on scientific, technical and medical matters. These advisors are leading scientists in the areas of pharmacology, chemistry, immunology and biology. Our scientific advisors are consulted regularly to assess, among other things:
| our research and development programs; |
| the design and implementation of our clinical programs; |
| our patent and publication strategies; |
| market opportunities from a clinical perspective; |
| new technologies relevant to our research and development programs; and |
| specific scientific and technical issues relevant to our business. |
The following are some of our scientific advisors and their primary affiliations:
Name | Primary affiliation | |
Harvey Cantor, M.D.
|
Professor of Pathology at Harvard Medical School
|
|
James J. Collins, D.Phil
|
Professor at Boston University
|
|
Alexander Fleming, M.D.
|
Chief Executive Officer of the Kinexum Corporation
|
|
Laurie Glimcher, M.D.
|
Member of the National Academy of Sciences and
Professor of Immunology at Harvard Medical School
|
|
Edward S. Horton, M.D.
|
Chief of Clinical Research at the Joslin Diabetes
Center
|
|
Thomas Kundig, M.D.
|
Professor at the University of Zurich
|
|
Harold E. Lebovitz, M.D.
|
Professor of Medicine and the Chief of
Endocrinology Emeritus at the State University of
New York Brooklyn
|
|
Frederick Levy, Ph.D.
|
Associate Member of the Ludwig Institute for
Cancer Research
|
|
Greg Petsko, Ph.D.
|
Professor at Brandeis University
|
|
Barrett Rollins, M.D., Ph.D.
|
Associate Professor of Medicine at Harvard
Medical School
|
|
Jesse Roth, M.D.
|
Chief Geriatrician of the Long Island Jewish
Medical Center
|
|
Jay S. Skyler, M.D.
|
Chief of Diabetes & Endocrinology at the
University of Miami School of Medicine
|
|
Rolf Zinkernagel, M.D., Ph.D.
|
Nobel Laureate in Medicine and Institute Director
at the University of Zurich
|
FACILITIES
In early 2001, we acquired a facility in Danbury, Connecticut to house our Technosphere-related activities, including development and manufacturing of Technosphere Insulin. This facility includes two buildings comprising approximately 187,000 square feet and currently house our research and development, administrative and manufacturing functions, including the Technosphere Insulin formulation, filling and packaging plant. We also lease approximately 20,000 square feet of laboratory space in Elmsford, New York for approximately $36,000 per month, pursuant to an 11-year, renewable lease that expires in October 2004. We believe that our facility in Danbury has sufficient space to contain additional Technosphere Insulin manufacturing capacity necessary to satisfy potential commercial demand for our products for several years after we launch our Technosphere Insulin System and other Technosphere-related products.
We own and occupy approximately 120,000 square feet of laboratory, office and manufacturing space in Valencia, California. The facility contains our principal executive offices and houses our research
and development laboratories for our cancer and other immunology programs. We also use this facility to provide support for the development of our Technosphere programs.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings. We may from time to time become a party to legal proceedings arising in the ordinary course of business.
WEBSITE
We maintain an Internet website at http://www.mannkindcorp.com. The information in, or that can be accessed through, our website is not incorporated into and does not form a part of this prospectus.
Management
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth our current executive officers and directors and their ages as of March 31, 2004:
Name | Age | Position(s) | ||||
Alfred E. Mann
|
78 | Chairman of the Board of Directors and Chief Executive Officer | ||||
Hakan S. Edstrom
|
54 | President, Chief Operating Officer and Director | ||||
Richard L. Anderson
|
64 | Corporate Vice President and Chief Financial Officer | ||||
Dan R. Burns
|
52 | Corporate Vice President and President, MannKind BioPharmaceuticals | ||||
Wayman Wendell Cheatham, M.D., FACE
|
55 | Corporate Vice President and Senior Vice President, Medical & Regulatory Affairs, MannKind BioPharmaceuticals | ||||
David Thomson, Ph.D., J.D.
|
37 | Corporate Vice President, Associate General Counsel and Corporate Secretary | ||||
Kathleen Connell, Ph.D.(1)(2)(3)
|
56 | Director | ||||
Ronald Consiglio(2)(3)
|
60 | Director | ||||
Michael Friedman, M.D.(1)(2)
|
60 | Director | ||||
Llew Keltner, M.D., Ph.D.
|
54 | Director | ||||
Kent Kresa
|
66 | Director | ||||
David H. MacCallum(3)
|
66 | Director |
(1) | Member of the Compensation Committee. |
(2) | Member of the Nominating and Corporate Governance Committee. |
(3) | Member of the Audit Committee. |
Alfred E. Mann has been one of our directors since April 1999, our Chairman of the Board since December 2001 and our Chief Executive Officer since October 2003. He founded and formerly served as Chairman and Chief Executive Officer of MiniMed, Inc., a publicly traded company focused on diabetes therapy and microinfusion drug delivery that was acquired by Medtronic, Inc. in August 2001. Mr. Mann also founded and, from 1972 through 1992, served as Chief Executive Officer of Pacesetter Systems and its successor, Siemens Pacesetter, a manufacturer of cardiac pacemakers. Since 1993, Mr. Mann has served as Chairman and Co-Chief Executive Officer of Advanced Bionics Corporation, a medical device manufacturer that has entered into an agreement to be acquired by Boston Scientific Corporation. Mr. Mann holds a bachelors and masters degree in Physics from the University of California at Los Angeles, honorary doctorates from Johns Hopkins University, the University of Southern California and Western University and is a member of the National Academy of Engineering.
Hakan S. Edstrom has been our President and Chief Operating Officer since April 2001 and has served as one of our directors since December 2001. Mr. Edstrom was with Bausch & Lomb, Inc., a health care product company, from January 1998 to April 2001, advancing to the position of Senior Corporate Vice President and President of Bausch & Lomb, Inc. Americas Region. From 1981 to 1997, Mr. Edstrom was with Pharmacia Corporation, where he held various executive positions, including President and Chief Executive Officer of Pharmacia Opthalmics Inc. Mr. Edstrom is currently a director of Q-Med AB, a biotechnology and medical device company, and Ixion Biotechnology, Inc.,
a biotechnology company. Mr. Edstrom was educated in Sweden and holds a masters degree in Business Administration from the Stockholm School of Economics.
Richard L. Anderson has been our Corporate Vice President and Chief Financial Officer since October 2002. He was previously Senior Vice President, Chief Financial Officer and Secretary at NeoRx Corporation, a Seattle-based publicly traded biotechnology company. From January 1997 to September 2002, Mr. Anderson held various executive positions at NeoRx, including President, Chief Operating Officer and Senior Vice President, Finance and Operations. Mr. Anderson holds a masters degree in Management from Johns Hopkins University, a masters degree in Solid State Physics from the University of Maryland and a bachelors degree in Physics from Bucknell University.
Dan R. Burns has been our Corporate Vice President and President of MannKind BioPharmaceuticals, which is our Danbury, Connecticut operation, since September 2002. Prior to joining us, he served as Chief Executive Officer of Trophix Pharmaceuticals, Inc., a pharmaceutical company in 1997, and from 1998 to 1999 he served as Chief Executive Officer of ProScript, Inc., a biopharmaceutical company. From 2000 to 2002, he served as Chief Executive Officer of HealthTalk Interactive, a pharmaceutical services firm. Mr. Burns has held senior executive positions internationally and domestically with Bristol Myers Squibb. Mr. Burns holds degrees in Psychology and Business Administration from McMaster University and Mohawk College.
Wayman Wendell Cheatham, M.D., FACE has been our Corporate Vice President and Senior Vice President, Medical & Regulatory Affairs of MannKind BioPharmaceuticals since August 2002. From April 1999 to August 2002, he was Vice President of Medical & Regulatory Affairs for Takeda Pharmaceuticals North America, Inc., a manufacturer of ethical pharmaceuticals. From August 1996 to April 1999, Dr. Cheatham served as Director of Medical Affairs for Novo Nordisk Pharmaceuticals, Inc., a manufacturer of pharmaceutical preparations. Dr. Cheatham received his M.D. degree from the Pennsylvania State University College of Medicine in 1975. Dr. Cheatham has also been nominated to serve as a member of the board of directors of the American Diabetes Association beginning June 2004.
David Thomson, Ph.D., J.D. has been our Corporate Vice President, Associate General Counsel and Corporate Secretary since January 2002. Prior to joining us, he practiced corporate/commercial and securities law at the Toronto law firm of Davies Ward Phillips & Vineberg LLP from May 1999 through December 2001, except for a period from May to December 2000, when he served as Vice President, Business Development for CTL ImmunoTherapies Corp. From March 1994 to August 1996, Dr. Thomson held a post-doctoral position at the Rockefeller University, where he conducted medical research in the Laboratory of Neurophysiology. Dr. Thomson obtained his bachelors degree, masters degree and Ph.D. degree from Queens University and obtained his J.D. degree from the University of Toronto.
Kathleen Connell, Ph.D. has been one of our directors since November 2003. Currently, Dr. Connell is president of Connell Group, an investment advisory firm and teaches international finance at the UC Berkeley Haas School of Business. From 1995 to 2002, she served as State Controller of California. Her prior experience includes serving as a president of a NASD-registered investment banking firm, as vice-president of a New York-based bank and as the founder and Chair of the UCLA Center for Finance and Real Estate at the John E. Anderson School of Management, where she taught for five years. Dr. Connell holds a Ph.D. degree from the University of California, Los Angeles.
Ronald Consiglio has been one of our directors since October 2003. Since 1999, Mr. Consiglio has been the managing director of Synergy Trading, a securities-trading partnership. From 1999 to 2001, Mr. Consiglio was Executive Vice President and Chief Financial Officer of Trading Edge, Inc., a national automated bond-trading firm. His prior experience includes serving as Senior Vice President and Chief Financial Officer of Cantor Fitzgerald & Co. and as a member of its board of directors.
Mr. Consiglio is currently a member of the board of directors of Natrol, Inc, a manufacturer of dietary supplements and a trustee on the board of directors of Metropolitan West Trust, a management investment company. Mr. Consiglio holds a bachelors degree in Accounting from California State University at Northridge.
Michael Friedman, M.D. has been one of our directors since December 2003. Currently, Dr. Friedman is the President and Chief Executive Officer of the City of Hope National Medical Center. Previously, from September 2001 until April 2003, Dr. Friedman held the position of Senior Vice President of Research and Development, Medical and Public Policy, for Pharmacia Corporation and, from July 1999 until September 2001, was a Senior Vice President of Searle, a subsidiary of Monsanto Company. From 1995 until June 1999, Dr. Friedman served as Deputy Commissioner for Operations for the FDA, and was Acting Commissioner and Lead Deputy Commissioner from 1997 to 1998. Dr. Friedman holds a bachelors degree, magna cum laude, from Tulane University, New Orleans, Louisiana, and a doctorate in medicine from the University of Texas, Southwestern Medical School.
Llew Keltner, M.D., Ph.D. has been one of our directors since October 2003. He founded EPISTAT, an international pharmaceutical and health care strategy company and has served as its Chief Executive Officer since 1985. He has also served as Chief Executive Officer of MetaStat, an oncology drug development firm, since 1994. In addition, Dr. Keltner is Chairman of Light Sciences Corporation, a company developing light-activated drugs. Dr. Keltner is currently on the board of directors of Infostat, Inc., a contract research organization, Oregon Life Sciences, a venture investment company focused on the bio-med and biotech sectors, LKHealthnet Inc., a company that acquires healthcare network assets, and Goodwell Technologies, Inc., a provider of real-time communications and collaboration services in the health care, financial, travel and lodging and other industries. Dr. Keltner holds a masters degree in Epidemiology and Biostatistics, a Ph.D. degree in Biomedical Informatics and a medical degree from Case Western Reserve University.
Kent Kresa has been one of our directors since June 2004. Currently, Mr. Kresa is Chairman Emeritus of Northrop Grumman Corporation and from September 1990 until October 2003, he was its Chairman. He also served as Chief Executive Officer of Northrop Grumman Corporation from January 1990 until March 2003 and as its president from 1987 until September 2001. Mr. Kresa serves on the boards of Avery Dennison Corporation, Eclipse Aviation Corporation, Fluor Corporation, General Motors Corporation, and several non-profit organizations and universities. He is also a senior advisor for The Carlyle Group and on the Advisory Board of Trust Company of the West. As a graduate of M.I.T., he received a B.S. in 1959, an M.S. in 1961, and an E.A.A. in 1966, all in Aeronautics and Astronautics.
David H. MacCallum has been one of our directors since June 2004. Currently, Mr. MacCallum is the Managing Partner of Outer Islands Capital, a hedge fund specializing in health care investments. From June 1999 until November 2001, he was Global Head of Health Care investment banking for Salomon Smith Barney, part of Citigroup. Prior to joining Salomon Smith Barney, he was Executive Vice President and Head of the Health Care group at ING Barings Furman Selz LLC, an investment banking firm and subsidiary of ING Group, a Dutch financial institution, from April 1998 to June 1999. Prior to that Mr. MacCallum formed the Life Sciences group at UBS Securities LLC, an investment banking firm, where he was Managing Director and Global Head of Life Sciences from May 1994 to April 1998. Before joining UBS Securities LLC, he founded the health care practice at Hambrecht & Quist, an investment banking firm, where he was Head of Health Care and Co-Head of Investment Banking. Mr. MacCallum received an A.B. degree from Brown University and an M.B.A. degree from New York University. He is a Chartered Financial Analyst.
BOARD COMPOSITION
Our business and affairs are managed under the direction of our board of directors. The primary responsibilities of our board of directors are to provide oversight, strategic guidance, counseling and direction to our management. Our board of directors meets regularly on a quarterly basis and additionally as required. Written board materials are distributed in advance of meetings as a general rule, and our board of directors schedules meetings with and presentations from members of our senior management on a regular basis.
Our board of directors consists of eight members, two of which are employees of ours. Five of these directors, Dr. Connell, Mr. Consiglio, Dr. Friedman, Mr. Kresa and Mr. MacCallum are independent directors, as defined by Rule 4200(a)(15) of the National Association of Securities Dealers.
In accordance with the terms of our amended and restated certificate of incorporation and bylaws, upon the completion of this offering, the term of each director then serving shall expire at the next annual meeting of stockholders, at which time the newly elected directors shall serve from the time of election and qualification until the following annual meeting of stockholders and until their successors are duly elected and qualified.
Our amended and restated certificate of incorporation provides that the authorized number of directors may be changed only by resolution of the board of directors. Our directors may be removed for cause by the affirmative vote of the holders of a majority of our voting stock and may be removed without cause by the affirmative vote of the holders of at least two-thirds of our voting stock.
Over the past year, our board of directors has devoted considerable time to further improving our governance by addressing the rules promulgated under the Sarbanes-Oxley Act of 2002 and the proposals and requirements of Nasdaq. In connection with such activities, our board of directors has evaluated its role and function, and examined the following, among other things:
| board and board committee meeting schedules; |
| board committee governance and composition; and |
| the size and composition of our board of directors and director independence. |
As a result of its evaluation and recent corporate governance rules enacted under the Sarbanes-Oxley Act of 2002 and Nasdaq, our board of directors has:
| revised the charter of our audit committee of the board; |
| created a separate compensation committee and a nominating and corporate governance committee of the board; |
| approved the audit committees formation of a disclosure committee; |
| adopted a code of business conduct and ethics governing our employees, officers and directors to promote high standards of integrity by conducting our affairs in an honest and ethical manner; and |
| adopted a policy of non-retaliation and a procedure for reporting complaints to protect our employees against unlawful retaliation as a result of their lawful, good-faith reporting of violations of federal or state law or our code of business conduct and ethics by us or any of our agents. |
BOARD COMMITTEES
Our board of directors has an audit committee, compensation committee and nominating and corporate governance committee, each of which has the composition and responsibilities described
below. Our board of directors is responsible for determining the composition of the members of these key committees.
Audit committee
| evaluating the independent registered public accounting firms qualifications, independence and performance; |
| determining the engagement of the independent registered public accounting firm; |
| approving the retention of the independent registered public accounting firm to perform any proposed permissible non-audit services; |
| monitoring the rotation of partners of the independent registered public accounting firm on our engagement team as required by law; |
| reviewing our financial statements; |
| reviewing our critical accounting policies and estimates; |
| discussing with management and the independent registered public accounting firm the results of the annual audit and the review of our quarterly financial statements; and |
| reviewing and evaluating, at least annually, the performance of the audit committee and its members, including compliance of the audit committee with its charter. |
We have appointed Mr. Consiglio as our audit committee financial expert. Both our independent registered public accounting firm and internal financial personnel regularly meet privately with our audit committee and have unrestricted access to this committee.
Compensation committee
| reviewing and recommending policy relating to compensation and benefits of our officers and employees, including reviewing and approving corporate goals and objectives relevant to compensation of our chief executive officer and other senior officers, evaluating the performance of these officers in light of those goals and objectives, and setting compensation of these officers based on such evaluations; |
| administering our benefit plans and the issuance of stock options and other awards under our stock plans; |
| reviewing and establishing appropriate insurance coverage for our directors and executive officers; |
| recommending the type and amount of compensation to be paid or awarded to members of our board of directors, including consulting, retainer, meeting, committee and committee chair fees and stock option grants or awards; |
| reviewing and approving the terms of any employment agreements, severance arrangements, change-of-control protections and any other compensatory arrangements for our executive officers; and |
| reviewing and evaluating, at least annually, the performance of the compensation committee and its members, including compliance of the compensation committee with its charter. |
Nominating and corporate governance committee
| planning for succession with respect to the position of CEO and other senior executives; |
| reviewing and recommending nominees for election as directors; |
| assessing the performance of the board of directors and monitoring committee evaluations; |
| suggesting, as appropriate, ad-hoc committees of the board of directors; |
| developing guidelines for board composition; and |
| reviewing and evaluating, at least annually, the performance of the nominating and corporate governance committee and its members, including compliance of the nominating and corporate governance committee with its charter. |
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to establishing our compensation committee, our board of directors as a whole made decisions relating to compensation of our executive officers. Drs. Glen Nelson, Donald Drakeman and Edward L. Korwek, former directors, served on our compensation committee in 2002 and 2003. During 2002 and 2003, none of our executive officers served as a member of the board of directors or compensation committee of any other entity that had one or more executive officers who served on our board of directors or compensation committee.
DIRECTOR COMPENSATION AND REIMBURSEMENT
Each of Messrs. Consiglio and Keltner and Drs. Connell and Friedman was granted an option to purchase 10,000 shares of our common stock under our 2004 equity plan effective upon joining our board. These options vest over three years. Effective upon the closing of this offering, all of our non-employee directors will receive an option to purchase 30,000 shares of our common stock as well as annual grants to purchase 10,000 shares of our common stock under the 2004 Non-Employee Directors Stock Option Plan, which is described elsewhere in this prospectus. Each of our non-employee directors receive an annual retainer of $15,000. Each non-employee director who serves as a committee chair receives an additional retainer of $2,000 per year. In addition, we reimburse our non-employee directors for their expenses incurred in connection with attending board and committee meetings, and these directors receive $1,500 for each meeting of the board attended in person, $750 for each telephonic board meeting attended and $750 for each meeting of a committee attended in person or by phone. See also Certain relationships and related transactionsOther transactions.
EXECUTIVE COMPENSATION
Summary compensation table
fact that the individual was not serving as an executive officer at the end of 2003. We refer to the individuals listed in the table below as our named executive officers elsewhere in this prospectus.
Long-term | |||||||||||||||||
compensation | |||||||||||||||||
Annual compensation(1) | |||||||||||||||||
securities | All other | ||||||||||||||||
Name and principal position(s) | Salary | Bonus | underlying options | compensation | |||||||||||||
Alfred E. Mann
|
$100,000 | $ | | 240,971 | $ | | |||||||||||
Chief Executive Officer and Chairman of the Board of Directors | |||||||||||||||||
Michael G. Page
|
350,015 | (2) | | 88,001 | 166,385(3) | ||||||||||||
Former Chief Executive Officer and Director | |||||||||||||||||
Solomon S. Steiner
|
36,676 | (4) | | 171,137 | 452,148(4) | ||||||||||||
Former Senior Vice President, Technology and Director | |||||||||||||||||
Hakan S. Edstrom
|
322,115 | 87,000 | 333,205 | | |||||||||||||
President, Chief Operating Officer and Director | |||||||||||||||||
Dan R. Burns
|
273,963 | | 133,333 | 44,731(5) | |||||||||||||
Corporate Vice President and President, MannKind BioPharmaceuticals | |||||||||||||||||
Richard L. Anderson
|
280,288 | | 116,666 | 59,950(6) | |||||||||||||
Corporate Vice President and Chief Financial Officer | |||||||||||||||||
David Thomson
|
223,269 | 63,000 | 109,095 | 37,842(7) | |||||||||||||
Corporate Vice President, Associate General Counsel and Corporate Secretary |
(1) | In accordance with the rules of the SEC, the compensation described in this table does not include medical, group life insurance or other benefits which are available generally to all of our salaried employees and certain perquisites and other personal benefits received which do not exceed the lesser of $50,000 or 10% of any named executive officers salary and bonus disclosed in this table. |
(2) | In October 2003, Dr. Michael Pages employment with us terminated. In accordance with the terms of his severance agreement, we are obligated to pay Dr. Page his base salary at the rate of $330,000 per year for up to 18 months. |
(3) | In connection with Dr. Pages resignation, he received a severance payment of $165,000. Also includes $1,385 in auto allowance. |
(4) | In February 2003, Dr. Solomon Steiners employment with us terminated. In accordance with the terms of his settlement agreement, we were obligated to pay Dr. Steiner approximately $1,049,288 over three years, comprised of $775,365 in deferred compensation from prior years and the remainder comprised of other severance-related items. In 2003, we paid his base salary through February. Additionally, we paid $258,455 in deferred compensation, $192,655 in severance-related items and $1,038 in auto allowance. |
(5) | Includes $35,731 in temporary housing reimbursements and $9,000 in auto allowance. |
(6) | Includes $50,546 in relocation reimbursements and $9,404 in auto allowance. Does not include compensation related to an amount loaned to Mr. Anderson, which has been subsequently repaid, or an amount paid to Mr. Anderson for the purchase of his residence, by a limited liability company that is not owned or controlled by us but is controlled by Mr. Mann. See Note 7 to the financial statements for further information. |
(7) | Includes $28,842 in relocation reimbursements and $9,000 in auto allowance. Does not include compensation related to an amount loaned to Mr. Thomson, which has been subsequently repaid, by a limited liability company that is not owned or controlled by us but is controlled by Mr. Mann. See Note 7 to the financial statements for further information. |
Stock option grants in 2003
2004 equity plan prior to its amendment and restatement. In 2003, we granted options to purchase a total of 1,664,886 shares of our common stock, with a weighted average exercise price of $9.36 per share, to our employees, including grants to our named executive officers. This total includes 781,572 options issued under the repricing program in exchange for 781,572 outstanding options that were tendered into the program for cancellation. All options granted to our named executive officers are nonstatutory stock options that do not qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or the Code. Under the terms of our 2004 plan, any options to purchase shares of our common stock that expire or are otherwise terminated are returned to the option pool and become available for future grant under the plan. Options expire ten years from the date of grant. See Employee benefit plans2004 Equity Incentive Plan.
The exercise price per share of each option granted to our named executive officers was equal to the fair market value or 85% of the fair market value of our common stock as determined by our board of directors on the date of the grant. The exercise price is payable in cash, by promissory note, shares of our common stock previously owned by the optionee or pursuant to the net exercise of the option. In determining the fair market value of the stock granted on the grant date, our board of directors considered many factors, including:
| our absolute and relative levels of revenues and other operating results; |
| the fact that our options involved illiquid securities in a nonpublic company; |
| prices of preferred stock issued by us to outside investors in arms-length transactions; |
| the rights, preferences and privileges of our preferred stock over our common stock; and |
| the likelihood that our common stock would become liquid through an initial public offering, a sale of us or another event. |
Options granted in 2003
Potential realizable | ||||||||||||||||||||||||||||
value | ||||||||||||||||||||||||||||
at assumed annual | ||||||||||||||||||||||||||||
Number | rates | |||||||||||||||||||||||||||
of | of stock price | |||||||||||||||||||||||||||
securities | Percentage of total | appreciation | ||||||||||||||||||||||||||
underlying | options granted | Exercise or | for option term(2) | |||||||||||||||||||||||||
options | to employees | base price | Expiration | |||||||||||||||||||||||||
Name | granted | in fiscal year(1) | per share | date | 5% | 10% | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Alfred E. Mann
|
| | % | $ | | | $ | | $ | | ||||||||||||||||||
Michael G. Page
|
83,333 | 5.0 | 12.75 | 4/7/05 | 241 | 385 | ||||||||||||||||||||||
Solomon S. Steiner
|
| | | | | | ||||||||||||||||||||||
Hakan S. Edstrom
|
233,206 | (3) | 14.0 | 7.95 | 11/5/07 | 2,114 | 2,926 | |||||||||||||||||||||
100,000 | 6.0 | 7.95 | 11/20/13 | 1,485 | 2,836 | |||||||||||||||||||||||
Dan R. Burns
|
83,333 | (3) | 5.0 | 7.95 | 11/5/07 | 756 | 1,046 | |||||||||||||||||||||
50,000 | 3.0 | 7.95 | 11/20/13 | 743 | 1,418 | |||||||||||||||||||||||
Richard L. Anderson
|
83,333 | (3) | 5.0 | 7.95 | 11/5/07 | 756 | 1,046 | |||||||||||||||||||||
33,333 | 2.0 | 7.95 | 11/20/13 | 495 | 945 | |||||||||||||||||||||||
David Thomson
|
50,000 | (3) | 3.0 | 7.95 | 11/5/07 | 453 | 627 | |||||||||||||||||||||
50,000 | 3.0 | 7.95 | 11/20/13 | 743 | 1,418 |
(1) | Based on 1,664,886 options granted during the fiscal year ended December 31, 2003 under our 2004 equity plan, including grants to executive officers. |
(2) | Potential realizable values are computed by (a) multiplying the number of shares of common stock subject to a given option by an assumed public offering price of $14.00 per share, (b) assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rate shown in the table for the entire term of the option and (c) subtracting from that result the aggregate option exercise price. The 5% and 10% assumed annual rates of stock price appreciation are mandated by the rules of the SEC and do not represent our estimate or projection of future common stock prices. |
(3) | Represents the replacement, pursuant to our option re-pricing program, of options granted in an earlier year. |
Aggregated option exercises during 2003 and fiscal year-end option values
The value realized and the value of unexercised in-the-money options at December 31, 2003 are based on an assumed initial public offering price of $14.00 per share, less the per share exercise price, multiplied by the number of shares subject to the option, without taking into account any taxes that
may be payable in connection with the transaction. Options outstanding as of December 31, 2003 may not be exercised prior to vesting.
Number of securities | ||||||||||||||||||||||||
underlying unexercised | Value of unexercised | |||||||||||||||||||||||
options at fiscal | in-the-money options | |||||||||||||||||||||||
year-end | at fiscal year-end | |||||||||||||||||||||||
Shares acquired | ||||||||||||||||||||||||
Name | on exercise | Value realized | Exercisable | Unexercisable | Exercisable | Unexercisable | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Alfred E. Mann(1)
|
| | 60,243 | 180,729 | $ | | $ | | ||||||||||||||||
Michael G. Page(2)
|
| | 88,004 | | 104 | | ||||||||||||||||||
Solomon S. Steiner(3)
|
| | 171,138 | | 1,328 | | ||||||||||||||||||
Hakan S. Edstrom(2)
|
| | | 333,206 | | 2,016 | ||||||||||||||||||
Dan R. Burns(2)
|
| | | 133,333 | | 807 | ||||||||||||||||||
Richard L. Anderson(2)
|
| | | 116,666 | | 706 | ||||||||||||||||||
David Thomson(4)
|
| | 6,821 | 102,274 | 28 | 614 |
(1) | All options were granted outside of our plans. |
(2) | All options were granted under our 2004 equity plan. |
(3) | 46,585 options were granted under the 1991 plan and 124,553 options were granted under the 1999 plan. |
(4) | 9,095 options were granted under the CTL plan and 100,000 options were granted under the 2004 plan. |
EMPLOYEE BENEFIT PLANS
1991 Stock Option Plan
Share reserve. Except with respect to the outstanding options referenced above, no shares of our common stock remain reserved or available for issuance under the 1991 plan.
Administration. Our board of directors administers the 1991 plan, but the board may delegate authority to administer the 1991 plan to a committee of three or more members of the board who qualify under the terms of the 1991 plan. Subject to the terms of the 1991 plan, the plan administrator has authority to construe and interpret the 1991 plan and to determine the option recipients, grant dates, numbers and types of options granted and the terms and conditions of the options, including the period of their exercisability and vesting. The plan administrator also has authority to make adjustments upon changes in capitalization.
Eligibility of awards. The 1991 plan provided for the grant of incentive stock options, or ISOs and nonstatutory stock options, or NSOs, only to our employees. ISOs are subject to section 422 of the Internal Revenue Code of 1986, as amended, or the Code.
Stock options. Stock options were granted under the 1991 plan pursuant to a stock option agreement. All outstanding options granted under the 1991 plan are now fully vested. In general, the term of stock options granted under the 1991 plan may not exceed ten years. Unless an optionees stock option agreement provides otherwise, if an optionees service with us terminates for any reason other than death, the optionee may exercise any vested option for up to three months following the termination of service. However, in the event the optionee is an employee of ours and is terminated for
cause, all options held by the optionee under the 1991 plan immediately expire and cease to be exercisable.
Shares of common stock subject to options granted under the 1991 plan may be paid for only in cash consideration.
Transferability. Generally, options granted under the 1991 plan are not assignable or transferable, other than by will or the laws of descent and distribution. During the life of the optionee, all rights granted to the optionee under the 1991 plan or under any agreement shall be exercisable only by the optionee.
Additional provisions. Our board of directors has the authority to amend outstanding options granted under the 1991 plan, except that no amendment may adversely affect an optionee without the optionees written consent.
The 1991 plan provides that we will use our best efforts to cause a registration statement with respect to the common stock issuable under the 1991 plan to be filed within 18 months after we become a publicly reporting company.
1999 Stock Plan
Share reserve. Except with respect to the outstanding options referenced above, no shares of our common stock remain reserved or available for issuance under the 1999 plan.
Administration. Our board of directors administers the 1999 plan, but the board may delegate authority to administer the 1999 plan to a committee consisting of two or more non-employee directors. The board may adopt, amend and rescind rules and regulations relating to the 1999 plan and may interpret and construe the 1999 plan. Subject to the terms of the 1999 plan, the plan administrator will determine which persons meet the requirements for eligibility, grant dates, the numbers and types of stock awards to be granted and the terms and conditions of the stock awards. Also subject to the limitations set forth in the 1999 plan, the administrator may make appropriate adjustments upon changes to our common stock to the number and type of shares or other securities that may be acquired pursuant to awards granted under the 1999 plan.
Eligibility of awards. The 1999 plan provided for the grant of ISOs, NSOs, stock sales, stock bonuses, restricted stock, reload stock options, stock purchase warrants, other rights to acquire stock, securities convertible into or redeemable for stock, stock appreciation rights, limited stock appreciation rights, phantom stock, dividend equivalents, performance units, performance shares and other awards. All of our directors, employees, consultants or advisers were eligible to be considered for the above awards.
Stock Options. Stock options were granted under the 1999 plan pursuant to a stock option agreement. Common stock may be issued under the 1999 plan for any lawful consideration as determined by the committee, including services rendered by the recipient. The term of options granted under the 1999 plan is for no more than ten years from the date the option was granted. Unless an optionees stock option agreement provides for earlier termination, if an optionees service relationship with us terminates due to disability or death, the optionee, or his or her beneficiary, generally may exercise any vested options for up to six months after the date of termination. If an optionees relationship with us ceases for any reason other than disability or death, the optionee may exercise any vested options for up to thirty days after the date of termination.
Additional provisions. The board of directors has the authority to amend or terminate the 1999 plan provided that no such amendment or termination deprives the recipient of any award granted under the 1999 plan, without consent of such recipient, of any of his or her rights.
Upon certain changes in our control, all awards under the 1999 plan will vest in full and be exercisable prior to the effectiveness of such transaction. The committee may also accelerate the vesting or exercisablity of any award under the 1999 plan. In no event could any grantee receive, in any fiscal year, awards which exceeded an aggregate of 500,000 shares of our common stock.
Non-employee director options. The 1999 plan included provisions for the automatic grant of options to non-employee directors. Such provisions have never been put into effect and will not be used in the future.
AlleCure Corp. 2000 Stock Option and Stock Plan and CTL ImmunoTherapies Corp. 2000 Stock Option and Stock Plan
Share Reserve. Except with respect to the outstanding options referenced above, no shares of our common stock remain reserved or available for issuance under the 2000 plans.
Administration. Pursuant to the merger, our board of directors administers the 2000 plans, but the board may delegate authority to administer the 2000 plans to a committee that complies with applicable law. Our board of directors has broad authority to administer the 2000 plans.
Eligibility of awards. The 2000 plans provided for the grant of ISOs, NSOs and stock purchase rights to employees, directors and consultants.
Stock Options. Stock options were granted under the 2000 plans pursuant to a stock option agreement. Options granted under the 2000 plans have a maximum term of ten years and vest at the rate specified in the option agreements. Except in the case of options granted to officers, directors, and consultants, options become exercisable at a rate of no less than 20% per year over five years from the date the options were granted.
Acceptable consideration for the purchase of common stock issued pursuant to options granted under the 2000 plans includes cash, common stock previously owned by the optionee, a promissory note or consideration received through a cashless exercise program.
Generally, options under the 2000 plans may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by laws of descent and distribution and may be exercised, during the lifetime of the optionee, only by the optionee.
Unless an optionees stock option agreement provides for earlier termination, if an optionees service relationship with us terminates due to disability or death, the optionee, or his or her beneficiary, generally may exercise any vested options for up to twelve months after the date the service relationship ends. If an optionees relationship with us ceases for any reason other than disability or death, the optionee may exercise his or her option within the time specified in the option agreement,
or if not specified, for three months. In no event may an option be exercised after the expiration of the term of the option set forth in the option agreement.
The administrator may at any time offer to buy out for a payment in cash or shares, an option previously granted, based on such terms and conditions as the administrator may establish and communicate to the optionee at the time such offer is made.
Stock Purchase Rights. Unless the administrator determines otherwise, a restricted stock purchase agreement grants us a repurchase option exercisable upon the voluntary or involuntary termination of the purchasers service with us for any reason (including death or disability). The purchase price for shares repurchased pursuant to the restricted stock purchase agreement is the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser. The repurchase option lapses at such rate as the administrator may determine. Except with respect to shares purchased by officers and directors, the repurchase option lapses at a rate of no less than 20% per year over five years from the date of purchase.
Corporate transactions or changes in control. Our board of directors will make appropriate adjustments for a stock split, reverse stock split, stock dividend, combination or reclassification of the stock, or any other increase or decrease in the number of issued shares of common stock effected without receipt of consideration by the company.
In the event of the proposed dissolution or liquidation of the company, the administrator shall notify each optionee as soon as practicable prior to the effective date of such proposed transaction. The administrator in its discretion may provide for an optionee to have the right to exercise his or her option or stock purchase right until fifteen days prior to such transaction as to all of the optioned stock covered thereby, including shares as to which the option or stock purchase right would not otherwise be exercisable. In addition, the administrator may provide that any company repurchase option applicable to any shares purchased upon exercise of an option or stock purchase right shall lapse as to all such shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an option or stock purchase right will terminate immediately prior to the consummation of such proposed action.
In addition, in the event we merge or sell all or substantially all of our assets, all outstanding stock awards under the 2000 plans will be assumed, continued or substituted for by any surviving or acquiring entity. If the surviving or acquiring entity elects not to assume, continue or substitute for these awards, each participant will be given notice of the transaction and permitted to exercise all outstanding awards held under the 2000 plans for a period of fifteen days after notice is provided. To the extent it has not been previously exercised, an option or stock purchase right will terminate at the end of such period.
Additional provisions. Our board of directors has the authority to amend outstanding awards granted under the 2000 plans, except that no amendment may adversely affect an award without the recipients written consent. Our board of directors has the power to amend the 2000 plans. We are required to provide annual financial statements to participants in the 2000 plans.
2004 Equity Incentive Plan
by the terms of the 2004 plan as amended and restated. The material differences between the terms of options granted under the 2004 plan prior to and following this offering are identified below.
Share reserve. An aggregate of 3,659,926 shares of our common stock are reserved for future issuance under the 2004 plan. Shares subject to options and stock awards that expire, terminate, are repurchased or are forfeited under the 2004 plan will again become available for the grant of awards under the 2004 plan. Shares issued under the 2004 plan may be previously unissued shares or reacquired shares bought on the market or otherwise. If any shares subject to a stock award are not delivered to a participant because such shares are withheld for the payment of taxes or the stock award is exercised through a net exercise, the number of shares that are not delivered to the participant shall remain available for the grant of awards under the 2004 plan. If the exercise of any stock award is satisfied by tendering shares of common stock held by the participant, the number of shares tendered shall become available for the grant of awards under the 2004 plan. The maximum number of shares that may be issued under the 2004 plan subject to incentive stock options is 7,000,000.
As of May 31, 2004, options to purchase 1,340,074 shares of our common stock subject to the terms of the 2004 plan prior to its amendment and restatement were outstanding. As of the date hereof, no shares of our common stock have been issued under the terms of the 2004 plan as amended and restated. The 2004 plan prior to its amendment and restatement provided for multiple forms of equity awards, but only options were granted by our board of directors.
Administration. Our board of directors will administer the 2004 plan, but the board may delegate authority to administer the 2004 plan to a committee of one or more members of the board. Subject to the terms of the 2004 plan, the plan administrator will determine the stock award recipients and grant dates, the numbers and types of stock awards to be granted under the 2004 plan and the terms and conditions of the stock awards, including the period of their exercisability and vesting. Subject to the limitations set forth below, the plan administrator will also determine the exercise price, purchase price or strike price, as applicable, for stock awards granted under the 2004 plan.
Eligibility of awards. The 2004 plan provides for the grant of ISOs, NSOs, restricted stock awards, stock appreciation rights, phantom stock awards and other stock awards based in whole or in part by reference to our common stock. ISOs may be granted solely to our employees, including officers. All other stock awards under the 2004 plan may generally be granted to our employees, directors, officers and consultants.
Stock options. Stock options are granted under the 2004 plan pursuant to a stock option agreement. Generally, the exercise price for an ISO cannot be less than 100% of the fair market value of the common stock subject to the option on the date of grant. The exercise price for an NSO is determined by our board of directors. Options granted under the 2004 plan vest at the rate specified in the stock option agreement. In addition, following this offering, our 2004 plan will allow for the early exercise of options, as set forth in an applicable stock option agreement. All shares of our common stock acquired through options exercised early may be subject to repurchase by us. Options granted under the 2004 plan prior to its amendment and restatement must vest at the rate of at least 20% per year and may not be exercised early.
In general, the term of stock options granted under the 2004 plan may not exceed ten years. With respect to options granted under the 2004 plan following this offering, unless the terms of an optionees stock option agreement provide for earlier termination, if an optionees service relationship with us, or any affiliate of ours, terminates due to disability, death or retirement, the optionee, or his or her beneficiary, generally may exercise any vested options after the date the service relationship ends for up to twelve months in the event of disability, up to eighteen months in the event of death and up to twenty-four months in the event of selected retirements. If an optionees relationship with us, or any
affiliate of ours, ceases for any reason other than disability, death or retirement, the optionee may exercise any vested options for up to three months after the termination of service, unless the terms of the stock option agreement provide for earlier termination. However, in the event the optionees service with us, or an affiliate of ours, is terminated for cause (as defined in the 2004 plan), all options held by the optionee under the 2004 plan will terminate in their entirety on the date of termination.
With respect to options granted under the 2004 plan prior to this offering, if an optionees service with us is terminated due to disability or death, the optionee, or his or her beneficiary, may exercise any vested options for up to six months after the date of termination. If an optionees service with us is terminated for any reason other than disability or death, the optionee may exercise any vested options for up to thirty days after the date of termination. However, in the event an optionees service with us is terminated for cause under the terms of the 2004 plan, all options held by the optionee under the 2004 plan will terminate on the date of termination.
Acceptable consideration for the purchase of our common stock issued under the 2004 plan will be determined by our board of directors and may include cash or common stock previously owned by the optionee, or may be paid through a deferred payment arrangement, a broker assisted exercise, the net exercise of the option or other legal consideration or arrangements approved by our board of directors.
Generally, options granted under the 2004 plan may not be transferred other than by will or the laws of descent and distribution unless the optionee holds an NSO and the related option agreement provides otherwise. However, an optionee may designate a beneficiary who may exercise the options granted under the 2004 plan following the optionees death.
Tax limitations on stock option grants. ISOs may be granted only to our employees. The aggregate fair market value, determined at the time of grant, of shares of our common stock subject to ISOs that are exercisable for the first time by an optionee during any calendar year under all of our stock plans may not exceed $100,000. The options or portions of options that exceed this limit are treated as NSOs. No ISO may be granted to a 10% stockholder unless the following conditions are satisfied:
| the option exercise price is at least 110% of the fair market value of the stock subject to the option on the grant date; and |
| the term of any ISO award must not exceed five years from the grant date. |
Section 162(m). When we become subject to the requirements of Section 162(m) of the Code, which denies a deduction to publicly held corporations for certain compensation paid to specified employees in a taxable year to the extent that the compensation exceeds $1,000,000, no person may be granted options under the 2004 plan covering more than 2,000,000 shares of our common stock in any calendar year.
Restricted stock awards. Restricted stock awards are purchased through a restricted stock award agreement. To the extent required by law, the purchase price for restricted stock awards must be at least the par value of the stock. The purchase price for a restricted stock award may be payable in cash or through a deferred payment or related arrangement, the recipients past services performed for us, or any other form of legal consideration or arrangement acceptable to our board of directors. Rights to acquire shares under a restricted stock award may be transferred only as set forth in the restricted stock award agreement.
Stock appreciation rights. Stock appreciation rights are granted under the 2004 plan pursuant to stock appreciation rights agreements. The plan administrator determines the strike price for a stock appreciation right. Stock appreciation rights granted under the 2004 plan vest at the rate specified in the stock appreciation rights agreement.
The plan administrator determines the term of stock appreciation rights granted under the 2004 plan. Unless the terms of an awardees stock appreciation rights agreement provides otherwise, if an awardees service relationship with us, or any affiliate of ours, terminates for any reason, the awardee, or his or her beneficiary, may exercise any vested stock appreciation rights for up to three months after the date the service relationship ends unless the terms of the agreement provide for earlier or later termination.
Phantom stock. Phantom stock awards are granted under the 2004 plan pursuant to phantom stock award agreements. A phantom stock award may require the payment of at least the par value of the option subject to the award. Payment of any purchase price may be made in cash or common stock previously owned by the recipient or a combination of the two. Dividend equivalents may be credited in respect of shares covered by a phantom stock award, as determined by our board of directors. All phantom stock awards will be forfeited upon termination of the holders service relationship with us, or any affiliate of ours, to the extent not vested on that date.
Other stock awards. The plan administrator may grant other awards based in whole or in part by reference to our common stock. The plan administrator will set the number of shares under the award, the purchase price, if any, the timing of exercise and vesting and any repurchase rights associated with these awards.
Corporate transactions and changes in control. In the event of certain corporate transactions, all outstanding stock awards granted under the 2004 plan following this offering either will be assumed, continued or substituted for by any surviving or acquiring entity. If the surviving or acquiring entity elects not to assume, continue or substitute for these awards, the vesting provisions of these awards will generally be accelerated and the awards will be terminated if not exercised prior to the effective date of the corporate transaction. We may assign any repurchase or reacquisition rights held by us with respect to outstanding stock awards to the surviving or acquiring entity. Following certain change in control transactions, the vesting and exercisability of certain stock awards granted under the 2004 plan following this offering generally will be accelerated only if and to the extent provided in the awardees award agreement.
Our board of directors will make appropriate adjustments for a stock split, reverse stock split, stock dividend, combination or reclassification of the stock, or any other increase or decrease in the number of issued shares of common stock effected without receipt of consideration by the company.
Additional provisions. Our board of directors has the authority to amend outstanding awards granted under the 2004 plan, except that no amendment may adversely affect an award without the recipients written consent. Our board of directors has the power to amend, suspend or terminate the 2004 plan. However, some amendments also require stockholder approval.
We are required to provide annual financial statements to individuals who participated in the 2004 plan prior to its amendment and restatement.
2004 Employee Stock Purchase Plan
Share reserve. An aggregate of 2,000,000 shares of our common stock are reserved for issuance pursuant to purchase rights granted to our employees or to employees of any of our affiliates under
the purchase plan. On the first day of each calendar year, for a period of ten years beginning on January 1, 2005, the share reserve will automatically increase by the lesser of:
| 700,000 shares; |
| 1% of the total number of shares of our common stock outstanding on that date; or |
| an amount as may be determined by our board of directors. |
However, under the terms of the purchase plan, in no event shall the annual increase cause the total number of shares reserved under the purchase plan to exceed 10% of the total number of shares of our capital stock outstanding on December 31 of the prior year. As of the date hereof, no shares of common stock have been purchased under the purchase plan.
Administration. Our board of directors will administer the purchase plan, but the board may delegate authority to administer the purchase plan to a committee of one or more members of the board. Subject to the terms of the purchase plan, the plan administrator will determine grant dates for purchase rights, interpret the purchase plan and purchase rights and establish rules for the administration of the purchase plan.
Eligibility. The purchase plan is implemented by offerings of rights to eligible employees. Our board of directors will establish the criteria for determining which employees are eligible to participate in an offering. Generally, all regular employees, including executive officers, who work more than twenty hours per week and are customarily employed by us or by any of our affiliates for more than five months per calendar year may participate in the purchase plan. Eligible employees may be granted rights only if the rights, together with any other rights granted under employee stock purchase plans, do not permit such employees rights to purchase our stock to accrue at a rate which exceeds $25,000 of the fair market value of such stock for each calendar year in which such rights are outstanding. In addition, no employee shall be eligible for the grant of any rights under the purchase plan if immediately after such rights are granted, the employee has voting power over 5% or more of our outstanding capital stock, measured by vote or value. For purposes of the purchase plan, stock which may be purchased under an outstanding purchase right is treated as owned by an employee. All outstanding purchase rights granted to an employee will terminate if the employee ceases to be employed by us or by any of our affiliates.
Offerings. Under the purchase plan, employees may purchase shares of our common stock during offerings through payroll deductions. Offerings may last up to 27 months. The first offering will begin on the effective date of this offering and last approximately six months, with one purchase occurring at the end of the six-month period. Eligible employees who participate in an offering may have up to 20% of their earnings for the period of that offering withheld for the purchase of common stock under the purchase plan. The price paid for common stock on the purchase dates will be determined by the plan administrator and will not be less than the lower of 85% of the fair market value of a share of our common stock on the first day of the offering period or 85% of the fair market value of a share of our common stock on the purchase date. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment.
Transferability. Generally, a purchase right granted under the purchase plan may not be transferred other than by will or the laws of descent and distribution. However, an employee may designate a beneficiary who may exercise the purchase right following the optionees death.
Corporate transactions. In the event of certain corporate transactions, any outstanding rights to purchase our stock under the purchase plan will be assumed, continued or substituted for by the surviving or acquiring entity. If the surviving or acquiring entity elects not to assume, continue or
substitute for these rights, then the participants accumulated contributions will be used to purchase shares of our common stock within ten days prior to the corporate transaction and the purchase rights will terminate immediately thereafter.
Our board of directors will make appropriate adjustments for a stock split, reverse stock split, stock dividend, combination or reclassification of the stock, or any other increase or decrease in the number of issued shares of common stock effected without receipt of consideration by the company.
Other provisions. Our board of directors has the authority to amend or terminate the purchase plan. However, no amendment or termination of the purchase plan or outstanding offering may adversely affect any outstanding rights to purchase shares of our common stock other than an amendment or termination as a result of an accounting treatment for the purchase plan that is detrimental to our best interests. Amendments generally will be submitted for stockholder approval only to the extent required by law or applicable exchange rules.
2004 Non-Employee Directors Stock Option Plan
Share reserve. An aggregate of 800,000 shares of our common stock are reserved for issuance under the directors plan. Shares subject to options granted under the directors plan that expire or otherwise terminate without being exercised will be returned to the directors plan and become available for issuance under the plan. Shares subject to options granted under the directors plan that are withheld upon the exercise of an option or shares that are provided by a non-employee director to exercise an option, will remain available for issuance under the directors plan. As of the date hereof, no shares of common stock have been issued under the directors plan.
Administration. Our board of directors will administer the directors plan, but the board may delegate authority to administer the directors plan to a committee of one or more members of the board. Our board of directors has broad discretion to interpret and administer the directors plan.
Automatic grants. Pursuant to the terms of the directors plan, upon the completion of this offering, each of our non-employee directors will automatically receive an initial option grant to purchase 30,000 shares of our common stock. Each person who is not an employee of ours who is first elected or appointed to our board of directors after the closing of this offering will receive an initial option grant on the date of his or her election or appointment to purchase 30,000 shares of our common stock. Any person who is a non-employee director on the day of an annual meeting of our stockholders, beginning in 2005, will automatically be granted an option to purchase 10,000 shares of our common stock under the directors plan on that date, the annual grant. However, in the event a non-employee director has not been a non-employee director since the date of the preceding annual meeting of our stockholders, that director will receive an annual grant that has been reduced pro rata for each full quarter prior to the date of grant during which such person did not serve as a non-employee director.
Terms. In general, the term of the stock options granted under the directors plan may not exceed 10 years and the exercise price for the options cannot be less than 100% of the fair market value of the common stock on the date of grant. Acceptable consideration for the purchase of our common stock issued under the directors plan will be determined by our board of directors and may include cash or common stock previously owned by the optionee or may be paid through a broker assisted exercise or net exercise feature. All initial option grants under the directors plan vest in three equal annual installments and all annual option grants under the directors plan vest in full on the grant
date. An optionee whose service relationship with us or any of our affiliates, whether as a non-employee director or subsequently as an employee, director or consultant of either us or one of our affiliates, ceases for any reason may exercise options for the term provided in the option agreement to the extent the options were exercisable on the date of termination.
Transferability. Generally, an option granted under the directors plan may not be transferred other than by will or by the laws of descent and distribution or pursuant to the terms of the option agreement. However, an optionee may designate a beneficiary who may exercise the option following the optionees death.
Corporate transactions. In the event of certain corporate transactions, all outstanding options granted under the directors plan will be assumed, continued or substituted for by any surviving entity. If the surviving or acquiring entity elects not to assume, continue or substitute for these options, the options will be terminated if not exercised prior to the effective date of the corporate transaction.
Our board of directors will make appropriate adjustments for a stock split, reverse stock split, stock dividend, combination or reclassification of the stock, or any other increase or decrease in the number of issued shares of common stock effected without receipt of consideration by the company.
Additional provisions. Our board of directors may amend or terminate the directors plan at any time. However, some amendments will require stockholder approval and no amendment or termination may adversely affect a non-employee directors outstanding options without the non-employee directors written consent.
401(k) Plan
EXECUTIVE SEVERANCE AGREEMENTS
On August 1, 2003, we entered into executive severance agreements with Drs. Cheatham and Thomson and Messrs. Edstrom, Anderson and Burns. Each agreement is for a period of two years and will be automatically renewed for additional one-year periods unless either party gives notice to terminate the agreement at least 90 days prior to the end of its initial term or any subsequent term.
The agreements provide that each executive is an at will employee and that his employment with us may be terminated at any time by the employee or us. Under the agreements, in the event we terminate an executives employment without cause (as defined below) or the employee terminates his employment with us for good reason (as defined below), the employee is generally entitled to receive the following:
| the portion of the employees annual base salary earned through the termination date that was not paid prior to his termination, if any; |
| on the condition the employee executes a general release and settlement agreement, or Release, in favor of us, the employees annual base salary on the date of termination for a period of 18 months following his termination, subject to certain limitations; |
| on the condition the employee executes a Release, an amount equal to the average annual bonus received by the employee for the three years prior to his termination (or the prior period up to three years during which the employee was one of our executive officers and received a bonus); |
| in the event the employee met the performance criteria for earning an annual bonus prior to his termination, a portion of the annual bonus earned for the year based on the number of days worked during the year; |
| any compensation previously deferred by the employee and any accrued paid time-off that the employee is entitled to under our policy; and |
| on the condition the employee executes a Release, health insurance and, under certain circumstances, life, disability and other insurance benefits for a period expiring on the earlier of 18 months following his termination or until he qualifies for related benefits from another employer. |
In addition, the executive severance agreements provide that, on the condition the employee executes a Release, each vested stock option held by the employee on the date of termination will be exercisable for a period ending on the earlier of 18 months following that date or the end of the original term of the option.
Under the agreements, an employee may be terminated for cause if he, among other things:
| refuses to carry out or satisfactorily perform any of his lawful duties or any lawful instruction of our board of directors or senior management; |
| violates any local, state or federal law involving the commission of a crime other than a minor traffic offense; |
| is grossly negligent, engages in willful misconduct or breaches a fiduciary obligation to us; |
| engages in any act that materially compromises his reputation or ability to represent us with investors, customers or the public; or |
| reaches a mandatory retirement age established by us. |
Under the agreements, good reason includes, among other things:
| a reduction of the executives annual base salary to a level below his salary as of August 1, 2003; |
| a material diminution in the executives position, authority, duties or responsibilities with us, subject to certain limitations; |
| an order by us to relocate the executive to an office located more than 50 miles from the executives current residence and worksite; |
| any non-renewal of the executive severance agreement by us, on the condition that the executive may terminate the agreement for good reason only during the 30-day period after he receives notice from us that we intend to terminate the agreement; and |
| any material violation of the executive severance agreement by us. |
Under the agreements, an employee must inform us if he intends to terminate his agreement for good reason. We have 30 days from the date we receive notice of the employees intent to terminate the agreement for good reason to cure the default.
CHANGE OF CONTROL AGREEMENTS
On August 1, 2003, we entered into change of control agreements with Drs. Cheatham and Thomson and Messrs. Edstrom, Anderson and Burns. Each agreement is for a period of two years and will be automatically renewed for additional one-year periods unless either party gives notice to terminate the agreement at least 90 days prior to the end of its initial term or any subsequent term.
Under the agreements, a change of control will be deemed to occur upon:
| any transaction that results in a person or group acquiring beneficial ownership of 50% or more of our voting stock, other than us, one of our employee benefit plans, Mr. Mann or any other entity in which Mr. Mann holds a majority of the beneficial interests; |
| any merger, consolidation or reorganization of us in which our stockholders immediately prior to the transaction hold less than 50% of the voting power of the surviving entity following the transaction, subject to certain limitations; |
| any transaction in which we sell all or substantially all of our assets, subject to certain limitations; |
| our liquidation; or |
| any reorganization of our board of directors in which our incumbent directors (as defined in the agreements) cease for any reason to constitute a majority of the members of our board. |
The agreements provide that in the event of a change of control, the employee is generally entitled to maintain the same position, authority and responsibilities held before the change of control, as well as the following compensation and benefits during the period ending on the earlier of 24 months following the change of control or the termination of his employment with us:
| his annual base salary in an amount equal or greater to his annual salary as of the date the change of control occurs; |
| an annual bonus in an amount equal to the average annual bonus received by him for the three years prior to his termination (or the prior period up to three years during which he was one of our executive officers and received a bonus); |
| medical, dental and other insurance, and any other benefits we may offer to our executives; and |
| prompt reimbursement for all reasonable employment expenses incurred by him in accordance with our policies and procedures. |
Under the change of control agreements, we may terminate an executive with or without cause (as defined below) and the executive may terminate his employment with us for good reason (as defined below) or any reason at any time during the 2-year period following a change of control. In the event we terminate an executive without cause or an executive terminates his employment with us for good reason, he is generally entitled to receive the following:
| the portion of his annual base salary earned through the termination date that was not paid prior to his termination, if any; |
| on the condition the employee executes a Release in favor of us, the employees annual base salary on the date of termination for a period of 18 months following his termination, subject to certain limitations; |
| on the condition the employee executes a Release, an amount equal to 150% of his average annual bonus received by the employee for the three years prior to his termination (or the prior period up to three years during which the employee was one of our executive officers and received a bonus); |
| in the event the employee met the performance criteria for earning an annual bonus prior to his termination, a portion of the annual bonus earned for the year based on the number of days worked during the year; |
| any compensation previously deferred by the employee and any accrued paid time-off that the employee is entitled to under our policy; and |
| on the condition the employee executes a Release, health insurance and, under certain circumstances, life, disability and other insurance benefits for a period expiring on the earlier of 18 months following his termination or until he qualifies for related benefits from another employer. |
In addition, the agreements provide that, on the condition the employee executes a Release, each option to purchase shares of our common stock held by him as of the termination date will become fully vested and exercisable at any point during the term of the option, subject to certain limitations.
Under the agreements, in the event we terminate an employee with cause or an employee terminates his employment with us without good reason, his agreement will terminate without any further obligation to either party.
The change of control agreements provide that an employee may be terminated for cause if he, among other things:
| refuses to carry out or satisfactorily perform any of his lawful duties or any lawful instruction of our board of directors or senior management; |
| violates any local, state or federal law involving the commission of a crime other than a minor traffic offense; |
| is grossly negligent, engages in willful misconduct or breaches a fiduciary obligation to us; |
| engages in any act that materially compromises his reputation or ability to represent us with investors, customers or the public; or |
| reaches a mandatory retirement age established by us before a change of control occurs. |
Under the agreements, good reason includes, among other things:
| a failure by us to make all compensation payments and provide all insurance and related benefits to the employee required under the agreement during his employment following a change of control, subject to certain limitations; |
| a material diminution in the employees position, authority, duties or responsibilities with us; |
| an order by us to relocate the employee to an office located more than 50 miles from the employees current residence and worksite; |
| any non-renewal of the change of control agreement by us, on the condition that the employee may terminate the agreement for good reason only during the 30-day period after he receives notice from us that we intend to terminate the agreement; and |
| any material violation of the change of control agreement by us. |
Under the change of control agreements, an employee must inform us if he intends to terminate his agreement for good reason. We have 30 days from the date we receive notice of the employees intent to terminate the agreement for good reason to cure the default.
The executive and change of control agreements provide that in the event an executive becomes entitled to benefits under both agreements, compensation payments and other benefits will be coordinated to ensure the executive is entitled to receive the benefits described above without duplicating coverage.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
We were incorporated under the laws of the State of Delaware. Section 145 of the Delaware General Corporation Law, or DGCL, generally provides that a Delaware corporation may indemnify any person who was or is, or is threatened to be made, a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that the person is or was an officer, director, employee or agent of the corporation, or is or was serving at the request of the corporation as an officer, director, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding, provided that the person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporations best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was illegal. A Delaware corporation may also indemnify any person who was or is, or is threatened to be made, a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit, provided the person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporations best interests, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him or her against the expenses which the officer or director has actually and reasonably incurred.
Our amended and restated certificate of incorporation and amended and restated bylaws provide for the indemnification of our directors and executive officers to the fullest extent permitted under the DGCL and other applicable laws.
As permitted by Delaware law, we have entered into indemnity agreements with each of our directors and executive officers. These agreements generally require us to indemnify our directors and executive officers against any and all expenses (including attorneys fees), witness fees, damages, judgments, fines, settlements and other amounts incurred (including expenses of a derivative action) in connection with any action, suit or proceeding, whether actual or threatened, to which any of these individuals may be made a party by reason of the fact that he or she is or was a director, officer, employee, or other agent of ours or is or was serving at our request as a director, officer, employee, or other agent of another corporation or enterprise, provided that he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to our best interests and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. Under the indemnification agreements, all expenses incurred by one of our directors or executive officers in defending any such action, suit or proceeding in advance of its final disposition shall be paid by us upon delivery to us of an undertaking, by or on behalf of the director or executive officer, to repay all advanced amounts if it is ultimately determined that the director or executive officer is not entitled to be indemnified by us under his or her indemnification agreement, our amended and restated bylaws or the DGCL. The indemnification agreements also set forth certain procedures that will apply in the event any of our directors or executive officers brings a claim for indemnification under his or her indemnification agreement.
In addition, Section 102(b)(7) of the DGCL permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duties as a director, except for liability for:
| any transaction from which the director derives an improper personal benefit; |
| acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; |
| unlawful payment of dividends or unlawful stock purchase or redemptions of shares; or |
| any breach of a directors duty of loyalty to the corporation or its stockholders. |
Our amended and restated certificate of incorporation includes such a provision.
There is currently no pending litigation or proceeding involving any of our directors or executive officers for which indemnification is being sought. We are not currently aware of any threatened litigation that may result in claims for indemnification against us by any of our directors or executive officers.
We have an insurance policy covering our officers and directors with respect to certain liabilities, including liabilities arising under the Securities Act of 1933, as amended, or Securities Act, or otherwise. The policy expires on March 14, 2005.
Certain relationships and related party transactions
The following is a description of transactions or series of transactions since January 1, 2000 to which we have been a party, in which the amount involved in the transaction or series of transactions exceeds $60,000, and in which any of our directors, executive officers or persons who we know held more than five percent of any class of our capital stock, including their immediate family members, had or will have a direct or indirect material interest, other than compensation arrangements, which are described under Management. Except as specifically described below regarding loans to former directors and former executive officers, we believe that the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arms-length transactions.
MERGER OF PDC, CTL AND ALLECURE
On December 12, 2001, we acquired AlleCure and CTL, and these entities became wholly-owned subsidiaries of ours. Pursuant to the terms of the acquisition, all outstanding shares of capital stock of CTL were exchanged for 2,504,928 shares of our common stock and 267,212 shares of our Series A preferred stock. In addition, all outstanding shares of capital stock of AlleCure were exchanged for 3,697,275 shares of our common stock and 192,618 shares of our Series B preferred stock. At the time of this transaction, we valued the stock issued to the former stockholders of CTL and AlleCure at approximately $195,153,000. Following the acquisition, we changed our name from Pharmaceutical Discovery Corporation to MannKind Corporation. On December 31, 2002, we merged AlleCure and CTL with and into us and became one entity. Our shares of preferred stock issued to the former stockholders of AlleCure and CTL in connection with the merger on December 12, 2001, or the Merger, constitute 100% of the shares of Series A preferred stock and Series B preferred stock issued by us to date.
Prior to the Merger, Alfred E. Mann, our Chief Executive Officer and Chairman of the Board of Directors, held approximately 63.1% of the outstanding shares of common stock and 83.4% of the outstanding shares of preferred stock of CTL, approximately 51.7% of the outstanding shares of common stock and 100% of the outstanding shares of preferred stock of AlleCure and approximately 76% of the outstanding shares of common stock of PDC. In the Merger, in exchange for all of the outstanding shares of capital stock of AlleCure and CTL held by Mr. Mann, he received 222,864 shares of our Series A preferred stock and 192,618 shares of our Series B preferred stock, and 3,493,850 shares of common stock, which, when combined with his holdings of PDC common stock, totalled 8,107,029 shares of our common stock.
In connection with the Merger, we assumed the obligation under a warrant issued by CTL for the purchase of 118,424 shares of our common stock at an exercise price of $21.12 per share initially issued to Mr. Mann by CTL on March 30, 2001. This warrant expired unexercised on March 31, 2003.
SEVERANCE AGREEMENTS
Dr. Solomon Steiner ceased to be an employee and a director of ours on February 6, 2003 pursuant to a settlement agreement with us. Under the settlement agreement, we became obligated to pay Dr. Steiner approximately $1,049,288 over three years, comprised of approximately $775,365 in deferred compensation from prior years and the remainder comprised of severance-related items. We have paid approximately $451,110 of this amount. An additional $271,378 is due in April 2004, $42,500 is due in September 2004 and the remaining $284,300 is due in April 2005. The settlement
agreement further provides that the options held by Dr. Steiner to purchase up to 46,585 shares of our common stock remain fully exercisable through April 2007, and options to purchase up to 124,553 shares of our common stock remain fully exercisable until at least April 2006.
Dr. Stephen McCormack resigned as an employee and a director of ours in February 2003 pursuant to a settlement agreement with us dated March 28, 2003. Under the settlement agreement, we became obligated to pay Dr. McCormack his base salary at the rate of approximately $22,468 per month through December 2003, and a lump sum payment of $67,404 in February 2005.
Mr. John Simard resigned as an employee and a director of ours in September 2002 pursuant to a post-employment agreement with us. The post-employment agreement provides that options held by Mr. Simard to purchase up to 30,316 shares of our common stock remain fully exercisable until January 2, 2006.
Dr. Michael Page, our Chief Executive Officer from January 1, 2003, resigned as an employee and a director of ours effective October 7, 2003. Under the terms of a severance agreement, we are obligated to pay Dr. Page his base salary at the rate of approximately $27,500 per month through April 2005 and a severance payment of $165,000. The agreement also provides for accelerated vesting of an option held by Dr. Page permitting him to purchase up to 83,333 shares of our common stock until April 7, 2005.
LOANS TO FORMER DIRECTORS AND FORMER EXECUTIVE OFFICERS
On May 18, 2000, CTL sold and issued 1,965,000 shares of its common stock to Mr. Simard in exchange for a promissory note in the aggregate principal amount of $1,179,000. The promissory note was due in May 2005, was full recourse as to both principal and interest, and was collateralized by the underlying shares of common stock issued in connection with the note. The note accrued interest at a fixed interest rate, which was less than the market interest rate available for a loan of similar size and terms from a third party. As a result, CTL recognized compensation expense of approximately $121,000 in 2002, which was equal to the amount of the discount on the promissory note based on the difference between a market interest rate and the fixed interest rate and the term of the note. In connection with the Merger, Mr. Simards shares of common stock of CTL were exchanged for 119,145 shares of our common stock and we were assigned the benefit of the promissory note. All outstanding principal and interest accrued under the note were repaid in full in March 2002.
On September 15, 2000, December 15, 2000 and April 2, 2001, AlleCure sold and issued an aggregate of 1,715,000 shares of its common stock to Dr. McCormack in exchange for three promissory notes in the aggregate principal amount of $1,963,380. The promissory notes are due at various dates from 2005 to 2006, are full recourse as to both principal and interest and are collateralized by the underlying shares of common stock issued in connection with the notes. The notes are pre-payable by Dr. McCormack and he has no service obligation to us under the terms of the stock purchase. The note-for-stock transaction was accounted for as in-substance stock option grants to an employee. As a result, AlleCure recognized stock-based compensation expense of $815,000 during 2001 in connection with these notes, which represented the intrinsic value of the in-substance stock options. This amount was reversed in 2002 because the in-substance options had no intrinsic value as of December 31, 2002. In connection with the Merger, Dr. McCormacks shares of common stock of AlleCure were exchanged for 110,113 shares of our common stock and we were assigned the benefit of the promissory notes. As of December 31, 2003, an aggregate of $2,274,474 in principal and accrued interest was outstanding under the notes.
COMMON STOCK FINANCINGS
From January 2001 through December 31, 2003, we sold shares of our common stock in private financings as follows:
| on June 30, 2001 and on August 31, 2001, we sold 159,048 and 1,192 861 shares of common stock, respectively, for a purchase price of $25.14 per share; |
| on May 2, 2002 we sold an aggregate of 233,849 shares of common stock for a purchase price of $25.23 per share; |
| during the period of June 2002 through December 2002 we sold 3,921,767 shares of common stock for a purchase price of $15.00 per share; |
| in January 2003, we entered into an agreement to sell an aggregate of 41,534 shares of common stock for a purchase price of $15.00 per share, which we sold on December 22, 2003; |
| during the period February 2003 through May 2003 we sold an aggregate of 2,838,315 shares of common stock for a purchase price of $13.80-$14.55 per share; and |
| on August 9, 2003 we sold an aggregate of 654,879 shares of common stock for a purchase price of $15.27 per share. |
The investors in these financings included the following executive officers, directors, holders of more than five percent of our securities, and the immediate family members and affiliated entities of each:
Purchaser | Shares | ||||
Directors and executive officers
|
|||||
Alfred E. Mann(1)
|
1,393,443 | ||||
Kent Kresa(2)
|
20,000 | ||||
David H. MacCallum
|
6,666 | ||||
Immediate family members
|
|||||
Claude Girault(3)
|
66,667 | ||||
Howard Mann(4)
|
271,344 | ||||
Richard Mann(5)
|
146,302 | ||||
Carla Mann(6)
|
100,000 | ||||
Kevin Mann(7)
|
26,667 | ||||
Alfred Mann, Jr.(8)
|
40,000 | ||||
Robert Mann(9)
|
19,818 | ||||
Rosalind Koff(10)
|
25,667 | ||||
5% or greater stockholders
|
|||||
Biomed Partners, LLC(11)
|
2,420,496 | ||||
Biomed Partners II, LLC(11)
|
2,406,027 |
(1) | Alfred E. Mann holds the shares set forth opposite his name as trustee of the Alfred E. Mann Living Trust dated April 9, 1999. | |
(2) | Kent Kresa holds the shares set forth opposite his name as trustee of the Kresa Family Trust. | |
(3) | Claude Girault is the spouse of Alfred E. Mann. | |
(4) | Howard Mann holds the shares set forth opposite his name as trustee of the Howard T. and Joni C. Mann Family Trust. Howard Mann is the son of Alfred E. Mann. | |
(5) | Richard Mann holds the shares set forth opposite his name as trustee of the Richard Mann Family Trust #1, the Richard Mann Family Trust #2 and the Richard and Cheryl Mann Revocable Living Trust. Richard Mann is the son of Alfred E. Mann. |
(6) | Carla Mann holds the shares set forth opposite her name as trustee of the Carla Mann Revocable Trust. Carla Mann is the daughter of Alfred E. Mann. | |
(7) | Kevin Mann is the son of Alfred E. Mann. | |
(8) | Alfred Mann, Jr. is the son of Alfred E. Mann. | |
(9) | Robert Mann is the brother of Alfred E. Mann. |
(10) | Rosalind Koff is the sister of Alfred E. Mann. |
(11) | The Alfred E. Mann Living Trust and Minimed Infusion, Inc. are each 0.1% managing members of each of Biomed Partners, LLC and Biomed Partners II, LLC. Alfred Mann has voting and dispositive power over the shares set forth opposite the names of each of these entities. |
SERIES C CONVERTIBLE PREFERRED STOCK FINANCING
On December 31, 2003 we sold 980,392 shares of our Series C convertible preferred stock in a private financing at a price of $51.00 per share, including 364,589 shares to the Alfred E. Mann Living Trust.
We effected a one-for-three reverse split of our common stock on July 22, 2004. After giving effect to the reverse split of our common stock, upon the closing of this offering, the outstanding shares of our Series A preferred stock, Series B preferred stock and Series C convertible preferred stock will automatically convert into an aggregate of 6,166,372 shares of our common stock.
INDEMNIFICATION AGREEMENTS WITH DIRECTORS AND EXECUTIVE OFFICERS
We have entered into indemnification agreements with each of our directors and executive officers, in addition to the indemnification provided for in our amended and restated certificate of incorporation and amended and restated bylaws. See Management Limitations of liability and indemnification of officers and directors.
CONSULTING SERVICES
In 2002, while he was one of our directors, Dr. Page provided us with consulting services relating to our research and development programs. We paid Dr. Page approximately $124,000 for his services. We did not enter into a written agreement with Dr. Page regarding his consulting services.
In 2004, we engaged one of our directors, Llew Keltner, to provide consulting services to our management in connection with our efforts to seek potential partners in the development and commercialization of our Technosphere Insulin System. As of March 31, 2004, we have paid Dr. Keltner approximately $36,900 for consulting services rendered.
OTHER TRANSACTIONS
In connection with certain meetings of our board of directors and on other occasions when our business necessitated air travel for Mr. Mann and other MannKind employees, we utilized Mr. Manns private aircraft and we paid the charter company that manages the aircraft on behalf of Mr. Mann approximately $441,000 in 2002 and approximately $321,278 in 2003.
From January 2002 to October 2003, we leased property located in Sylmar, California from Sylmar Biomedical Park LLC, a company owned by Mr. Mann. Under the lease, we paid Sylmar Biomedical Park approximately $39,081 and $19,709 during the years ended December 31, 2002 and 2003, respectively.
On December 11, 2001, Mr. Mann entered into a put agreement with Mr. Simard whereby Mr. Simard had the right to require Mr. Mann to purchase 119,145 shares of our common stock held by Mr. Simard for a fixed price of approximately $2,948,830, or $24.75 per share. In February 2002 Mr. Simard exercised a portion of the put for approximately $1,921,000, or 77,611 shares, which Mr. Mann paid to Mr. Simard in cash. Mr. Simard resigned in September 2002 and, pursuant to a post-employment agreement that was formalized and executed in January 2003, we assumed
Mr. Manns remaining obligation under the put agreement of approximately $1,028,000. In January 2003, Mr. Simard exercised the remaining 41,534 shares covered by the put agreement and we paid Mr. Simard approximately $1,028,000 in cash. In January 2003, in connection with our assumption of the remaining obligations under the put agreement, Mr. Mann agreed to purchase 41,534 shares of common stock for an aggregate price of approximately $623,000. This price corresponded to the estimated fair value per share of our common stock at the time we entered into the agreement with Mr. Mann, which had declined below the exercise price of the put. We recorded approximately $405,000 as a stock-based compensation expense representing the intrinsic value of the 41,534 shares of common stock subject to the put agreement at the time that we assumed the obligations thereunder.
Principal stockholders
The following table sets forth information regarding beneficial ownership of our capital stock as of May 31, 2004, as adjusted to reflect the sale of shares of our common stock in this offering, by the following:
| each person, or group of affiliated persons, known by us to be the beneficial owner of more than five percent of any class of our voting securities; |
| each of our directors; |
| each of the named executive officers; and |
| all of our directors and executive officers as a group. |
Beneficial ownership is determined in accordance with the rules of the SEC and is generally based on voting or investment power with respect to securities. Under SEC rules, in computing the number of shares beneficially owned and the percentage ownership, options and warrants to purchase shares of our capital stock that are exercisable within 60 days of May 31, 2004 are deemed to be beneficially owned by the persons holding these options or warrants for the purpose of determining beneficial ownership and computing percentage ownership of that person but are not treated as outstanding for the purpose of computing any other persons ownership percentage.
All information in this table relating to the number and percent of shares for the period before the offering is based on a total of 19,975,089 shares of common stock outstanding on May 31, 2004, 4,930,341 shares of our common stock issuable upon conversion of all outstanding shares of our preferred stock, at the conversion prices then in effect, and shares beneficially owned pursuant to options and warrants. All information in this table relating to the number and percent of shares for the period after the offering is based on a total of 19,975,089 shares of common stock outstanding on May 31, 2004, 5,500,000 shares of common stock offered hereby, 6,166,372 shares of common stock issuable upon conversion of all outstanding shares of preferred stock, at the conversion prices in effect on the date of the offering resulting from an assumed initial public offering price of $14.00 per share, and shares beneficially owned pursuant to options and warrants. Except as indicated in the footnotes below, we believe, based on information furnished to us and subject to applicable community property laws, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The information below also does not reflect any potential participation in our directed share program by such persons
or their affiliates. Unless otherwise indicated, the address for each of the stockholders in the table below is MannKind Corporation, 28903 North Avenue Paine, Valencia, California 91355.
Number of shares | Percent of shares | |||||||||||||||
beneficially owned | beneficially owned | |||||||||||||||
Beneficial owner | Before offering | After offering | Before offering | After offering | ||||||||||||
Named executive officers and
directors:
|
||||||||||||||||
Alfred E. Mann(1)
|
15,512,007 | (2) | 15,996,612 | (3) | 62.0% | 50.4 | % | |||||||||
Hakan S. Edstrom
|
| | * | * | ||||||||||||
Richard L. Anderson
|
| | * | * | ||||||||||||
Dan R. Burns
|
| | * | * | ||||||||||||
David Thomson(4)
|
9,095 | 9,095 | * | * | ||||||||||||
Kathleen Connell
|
| | * | * | ||||||||||||
Ronald Consiglio
|
| | * | * | ||||||||||||
Michael Friedman
|
| | * | * | ||||||||||||
Llew Keltner
|
| | * | * | ||||||||||||
Kent Kresa
|
20,000 | 20,000 | * | * | ||||||||||||
David H. MacCallum
|
6,666 | 6,666 | * | * | ||||||||||||
All directors and current executive officers as a
group (12 persons)
|
15,547,768 | 16,032,373 | 62.1% | 50.5 | % | |||||||||||
Solomon S. Steiner(5)
|
583,574 | 583,574 | 2.3% | 1.8 | % | |||||||||||
Michael G. Page(6)
|
88,004 | 88,004 | * | * | ||||||||||||
Five percent stockholders:
|
||||||||||||||||
Biomed Partners, LLC(7)
|
2,420,496 | 2,420,496 | 9.7% | 7.6 | % | |||||||||||
Biomed Partners II, LLC(7)
|
2,406,027 | 2,406,027 | 9.7% | 7.6 | % |
* | Represents beneficial ownership of less than one percent. |
(1) | Includes 7,824,173 shares held by the Alfred E. Mann Living Trust, 10,968 shares held by Mannco LLC, 120,486 shares issuable to Alfred E. Mann upon the exercise of options vested as of 60 days following May 31, 2004, 2,420,496 shares held by Biomed Partners, LLC and 2,406,027 shares held by Biomed Partners II, LLC. The Alfred E. Mann Living Trust and Minimed Infusion, Inc. are each 0.1% managing members of each of Biomed Partners, LLC and Biomed Partners II, LLC. Alfred Mann has voting and dispositive power over the shares set forth opposite the names of each of these entities. |
(2) | Includes 2,729,857 shares issuable upon conversion of preferred stock held by the Alfred E. Mann Living Trust. |
(3) | Includes 3,214,462 shares issuable upon conversion of preferred stock held by the Alfred E. Mann Living Trust. |
(4) | Includes 9,095 shares issuable to Dr. Thomson upon the exercise of options vested as of 60 days following May 31, 2004. |
(5) | Includes 171,138 shares issuable to Dr. Steiner upon the exercise of options vested as of 60 days following May 31, 2004. |
(6) | Includes 88,004 shares issuable to Dr. Page upon the exercise of options vested as of 60 days following May 31, 2004. |
(7) | The Alfred E. Mann Living Trust and Minimed Infusion, Inc. are each 0.1% managing members of each of Biomed Partners, LLC and Biomed Partners II, LLC. Alfred Mann has voting and dispositive power over the shares set forth opposite the names of each of these entities. |
Description of capital stock
The following description of our capital stock gives effect to a one-for-three reverse stock split of our common stock that we effected on July 22, 2004 and to the amendment and restatement of our certificate of incorporation and bylaws which will occur effective upon the closing of this offering, and the conversion, upon the closing of this offering, of all then outstanding shares of our preferred stock, at an assumed initial public offering price of $14.00 per share, into 6,166,372 shares of our common stock.
Upon completion of this offering, our authorized capital stock will consist of 90,000,000 shares of common stock, par value $0.01 per share, and 10,000,000 shares of undesignated preferred stock, par value $0.01 per share. The following description of our capital stock does not purport to be complete and is subject to, and qualified in its entirety by, the DGCL and our restated certificate of incorporation and bylaws, which are filed as exhibits to the registration statement of which this prospectus forms a part.
COMMON STOCK
Outstanding shares
Voting rights
Dividends
Liquidation, dissolution or winding up
Rights and preferences
PREFERRED STOCK
Our current certificate of incorporation authorizes 5,000,000 shares of preferred stock, including:
| 267,213 shares designated Series A preferred stock; |
| 192,618 shares designated Series B preferred stock; and |
| 980,393 shares designated Series C preferred stock. |
See Note 9 of the notes to our financial statements for a description of our currently outstanding preferred stock. Upon the closing of this offering, all outstanding shares of our Series A preferred stock, Series B preferred stock and Series C preferred stock will be converted into 6,166,372 shares of our common stock, at an assumed initial public offering price of $14.00 per share. Following the conversion, our certificate of incorporation will be amended and restated to delete all references to these shares of preferred stock.
Under our amended and restated certificate of incorporation to be filed upon completion of this offering, our board of directors will have the authority, without further action by our stockholders, to issue up to 10,000,000 shares of our undesignated preferred stock in one or more series and to fix or alter the rights, preferences, privileges, qualifications and restrictions granted to or imposed upon any wholly unissued series of preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption and any liquidation preferences, and to establish from time to time the number of shares constituting any such series. The issuance of preferred stock could result in one or more of the following:
| decreasing the market price of our common stock; |
| restricting dividends on our common stock; |
| diluting the voting power of our common stock; |
| impairing the liquidation rights of our common stock; or |
| delaying or preventing a change in control of us. |
We currently have no plans to issue any shares of our undesignated preferred stock.
WARRANTS
As of May 31, 2004, warrants to purchase an aggregate of 175,227 shares of our common stock were outstanding, with a weighted average exercise price of $12.54 per share, all of which were exercisable as of that date. On July 22, 2004, certain warrantholders elected to convert their warrants into an aggregate of 22,309 shares of our common stock pursuant to conversion rights held only by these warrantholders. As a result, as of the date hereof, 135,328 shares of our common stock are issuable upon exercise of the remaining warrants, with a weighted average exercise price of $12.54 per share. Each warrant contains provisions for the adjustment of the exercise price and the number of shares issuable upon the exercise of the warrant in the event we declare and issue any stock dividends or effect any stock split, reclassification or consolidation of our common stock. The warrants also contain
a provision that provides for an adjustment to the exercise price and number of shares issuable in the event that we issue certain securities for a per share price less than a specified price. We may be in breach of certain notice provisions contained in the outstanding warrants. However, we believe that the impact of any such breach would not be material to our financial condition.
STOCK OPTIONS
As of May 31, 2004, options to purchase an aggregate of 2,132,922 shares of our common stock were outstanding, comprised of:
| options to purchase 126,099 shares of our common stock granted under the 1991 plan, all of which were exercisable as of that date; |
| options to purchase 305,430 shares of our common stock granted under the 1999 plan, 304,728 of which were exercisable as of that date; |
| options to purchase 14,366 shares of our common stock granted under the AlleCure plan, 10,053 of which were exercisable as of that date; |
| options to purchase 105,981 shares of our common stock granted under the CTL plan, 103,583 of which were exercisable as of that date; |
| options to purchase 1,340,074 shares of our common stock granted under our 2004 equity plan, 125,301 of which were exercisable as of that date; and |
| options to purchase 240,972 shares of our common stock granted outside our equity incentive plans, 120,486 of which were exercisable as of that date. |
The options outstanding as of May 31, 2004 had a weighted average exercise price of $10.18 per share of our common stock.
Based on options outstanding as of May 31, 2004, 3,659,926 shares of our common stock are reserved for future issuance under our 2004 equity plan effective as of the completion of this offering. In March 2004, our board of directors adopted, and our stockholders subsequently approved, effective upon completion of this offering, our director plan and purchase plan and an increase in the number of shares available for grant under our 2004 equity plan. See Management Employee benefit plans.
REGISTRATION RIGHTS
Following completion of this offering, under a registration rights agreement and pursuant to outstanding and previously exercised warrants to purchase shares of our common stock, holders of an aggregate of 1,048,343 shares of our common stock or their transferees may be entitled to rights with respect to the registration of these shares under the Securities Act, subject to limitations and restrictions described below.
Demand registration rights
Under the Rights Agreement, at any time after 180 days following the completion of this offering, the holders of a majority of the shares of our common stock (on an as converted basis) subject to the Rights Agreement may require us, on not more than two occasions, to file a registration statement under the Securities Act covering these shares as long as the aggregate sale price of these shares to the public is at least $5 million, subject to certain limitations. We will also be required to use our best efforts to have the registration statement declared effective. However, if we believe in our reasonable judgment that proceeding with the registration would have a material and adverse impact on any financing, acquisition, reorganization or other material transaction involving us, we may delay filing the registration statement for a period not to exceed 60 days. Also, if the stockholders requesting registration request that the shares be offered for distribution through an underwriting, we may reduce the number of shares of our common stock requested to be registered upon the advice of our underwriters. If shares of our stock requested to be included in a registration must be excluded pursuant to the underwriters advice, we will register a portion of the shares requested to be registered on a pro rata basis upon the holders of our stock requesting registration.
Piggyback registration rights
We have also granted registration rights to holders of 22,309 shares of our common stock issued upon conversion of warrants and holders of outstanding warrants to purchase up to 135,328 shares of our common stock. Under the terms of the warrants, in the event we propose to register any shares of our common stock on a registration statement, these warrantholders may have unlimited rights to request that their shares of common stock issued upon exercise of the warrants and any other shares of our common stock held by the warrantholders be included in the registration. However, if we are offering shares for distribution through an underwriting, we may reduce the number of shares of our common stock requested to be registered by the warrantholders upon the advice of our underwriters. If shares of our stock requested to be included in a registration must be excluded pursuant to the underwriters advice, we will register a portion of the shares requested to be registered on a pro rata basis upon the holders of our stock requesting registration.
Additional registration rights
Transferability
Expenses
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION AND BYLAWS
We are subject to Section 203 of the DGCL, which regulates acquisitions of some Delaware corporations. In general, Section 203 prohibits, with some exceptions, a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years following the date of the transaction in which the person became an interested stockholder, unless:
| the board of directors of the corporation approved the business combination or the other transaction in which the person became an interested stockholder prior to the date of the business combination or other transaction; |
| upon consummation of the transaction that resulted in the person becoming an interested stockholder, the person owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding shares owned by persons who are directors and also officers of the corporation and shares issued under employee stock plans under which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or |
| on or subsequent to the date the person became an interested stockholder, the board of directors of the corporation approved the business combination and the stockholders of the corporation authorized the business combination at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding stock of the corporation not owned by the interested stockholder. |
Section 203 of the DGCL generally defines a business combination to include any of the following:
| any merger or consolidation involving the corporation and the interested stockholder; |
| any sale, transfer, pledge or other disposition of 10% or more of the corporations assets or outstanding stock involving the interested stockholder; |
| in general, any transaction that results in the issuance or transfer by the corporation of any of its stock to the interested stockholder; |
| any transaction involving the corporation that has the effect of increasing the proportionate share of its stock owned by the interested stockholder; or |
| the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. |
In general, Section 203 defines an interested stockholder as any person who, together with the persons affiliates and associates, owns, or within three years prior to the determination of interested stockholder status did own, 15% or more of a corporations voting stock.
Section 203 of the DGCL could depress our stock price and delay, discourage or prohibit transactions not approved in advance by our board of directors, such as takeover attempts that might otherwise involve the payment to our stockholders of a premium over the market price of our common stock.
Amended and restated certificate of incorporation and bylaw provisions
| Our board of directors can issue up to 10,000,000 shares of preferred stock with any rights or preferences, including the right to approve or not approve an acquisition or other change in our control. |
| Our restated certificate of incorporation provides that all stockholder actions upon completion of this offering must be effected at a duly called meeting of holders and not by written consent. |
| Our amended and restated bylaws provide that special meetings of the stockholders may be called only by the Chairman of our board of directors, by our Chief Executive Officer, by our board of directors upon a resolution adopted by a majority of the total number of authorized directors or, under certain limited circumstances, by the holders of at least 5% of our outstanding voting stock. |
| Our amended and restated bylaws provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide timely notice in writing and also specify requirements as to the form and content of a stockholders notice. These provisions may delay or preclude stockholders from bringing matters before a meeting of our stockholders or from making nominations for directors at a meeting of stockholders, which could delay or deter takeover attempts or changes in our management. |
| Our amended and restated certificate of incorporation provides that, subject to the rights of the holders of any outstanding series of preferred stock, all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum. In addition, our amended and restated certificate of incorporation provides that our board of directors may fix the number of directors by resolution. |
| Our amended and restated certificate of incorporation does not provide for cumulative voting for directors. The absence of cumulative voting may make it more difficult for stockholders who own an aggregate of less than a majority of our voting stock to elect any directors to our board of directors. |
These and other provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. However, these provisions could delay or discourage transactions involving an actual or potential change in control of us or our management, including transactions in which our stockholders might otherwise receive a premium for their shares over market price of our stock and may limit the ability of stockholders to remove our current management or approve transactions that our stockholders may deem to be in their best interests and, therefore, could adversely affect the price of our common stock.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
We have adopted provisions in our amended and restated certificate of incorporation that limit the liability of our directors for monetary damages for breach of their fiduciary duties, except for liability that cannot be eliminated under the DGCL. Delaware law permits corporations to eliminate the
personal liability of their directors for monetary damages for breach of their fiduciary duties as directors, except liability for any of the following:
| any breach of their duty of loyalty to the corporation or its stockholders; |
| acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; |
| unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL; or |
| any transaction from which the director derived an improper personal benefit. |
This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission.
Our amended and restated certificate of incorporation and our amended and restated bylaws also provide that we must indemnify our directors and executive officers and may indemnify our other officers and employees and other agents to the fullest extent permitted by law. We believe that indemnification under our bylaws covers at least negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in this capacity, regardless of whether our bylaws would permit indemnification.
We have also entered into separate indemnification agreements with our directors and executive officers. These agreements among other things, provide for indemnification of our directors and executive officers for expenses, judgments, fines and settlement amounts incurred by them in any action or proceeding arising out of their services as a director or executive officer or at our request. We believe that these provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws and the indemnification agreements are necessary in order for us to attract and retain qualified persons as directors and executive officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is expected to be Chase Mellon Investor Services. Chase Mellon Investor Services address is 400 South Hope Street, Suite 400, Los Angeles, California 90071.
NASDAQ NATIONAL MARKET LISTING
There is currently no established public trading market for our common stock. We have applied to have our common stock quoted on The Nasdaq National Market under the trading symbol MNKD.
Shares eligible for future sale
Prior to this offering, no public market existed for our common stock. Future sales of substantial amounts of common stock in the public market, or the perception that these sales could occur, could adversely affect prevailing market prices of our common stock.
Based on 19,975,089 shares of our common stock outstanding on May 31, 2004, upon completion of this offering, we will have 31,641,461 shares of common stock outstanding, assuming no exercise of currently outstanding options or warrants or the underwriters over-allotment option and assuming the conversion, upon the closing of this offering, of all shares of preferred stock into common stock. All of the shares sold in this offering, plus any additional shares sold upon exercise of the underwriters over-allotment option, will be freely transferable without restriction under the Securities Act unless they are held by our affiliates, as that term is defined under the Securities Act and the rules and regulations promulgated thereunder. The remaining shares of our common stock held by existing stockholders are restricted securities. Restricted securities may be sold in the public market only if registered under the Securities Act or if they qualify for an exemption from registration under Rule 144 or Rule 701 promulgated under the Securities Act, which are summarized below, or another exemption.
LOCK-UP AGREEMENTS
We, our executive officers and directors and our existing stockholders holding an aggregate of over 90% of the shares of our capital stock have entered into lock-up agreements with the underwriters. Under these agreements, subject to certain exceptions, we and each of these persons may not, without the prior written approval of UBS Securities LLC, offer, sell, contract to sell or otherwise dispose of, directly or indirectly, or hedge, our common stock or securities convertible into or exchangeable or exercisable for our common stock. These restrictions will be in effect for a period of 180 days after the date of this prospectus. The 180-day lock-up period may be extended for up to 37 additional days under certain circumstances where we announce or pre-announce earnings or material news or a material event within approximately 18 days prior to, or approximately 16 days after, the termination of the 180-day period. Even under those circumstances, however, the lock-up period will not extend if we are actively traded, meaning that we have a public float of at least $150.0 million and average trading volume at least $1.0 million per day. At any time and without public notice, UBS Securities LLC may, in its sole discretion, release all or some of the securities from these lock-up agreements. See Underwriting.
RULE 144
In general, under Rule 144 of the Securities Act as currently in effect, beginning 90 days after the effective date of the registration statement of which this prospectus forms a part, a person who has beneficially owned shares of our common stock that are restricted securities for at least one year, including the holding period of any prior owner other than us or one of our affiliates, would be entitled to sell the number of restricted shares within any three-month period that does not exceed the greater of:
| one percent of the number of shares of our common stock then outstanding, which will equal approximately 316,415 shares immediately after the offering; or |
| the average weekly reported trading volume of our common stock on The Nasdaq National Market during the four preceding calendar weeks. |
Sales of restricted shares under Rule 144 are also subject to requirements regarding the manner of sale, notice and the availability of current public information about us.
RULE 144(k)
Under Rule 144(k) of the Securities Act as currently in effect, a stockholder who is not one of our affiliates at any time during the 3 months preceding a sale and who has beneficially owned the restricted securities proposed to be sold for at least two years, including the holding period of any prior owner other than us or an affiliate of us, may sell those restricted securities without complying with the manner of sale, notice, public information or volume limitation provisions of Rule 144. However, these manner of sale, notice, public information and volume restrictions always apply to affiliates who sell shares in reliance on Rule 144.
RULE 701
Our directors, officers, other employees and consultants who acquired or will acquire shares of our common stock upon exercise of options granted under our equity incentive plans prior to this offering or who were granted options by AlleCure or CTL and assumed by us in connection with the Merger are entitled to rely on the resale provisions of Rule 701 under the Securities Act. Rule 701, as currently in effect, permits our affiliates and non-affiliates to sell their shares of our common stock issued pursuant to Rule 701 in reliance on Rule 144 beginning 90 days after the effective date of the registration statement of which this prospectus forms a part. Non-affiliates may sell Rule 701 shares without having to comply with the one-year holding period restrictions, subject only to the manner of sale provisions of Rule 144. Affiliates may also sell Rule 701 shares without having to comply with the one-year holding period restrictions, but they must meet the manner of sale, notice, public information and volume limitation provisions of Rule 144. However, substantially all Rule 701 shares of our common stock are subject to lock-up agreements described below and will only become eligible for sale at the expiration of the 180-day lock-up period.
SALE OF RESTRICTED SHARES
Based on the anticipated date of this offering, 26,141,461 shares of our common stock outstanding on a pro forma basis, assuming conversion of our preferred stock prior to consummation of this offering, will become eligible for sale under Rule 144 and Rule 701 without registration approximately as follows:
| approximately 6,877,892 shares of our common stock will be eligible for sale in the public market without restriction; |
| approximately 14,799,303 shares of our common stock will be eligible for sale in the public market under Rule 144 or Rule 701, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, subject to the volume, manner of sale and other limitations under those rules, approximately 10,003,587 of which are owned or controlled directly or indirectly by Mr. Mann and therefore are subject to the manner of sale, notice, public information and volume limitation provisions described above; and |
| the remaining approximately 3,061,066 shares of our common stock will become eligible for sale in the public market from time to time under Rule 144. |
The discussion above does not take into consideration the effect of lock-up agreements as described above. Additionally, of the 2,132,922 shares issuable upon exercise of options to purchase our common stock outstanding as of May 31, 2004, approximately 1,387,750 shares will be vested and eligible for sale 180 days after the effective date of this offering under Rule 701.
REGISTRATION RIGHTS
The holders of 1,048,343 shares of our common stock (after giving effect to the conversion of our Series A preferred stock and the exercise of our outstanding warrants), or their transferees, have the right in specified circumstances to require us to register their shares under the Securities Act for resale beginning 180 days from the effective date of this offering. If those holders, by exercising their demand registration rights, cause a large number of shares to be registered and sold in the public market, such sales could have an adverse effect on the market price for our common stock. In addition, if at any time we are required to include in a registration initiated either for our account or for the account of our other securityholders shares held by these holders upon the exercise of their piggyback registration rights, these sales may have an adverse effect on our ability to raise needed capital. See Description of capital stockRegistration rights.
STOCK OPTIONS AND FORM S-8 REGISTRATION STATEMENTS
As of May 31, 2004, options to purchase 126,099 shares of our common stock were outstanding under the 1991 plan, options to purchase 305,430 shares of our common stock were outstanding under the 1999 plan, options to purchase 14,366 shares of our common stock were outstanding under the AlleCure plan, options to purchase 105,981 shares of our common stock were outstanding under the CTL plan, options to purchase 1,340,074 shares of our common stock were outstanding under the 2004 equity plan and options to purchase 240,972 shares of our common stock granted outside of our equity plans were outstanding. We have reserved for issuance, effective as of the closing of this offering, 3,659,926 shares of our common stock for issuance under our 2004 equity plan, and 2,800,000 shares of our common stock for issuance under our directors plan and purchase plan.
We intend to register the shares subject to these plans and the options on a registration statement on Form S-8 under the Securities Act following this offering. Subject to the lock-up agreements, the restrictions imposed under the 1991 plan, the 1999 plan, the AlleCure plan, the CTL plan, the 2004 equity plan and related option agreements, shares of common stock issued under these plans or agreements after the effective date of any registration statement on Form S-8 will be available for sale in the public market without restriction to the extent that they are held by persons who are not our affiliates.
Underwriting
We are offering the shares of our common stock described in this prospectus through the underwriters named below. UBS Securities LLC, Piper Jaffray & Co., Wachovia Capital Markets, LLC, Jefferies & Company, Inc. and Harris Nesbitt Corp. are the representatives of the underwriters. UBS Securities LLC is the sole book-running manager for this offering. We have entered into an agreement with the representatives. Subject to the terms and conditions of the underwriting agreement, each of the underwriters has severally agreed to purchase the number of shares of common stock listed next to its name in the following table:
Number of | |||
Underwriters | shares | ||
UBS Securities LLC
|
|||
Piper Jaffray & Co.
|
|||
Wachovia Capital Markets, LLC
|
|||
Jefferies & Company, Inc.
|
|||
Harris Nesbitt Corp.
|
|||
Total
|
5,500,000 | ||
The underwriting agreement provides that the underwriters must buy all of the shares if they buy any of them. However, the underwriters are not required to take or pay for the shares covered by the underwriters over-allotment option described below.
Our common stock is offered subject to a number of conditions, including:
| receipt and acceptance of our common stock by the underwriters; and |
| the underwriters right to reject orders in whole or in part. |
We have been advised by the representatives that the underwriters intend to make a market in our common stock but that they are not obligated to do so and may discontinue making a market at any time without notice.
In connection with this offering certain of the underwriters or securities dealers may distribute prospectus electronically.
Sales of shares made outside the United States may be made by affiliates of the underwriters.
OVER-ALLOTMENT OPTION
We have granted the underwriters an option to buy 825,000 additional shares of our common stock. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with this offering. The underwriters have 30 days from the date of this prospectus to exercise this option. If the underwriters exercise this option they will each purchase additional shares approximately in proportion to the amounts specified in the table above.
COMMISSIONS AND DISCOUNTS
Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any of these securities dealers may resell any shares purchased from the underwriters to other brokers or dealers at a discount of up to $ per share from the initial public offering price. If all the shares are not sold
at the initial public offering price, the representatives may change the offering price and the other selling terms. Upon execution of the underwriting agreement, the underwriters will be obligated to purchase the shares at the prices and upon the terms stated therein and, as a result, will thereafter bear any risk associated with changing the offering price to the public or other selling terms. The underwriters have informed us that they do not expect discretionary sales to exceed 5% of the shares of common stock to be offered.
The following table shows the per share and total underwriting discounts and commissions we will pay to the underwriters assuming both no exercise and full exercise of the underwriters option to purchase up to 825,000 additional shares.
No exercise | Full exercise | ||||||||
Per share
|
$ | $ | |||||||
Total
|
$ | $ |
We estimate that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately $1,800,000.
NO SALES OF SIMILAR SECURITIES
We, our executive officers and directors and our existing stockholders holding an aggregate of over 90% of the shares of our capital stock have entered into lock-up agreements with the underwriters. Under these agreements, subject to certain exceptions, we and each of these persons may not, without the prior written approval of UBS Securities LLC, offer, sell, contract to sell or otherwise dispose of, directly or indirectly, or hedge, our common stock or securities convertible into or exchangeable or exercisable for our common stock. These restrictions will be in effect for a period of 180 days after the date of this prospectus. The 180-day lock-up period may be extended for up to 37 additional days under certain circumstances where we announce or pre-announce earnings or material news or a material event within approximately 18 days prior to, or approximately 16 days after, the termination of the 180-day period. Even under those circumstances, however, the lock-up period will not extend if we are actively traded, meaning that we have a public float of at least $150.0 million and average trading volume at least $1.0 million per day. At any time and without public notice, UBS Securities LLC may, in its sole discretion, release all or some of the securities from these lock-up agreements.
INDEMNIFICATION
We have agreed to indemnify the underwriters against certain liabilities, including certain liabilities under the Securities Act. If we are unable to provide this indemnification, we have agreed to contribute to payments the underwriters may be required to make in respect of those liabilities.
NASDAQ NATIONAL MARKET QUOTATION
We have applied to have our common stock approved for quotation on The Nasdaq National Market under the trading symbol MNKD.
PRICE STABILIZATION, SHORT POSITIONS, PASSIVE MARKET MAKING
In connection with this offering, the underwriters may engage in activities that stabilize, maintain or otherwise affect the price of our common stock, including:
| stabilizing transactions; |
| short sales; |
| purchases to cover positions created by short sales; |
| imposition of penalty bids; |
| syndicate covering transactions; and |
| passive market making. |
Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress. These transactions may also include short sales of our common stock, which involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering and purchasing shares of common stock in the open market to cover positions created by short sales. Short sales may be covered short sales, which are short positions in an amount not greater than the underwriters over-allotment option referred to above, or may be naked short sales, which are short positions in excess of that amount.
The underwriters may close out any covered short position by either exercising their over-allotment option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option.
Naked short sales are sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchased in this offering.
The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions.
As a result of these activities, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. The underwriters may carry out these transactions on The Nasdaq National Market, in the over-the-counter market or otherwise.
DETERMINATION OF OFFERING PRICE
Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiation by us and the representatives of the underwriters. The principal factors to be considered in determining the initial public offering price include:
| the information set forth in this prospectus and otherwise available to the representatives; |
| the history of, and the prospects for, the industries in which we compete; |
| our past and present financial performance and an assessment of our management; |
| our prospects for future earnings and the present state of our development; |
| the general condition of the securities markets at the time of this offering; |
| the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies; and |
| other factors deemed relevant by the underwriters and us. |
DIRECTED SHARE PROGRAM
At our request, certain of the underwriters have reserved up to 30% of the common stock being offered by this prospectus for sale at the initial public offering price to our directors, officers, employees and other individuals associated with us and members of their families. The sales will be made by UBS Financial Services Inc., a selected dealer affiliated with UBS Securities LLC, through a directed share program. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. Certain employees and other persons purchasing these reserved shares will be prohibited from disposing of or hedging the shares for a period of at least 180 days after the date of this prospectus.
AFFILIATIONS
Certain of the underwriters and their affiliates have provided in the past and may provide from time to time certain commercial banking, financial advisory, investment banking and other services for us for which they will be entitled to receive separate fees. The underwriters may, from time to time, engage in transactions with us and perform services for us in the ordinary course of their business.
Legal matters
The validity of our shares of common stock being offered by this prospectus and certain other legal matters will be passed upon for us by Cooley Godward LLP, San Diego, California. Dewey Ballantine LLP, East Palo Alto, California, is counsel for the underwriters in connection with this offering.
Experts
The financial statements included in this prospectus, and the financial statements from which the Selected financial data included in this prospectus have been derived, have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such financial statements and Selected financial data have been included herein in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
Where you can find additional information
We have filed with the SEC a registration statement on Form S-1 under the Securities Act that registers the shares of our common stock to be sold in this offering. This prospectus does not contain all of the information in the registration statement, including the exhibits and schedules filed with the registration statement. The rules and regulations of the SEC allow us to omit from this prospectus certain information included in the registration statement. For further information about us and our common stock, you should refer to the registration statement and the exhibits and schedules filed with the registration statement. With respect to the statements contained in this prospectus regarding the contents of any agreement or any other document, in each instance, the statement is qualified in all respects by the complete text of the agreement or document, a copy of which has been filed as an exhibit to the registration statement of which this prospectus forms a part. You may obtain copies of any materials we file with the SEC at the SECs Public Reference Room at 450 Fifth Street, N.W., Washington, DC 20549, at prescribed rates. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information about issuers that file electronically with the SEC. The address of that website is http://www.sec.gov.
Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended. Under the Exchange Act, we will file annual, quarterly and current reports, as well as proxy statements and other information with the SEC. These periodic reports, proxy statements and other information will be available for inspection and copying at the SECs Public Reference Room and the website of the SEC referred to above.
MannKind Corporation and Subsidiary (A Development Stage Company)
Page | ||||
Report of Independent Registered Public
Accounting Firm
|
F-2 | |||
Consolidated Balance Sheets
|
F-3 | |||
Statements of Operations
|
F-4 | |||
Statements of Stockholders Equity (Deficit)
|
F-5 | |||
Statements of Cash Flows
|
F-9 | |||
Notes to Financial Statements
|
F-11 |
Report of Independent Registered Public Accounting Firm
Board of Directors
We have audited the accompanying consolidated balance sheets of MannKind Corporation and subsidiaries (a development stage company) (the Company) as of December 31, 2002 and 2003 and the related statements of operations, stockholders equity (deficit) and cash flows for each of the three years in the period ended December 31, 2003 and for the period from February 14, 1991 (date of inception) to December 31, 2003. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of MannKind Corporation and subsidiaries at December 31, 2002 and 2003 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 and for the period from February 14, 1991 (date of inception) to December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.
Los Angeles, California
(July 22, 2004 as to the fifth paragraph of Note 1)
DELOITTE & TOUCHE LLP
MannKind Corporation and Subsidiary (A Development Stage Company)
Pro forma | ||||||||||||||||||
Stockholders | ||||||||||||||||||
December 31, | Equity at | |||||||||||||||||
March 31, | March 31, | |||||||||||||||||
2002 | 2003 | 2004 | 2004 | |||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||
Assets
|
||||||||||||||||||
Current assets:
|
||||||||||||||||||
Cash and cash equivalents
|
$ | 19,917 | $ | 54,120 | $ | 56,111 | ||||||||||||
Marketable securities
|
11,135 | 1,825 | 3,194 | |||||||||||||||
Prepaid expenses and other current assets
|
949 | 1,859 | 1,917 | |||||||||||||||
Total current assets
|
32,001 | 57,804 | 61,222 | |||||||||||||||
Property and equipmentnet
|
72,675 | 67,323 | 66,881 | |||||||||||||||
Restricted cash
|
| 559 | 559 | |||||||||||||||
Other assets
|
97 | 190 | 104 | |||||||||||||||
Total
|
$ | 104,773 | $ | 125,876 | $ | 128,766 | ||||||||||||
Liabilities and stockholders equity | ||||||||||||||||||
Current liabilities:
|
||||||||||||||||||
Accounts payable
|
$ | 4,209 | $ | 1,926 | $ | 2,329 | ||||||||||||
Accrued expenses and other current liabilities
|
1,757 | 4,015 | 4,947 | |||||||||||||||
Payable to stockholder
|
| 1,406 | | |||||||||||||||
Deferred compensationcurrent
|
1,864 | 1,360 | 1,360 | |||||||||||||||
Total current liabilities
|
7,830 | 8,707 | 8,636 | |||||||||||||||
Deferred compensation
|
| 284 | 284 | |||||||||||||||
Other liabilities
|
207 | 120 | 163 | |||||||||||||||
Total liabilities
|
8,037 | 9,111 | 9,083 | |||||||||||||||
Commitments and contingencies
|
||||||||||||||||||
Series A redeemable convertible preferred stock, $0.01 par value267,213 shares authorized; 267,212, issued and outstanding at December 31, 2002 and 2003 and March 31, 2004 (unaudited), respectively; aggregate liquidation value, $5,188 as of December 31, 2003 and $5,252 as of March 31, 2004 (unaudited) | 4,935 | 5,188 | 5,252 | |||||||||||||||
Common stock subject to repurchase
|
1,028 | | | |||||||||||||||
Stockholders equity:
|
||||||||||||||||||
Series B convertible preferred stock, $0.01 par value192,618 shares authorized, issued and outstanding at December 31, 2002 and 2003 and March 31, 2004 (unaudited), respectively; aggregate liquidation value, $15,000 at December 31, 2003 and March 31, 2004 (unaudited) | 15,000 | 15,000 | 15,000 | | ||||||||||||||
Series C convertible preferred stock issuable | | 50,000 | | | ||||||||||||||
Series C convertible preferred stock subscriptions receivable | | (18,153 | ) | | | |||||||||||||
Series C convertible preferred stock, $.01 par value 980,393 shares authorized; 980,392 shares issued and outstanding at March 31, 2004 (unaudited), aggregate liquidation value of $50,000 at March 31, 2004 (unaudited) | | | 50,000 | | ||||||||||||||
Common stock, $0.01 par value100,000,000 shares authorized; 16,463,904, 19,974,727, 19,975,089 and 26,141,461 shares issued and outstanding at December 31, 2002, 2003, March 31, 2004 (unaudited) and March 31, 2004 (pro forma unaudited), respectively | 165 | 200 | 200 | 261 | ||||||||||||||
Additional paid-in capital
|
378,010 | 433,141 | 434,202 | 504,393 | ||||||||||||||
Notes receivable from stockholders
|
(1,310 | ) | (1,412 | ) | (1,438 | ) | (1,438 | ) | ||||||||||
Notes receivable from officers
|
| (228 | ) | (153 | ) | (153 | ) | |||||||||||
Deficit accumulated during the development stage
|
(301,092 | ) | (366,971 | ) | (383,380 | ) | (383,380 | ) | ||||||||||
Total stockholders equity
|
90,773 | 111,577 | 114,431 | 119,683 | ||||||||||||||
Total
|
$ | 104,773 | $ | 125,876 | $ | 128,766 | $ | 128,766 | ||||||||||
See notes to financial statements.
MannKind Corporation and Subsidiary (A Development Stage Company)
Cumulative period | Cumulative period | |||||||||||||||||||||||||||||
from | Three Months | from | ||||||||||||||||||||||||||||
February 14, 1991 | Ended | February 14, 1991 | ||||||||||||||||||||||||||||
Year ended December 31, | (date of inception) | March 31, | (date of inception) | |||||||||||||||||||||||||||
to December 31, | to March 31, | |||||||||||||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2003 | 2004 | 2004 | ||||||||||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||||||||||
Revenue
|
$ | 326 | $ | | $ | | $ | 2,858 | $ | | $ | | $ | 2,858 | ||||||||||||||||
Operating expenses:
|
||||||||||||||||||||||||||||||
Research and development
|
19,763 | 42,724 | 45,613 | 143,647 | 11,564 | 12,799 | 156,446 | |||||||||||||||||||||||
General and administrative
|
10,629 | 13,215 | 20,699 | 57,457 | 8,807 | 3,769 | 61,226 | |||||||||||||||||||||||
In-process research and development costs
|
19,726 | | | 19,726 | | | 19,726 | |||||||||||||||||||||||
Goodwill impairment
|
| 151,428 | | 151,428 | | | 151,428 | |||||||||||||||||||||||
Total operating expenses
|
50,118 | 207,367 | 66,312 | 372,258 | 20,371 | 16,568 | 388,826 | |||||||||||||||||||||||
Loss from operations
|
(49,792 | ) | (207,367 | ) | (66,312 | ) | (369,400 | ) | (20,371 | ) | (16,568 | ) | (385,968 | ) | ||||||||||||||||
Other income (expense)
|
288 | 487 | (25 | ) | (2,196 | ) | (51 | ) | 54 | (2,142 | ) | |||||||||||||||||||
Interest income
|
1,261 | 617 | 459 | 4,639 | 86 | 105 | 4,744 | |||||||||||||||||||||||
Loss before provision for income taxes
|
(48,243 | ) | (206,263 | ) | (65,878 | ) | (366,957 | ) | (20,336 | ) | (16,409 | ) | (383,366 | ) | ||||||||||||||||
Income taxes
|
(2 | ) | (2 | ) | (1 | ) | (14 | ) | (14 | ) | ||||||||||||||||||||
Net loss
|
(48,245 | ) | (206,265 | ) | (65,879 | ) | (366,971 | ) | (20,336 | ) | (16,409 | ) | (383,380 | ) | ||||||||||||||||
Deemed dividend related to beneficial conversion
feature of convertible preferred stock
|
| (1,421 | ) | (1,017 | ) | (2,438 | ) | | (612 | ) | (3,050 | ) | ||||||||||||||||||
Accretion on redeemable preferred stock
|
(239 | ) | (251 | ) | (253 | ) | (892 | ) | (60 | ) | (64 | ) | (956 | ) | ||||||||||||||||
Net loss applicable to common stockholders
|
$ | (48,484 | ) | $ | (207,937 | ) | $ | (67,149 | ) | $ | (370,301 | ) | $ | (20,396 | ) | $ | (17,085 | ) | $ | (387,386 | ) | |||||||||
Basic and diluted net loss per share:
|
||||||||||||||||||||||||||||||
Historical
|
$ | (4.60 | ) | $ | (15.43 | ) | $ | (3.63 | ) | $ | (1.24 | ) | $ | (0.86 | ) | |||||||||||||||
Pro Forma (unaudited)
|
$ | (3.34 | ) | $ | (0.71 | ) | ||||||||||||||||||||||||
Shares used to compute basic and diluted net loss
per share:
|
||||||||||||||||||||||||||||||
Historical
|
10,534 | 13,472 | 18,488 | 16,466 | 19,975 | |||||||||||||||||||||||||
Pro Forma (unaudited)
|
20,107 | 24,218 | ||||||||||||||||||||||||||||
See notes to financial statements.
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
Series C | |||||||||||||||||||||||||
Series B | Series C | Series C | convertible | ||||||||||||||||||||||
convertible | convertible | convertible | preferred | ||||||||||||||||||||||
preferred stock | preferred stock | preferred | stock | ||||||||||||||||||||||
stock | subscriptions | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | issuable | receivable | ||||||||||||||||||||
BALANCE, FEBRUARY 14, 1991
|
|||||||||||||||||||||||||
Issuance of common stock for cash
|
| $ | | | $ | | $ | | $ | | |||||||||||||||
Net loss
|
| | | | | | |||||||||||||||||||
BALANCE, FEBRUARY 29, 1992
|
| | | | | | |||||||||||||||||||
Issuance of common stock for cash and services
|
| | | | | | |||||||||||||||||||
Capital contribution
|
| | | | | | |||||||||||||||||||
Net loss
|
| | | | | | |||||||||||||||||||
BALANCE, FEBRUARY 28, 1993
|
| | | | | | |||||||||||||||||||
Issuance of common stock for cash
|
| | | | | | |||||||||||||||||||
Issuance of stock for notes receivable
|
| | | | | | |||||||||||||||||||
Net loss
|
| | | | | | |||||||||||||||||||
BALANCE, FEBRUARY 28, 1994
|
| | | | | | |||||||||||||||||||
Issuance of common stock for cash and services
|
| | | | | | |||||||||||||||||||
Collection of stock subscription
|
| | | | | | |||||||||||||||||||
Net loss
|
| | | | | | |||||||||||||||||||
BALANCE, DECEMBER 31, 1994
|
| | | | | | |||||||||||||||||||
Issuance of common stock for services
|
| | | | | | |||||||||||||||||||
Exercise of stock options
|
| | | | | | |||||||||||||||||||
Stock compensation
|
| | | | | | |||||||||||||||||||
Net loss
|
| | | | | | |||||||||||||||||||
BALANCE, DECEMBER 31, 1995
|
| | | | | | |||||||||||||||||||
Issuance of common stock for cash and services
|
| | | | | | |||||||||||||||||||
Exercise of stock options
|
| | | | | | |||||||||||||||||||
Stock compensation
|
| | | | | | |||||||||||||||||||
Net loss
|
| | | | | | |||||||||||||||||||
BALANCE, DECEMBER 31, 1996
|
| | | | | | |||||||||||||||||||
Issuance of common stock for cash and services
|
| | | | | | |||||||||||||||||||
Stock compensation
|
| | | | | | |||||||||||||||||||
Exercise of stock options
|
| | | | | | |||||||||||||||||||
Conversion of notes payable
|
| | | | | | |||||||||||||||||||
Net loss
|
| | | | | | |||||||||||||||||||
BALANCE, DECEMBER 31, 1997
|
| | | | | | |||||||||||||||||||
Issuance of common stock for cash and services
|
| | | | | | |||||||||||||||||||
Stock compensation
|
| | | | | | |||||||||||||||||||
Exercise of stock options
|
| | | | | | |||||||||||||||||||
Conversion of notes payable
|
| | | | | | |||||||||||||||||||
Net loss
|
| | | | | | |||||||||||||||||||
[Additional columns below]
[Continued from above table, first column(s) repeated]
Deficit | |||||||||||||||||||||||||||||
Notes | Notes | accumulated | |||||||||||||||||||||||||||
Common stock | Additional | receivable | receivable | during the | |||||||||||||||||||||||||
paid-in | from | from | development | ||||||||||||||||||||||||||
Shares | Amount | capital | stockholders | officers | stage | Total | |||||||||||||||||||||||
BALANCE, FEBRUARY 14, 1991
|
|||||||||||||||||||||||||||||
Issuance of common stock for cash
|
998 | $ | 10 | $ | 890 | $ | | $ | | $ | | $ | 900 | ||||||||||||||||
Net loss
|
| | | | | (911 | ) | (911 | ) | ||||||||||||||||||||
BALANCE, FEBRUARY 29, 1992
|
998 | 10 | 890 | | | (911 | ) | (11 | ) | ||||||||||||||||||||
Issuance of common stock for cash and services
|
73 | 1 | 887 | | | | 888 | ||||||||||||||||||||||
Capital contribution
|
| | 20 | | | | 20 | ||||||||||||||||||||||
Net loss
|
| | | | | (1,175 | ) | (1,175 | ) | ||||||||||||||||||||
BALANCE, FEBRUARY 28, 1993
|
1,071 | 11 | 1,797 | | | (2,086 | ) | (278 | ) | ||||||||||||||||||||
Issuance of common stock for cash
|
11 | | 526 | | | | 526 | ||||||||||||||||||||||
Issuance of stock for notes receivable
|
8 | | 400 | (400 | ) | | | | |||||||||||||||||||||
Net loss
|
| | | | (1,156 | ) | (1,156 | ) | |||||||||||||||||||||
BALANCE, FEBRUARY 28, 1994
|
1,090 | 11 | 2,723 | (400 | ) | | (3,242 | ) | (908 | ) | |||||||||||||||||||
Issuance of common stock for cash and services
|
36 | | 1,805 | | | | 1,805 | ||||||||||||||||||||||
Collection of stock subscription
|
| | | 400 | | | 400 | ||||||||||||||||||||||
Net loss
|
| | | | | (2,004 | ) | (2,004 | ) | ||||||||||||||||||||
BALANCE, DECEMBER 31, 1994
|
1,126 | 11 | 4,528 | | | (5,246 | ) | (707 | ) | ||||||||||||||||||||
Issuance of common stock for services
|
| | 8 | | | | 8 | ||||||||||||||||||||||
Exercise of stock options
|
1 | | 22 | | | | 22 | ||||||||||||||||||||||
Stock compensation
|
| | 384 | | | | 384 | ||||||||||||||||||||||
Net loss
|
| | | | | (2,815 | ) | (2,815 | ) | ||||||||||||||||||||
BALANCE, DECEMBER 31, 1995
|
1,127 | 11 | 4,942 | | | (8,061 | ) | (3,108 | ) | ||||||||||||||||||||
Issuance of common stock for cash and services
|
1 | | 59 | | | | 59 | ||||||||||||||||||||||
Exercise of stock options
|
3 | | 12 | | | | 12 | ||||||||||||||||||||||
Stock compensation
|
| | 126 | | | | 126 | ||||||||||||||||||||||
Net loss
|
| | | | | (2,570 | ) | (2,570 | ) | ||||||||||||||||||||
BALANCE, DECEMBER 31, 1996
|
1,131 | 11 | 5,139 | | | (10,631 | ) | (5,481 | ) | ||||||||||||||||||||
Issuance of common stock for cash and services
|
548 | 6 | 190 | | | | 196 | ||||||||||||||||||||||
Stock compensation
|
| | 2 | | | | 2 | ||||||||||||||||||||||
Exercise of stock options
|
27 | | 135 | | | | 135 | ||||||||||||||||||||||
Conversion of notes payable
|
12 | | 60 | | | | 60 | ||||||||||||||||||||||
Net loss
|
| | | | | (2,280 | ) | (2,280 | ) | ||||||||||||||||||||
BALANCE, DECEMBER 31, 1997
|
1,718 | 17 | 5,526 | | | (12,911 | ) | (7,368 | ) | ||||||||||||||||||||
Issuance of common stock for cash and services
|
2,253 | 23 | 12,703 | | | | 12,726 | ||||||||||||||||||||||
Stock compensation
|
| | 150 | | | | 150 | ||||||||||||||||||||||
Exercise of stock options
|
68 | 1 | 24 | | | | 25 | ||||||||||||||||||||||
Conversion of notes payable
|
215 | 2 | 1,200 | | | | 1,202 | ||||||||||||||||||||||
Net loss
|
| | | | | (3,331 | ) | (3,331 | ) | ||||||||||||||||||||
Series C | |||||||||||||||||||||||||
Series B | Series C | Series C | convertible | ||||||||||||||||||||||
convertible | convertible | convertible | preferred | ||||||||||||||||||||||
preferred stock | preferred stock | preferred | stock | ||||||||||||||||||||||
stock | subscriptions | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | issuable | receivable | ||||||||||||||||||||
BALANCE, DECEMBER 31, 1998
|
| $ | | | $ | | $ | | $ | | |||||||||||||||
Issuance of common stock
|
|||||||||||||||||||||||||
Conversion of notes payable
|
|||||||||||||||||||||||||
Net loss
|
|||||||||||||||||||||||||
BALANCE, DECEMBER 31, 1999
|
| | | | | | |||||||||||||||||||
Conversion of notes payable
|
| | | | | | |||||||||||||||||||
Issuance of Series B preferred stock for cash
|
193 | 15,000 | | | | | |||||||||||||||||||
Issuance of common stock for cash, services and
notes
|
| | | | | | |||||||||||||||||||
Discount on notes below market rate
|
| | | | | | |||||||||||||||||||
Accrued interest on notes
|
| | | | | | |||||||||||||||||||
Purchase of Series A redeemable convertible
preferred stock
|
| | | | | | |||||||||||||||||||
Amount in excess of redemption obligation
|
| | | | | | |||||||||||||||||||
Accretion to redemption value on Series A
redeemable convertible preferred stock
|
| | | | | | |||||||||||||||||||
Stock-based compensation
|
| | | | | | |||||||||||||||||||
Net loss
|
| | | | | | |||||||||||||||||||
BALANCE, DECEMBER 31, 2000
|
193 | 15,000 | | | | | |||||||||||||||||||
Issuance of common stock for cash
|
| | | | | | |||||||||||||||||||
Cash received for common stock to be issued
|
| | | | | | |||||||||||||||||||
Issuance of common stock for services
|
| | | | | | |||||||||||||||||||
Exercise of stock options
|
| | | | | | |||||||||||||||||||
Accrued interest on notes
|
| | | | | | |||||||||||||||||||
Payments on notes receivable
|
| | | | | | |||||||||||||||||||
Accretion to redemption value on Series A
redeemable convertible preferred stock
|
| | | | | | |||||||||||||||||||
Stock-based compensation
|
| | | | | | |||||||||||||||||||
Issuance of put option by stockholder
|
| | | | | | |||||||||||||||||||
Record merger of entities
|
| | | | | | |||||||||||||||||||
Net loss
|
| | | | | | |||||||||||||||||||
BALANCE, DECEMBER 31, 2001
|
193 | 15,000 | | | | | |||||||||||||||||||
Issuance of common stock for cash
|
| | | | | | |||||||||||||||||||
Issuance of common stock for cash already received
|
| | | | | | |||||||||||||||||||
Issuance of stock award to employee
|
| | | | | | |||||||||||||||||||
Cash received for common stock issuable
|
| | | | | | |||||||||||||||||||
Accrued interest on notes
|
| | | | | |
[Additional columns below]
[Continued from above table, first column(s) repeated]
Deficit | |||||||||||||||||||||||||||||
Notes | Notes | accumulated | |||||||||||||||||||||||||||
Common stock | Additional | receivable | receivable | during the | |||||||||||||||||||||||||
paid-in | from | from | development | ||||||||||||||||||||||||||
Shares | Amount | capital | stockholders | officers | stage | Total | |||||||||||||||||||||||
BALANCE, DECEMBER 31, 1998
|
4,254 | $ | 43 | $ | 19,603 | $ | | $ | | $ | (16,242 | ) | $ | 3,404 | |||||||||||||||
Issuance of common stock
|
162 | 2 | 532 | 534 | |||||||||||||||||||||||||
Conversion of notes payable
|
80 | 1 | 994 | 995 | |||||||||||||||||||||||||
Net loss
|
(5,679 | ) | (5,679 | ) | |||||||||||||||||||||||||
BALANCE, DECEMBER 31, 1999
|
4,496 | 46 | 21,129 | | | (21,921 | ) | (746 | ) | ||||||||||||||||||||
Conversion of notes payable
|
63 | 1 | 1,073 | | | | 1,074 | ||||||||||||||||||||||
Issuance of Series B preferred stock for cash
|
| | | | | | 15,000 | ||||||||||||||||||||||
Issuance of common stock for cash, services and
notes
|
4,690 | 46 | 33,945 | (2,358 | ) | | | 31,633 | |||||||||||||||||||||
Discount on notes below market rate
|
| | | 241 | | | 241 | ||||||||||||||||||||||
Accrued interest on notes
|
| | | (117 | ) | | | (117 | ) | ||||||||||||||||||||
Purchase of Series A redeemable convertible
preferred stock
|
| | (993 | ) | | | | (993 | ) | ||||||||||||||||||||
Amount in excess of redemption obligation
|
| | 999 | | | | 999 | ||||||||||||||||||||||
Accretion to redemption value on Series A
redeemable convertible preferred stock
|
| | (149 | ) | | | | (149 | ) | ||||||||||||||||||||
Stock-based compensation
|
| | 9,609 | | | | 9,609 | ||||||||||||||||||||||
Net loss
|
| | | | | (24,661 | ) | (24,661 | ) | ||||||||||||||||||||
BALANCE, DECEMBER 31, 2000
|
9,249 | 93 | 65,613 | (2,234 | ) | | (46,582 | ) | 31,890 | ||||||||||||||||||||
Issuance of common stock for cash
|
3,052 | 30 | 78,000 | | | | 78,030 | ||||||||||||||||||||||
Cash received for common stock to be issued
|
| | 3,900 | | | | 3,900 | ||||||||||||||||||||||
Issuance of common stock for services
|
3 | | 60 | | | | 60 | ||||||||||||||||||||||
Exercise of stock options
|
1 | | 13 | | | | 13 | ||||||||||||||||||||||
Accrued interest on notes
|
| | | (189 | ) | | | (189 | ) | ||||||||||||||||||||
Payments on notes receivable
|
| | | 28 | | | 28 | ||||||||||||||||||||||
Accretion to redemption value on Series A
redeemable convertible preferred stock
|
| | (239 | ) | | | | (239 | ) | ||||||||||||||||||||
Stock-based compensation
|
| | 1,565 | | | | 1,565 | ||||||||||||||||||||||
Issuance of put option by stockholder
|
| | (2,949 | ) | | | | (2,949 | ) | ||||||||||||||||||||
Record merger of entities
|
| | 171,154 | | | | 171,154 | ||||||||||||||||||||||
Net loss
|
| | | | | (48,245 | ) | (48,245 | ) | ||||||||||||||||||||
BALANCE, DECEMBER 31, 2001
|
12,305 | 123 | 317,117 | (2,395 | ) | | (94,827 | ) | 235,018 | ||||||||||||||||||||
Issuance of common stock for cash
|
3,922 | 40 | 58,775 | | | | 58,815 | ||||||||||||||||||||||
Issuance of common stock for cash already received
|
234 | 2 | (2 | ) | | | | | |||||||||||||||||||||
Issuance of stock award to employee
|
3 | | 84 | | | | 84 | ||||||||||||||||||||||
Cash received for common stock issuable
|
| | 98 | | | | 98 | ||||||||||||||||||||||
Accrued interest on notes
|
| | | (229 | ) | | | (229 | ) |
Series C | |||||||||||||||||||||||||
Series B | Series C | Series C | convertible | ||||||||||||||||||||||
convertible | convertible | convertible | preferred | ||||||||||||||||||||||
preferred stock | preferred stock | preferred | stock | ||||||||||||||||||||||
stock | subscriptions | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | issuable | receivable | ||||||||||||||||||||
Payments on notes receivable
|
| $ | | | $ | | $ | | $ | | |||||||||||||||
Beneficial conversion feature of Series B
convertible preferred stock
|
| | | | | | |||||||||||||||||||
Deemed dividend related to beneficial conversion
feature of Series B convertible preferred stock
|
| | | | | | |||||||||||||||||||
Accretion to redemption value on Series A
redeemable convertible preferred stock
|
| | | | | | |||||||||||||||||||
Stock-based compensation
|
| | | | | | |||||||||||||||||||
Put option redemption by stockholder
|
| | | | | | |||||||||||||||||||
Net loss
|
| | | | | | |||||||||||||||||||
BALANCE, DECEMBER 31, 2002
|
193 | 15,000 | | | | | |||||||||||||||||||
Issuance of Series C convertible preferred
stock subscriptions
|
| | | | 50,000 | (50,000 | ) | ||||||||||||||||||
Cash collected on Series C convertible
preferred stock subscriptions
|
| | | | | 31,847 | |||||||||||||||||||
Issuance of common stock for cash
|
| | | | | | |||||||||||||||||||
Non-cash compensation expense of officer
resulting from stockholder contribution
|
| | | | | | |||||||||||||||||||
Issuance of common stock for cash already received
|
| | | | | | |||||||||||||||||||
Notes receivable by stockholder issued to officers
|
| | | | | | |||||||||||||||||||
Accrued interest on notes
|
| | | | | | |||||||||||||||||||
Beneficial conversion feature of Series B
convertible preferred stock
|
| | | | | | |||||||||||||||||||
Deemed dividend related to beneficial conversion
feature of Series B convertible preferred stock
|
| | | | | | |||||||||||||||||||
Accretion to redemption value on Series A
redeemable convertible preferred stock
|
| | | | | | |||||||||||||||||||
Stock-based compensation
|
| | | | | | |||||||||||||||||||
Put shares sold to majority stockholder
|
| | | | | | |||||||||||||||||||
Net loss
|
| | | | | | |||||||||||||||||||
BALANCE, DECEMBER 31, 2003
|
193 | $ | 15,000 | | $ | | $ | 50,000 | $ | (18,153 | ) |
[Additional columns below]
[Continued from above table, first column(s) repeated]
Deficit | |||||||||||||||||||||||||||||
Notes | Notes | accumulated | |||||||||||||||||||||||||||
Common stock | Additional | receivable | receivable | during the | |||||||||||||||||||||||||
paid-in | from | from | development | ||||||||||||||||||||||||||
Shares | Amount | capital | stockholders | officers | stage | Total | |||||||||||||||||||||||
Payments on notes receivable
|
| $ | | $ | | $ | 1,314 | $ | | $ | | $ | 1,314 | ||||||||||||||||
Beneficial conversion feature of Series B
convertible preferred stock
|
| | 1,421 | | | | 1,421 | ||||||||||||||||||||||
Deemed dividend related to beneficial conversion
feature of Series B convertible preferred stock
|
| | (1,421 | ) | | | | (1,421 | ) | ||||||||||||||||||||
Accretion to redemption value on Series A
redeemable convertible preferred stock
|
| | (251 | ) | | | | (251 | ) | ||||||||||||||||||||
Stock-based compensation
|
| | 268 | | | | 268 | ||||||||||||||||||||||
Put option redemption by stockholder
|
| | 1,921 | | | | 1,921 | ||||||||||||||||||||||
Net loss
|
| | | | | (206,265 | ) | (206,265 | ) | ||||||||||||||||||||
BALANCE, DECEMBER 31, 2002
|
16,464 | 165 | 378,010 | (1,310 | ) | | (301,092 | ) | 90,773 | ||||||||||||||||||||
Issuance of Series C convertible preferred
stock subscriptions
|
| | | | | | | ||||||||||||||||||||||
Cash collected on Series C convertible
preferred stock subscriptions
|
| | | | | | 31,847 | ||||||||||||||||||||||
Issuance of common stock for cash
|
3,494 | 35 | 49,965 | | | | 50,000 | ||||||||||||||||||||||
Non-cash compensation expense of officer
resulting from stockholder contribution
|
| | 70 | | | | 70 | ||||||||||||||||||||||
Issuance of common stock for cash already received
|
17 | | | | | | | ||||||||||||||||||||||
Notes receivable by stockholder issued to officers
|
| | 225 | | (225 | ) | |||||||||||||||||||||||
Accrued interest on notes
|
| | | (102 | ) | (3 | ) | | (105 | ) | |||||||||||||||||||
Beneficial conversion feature of Series B
convertible preferred stock
|
| | 1,017 | | | | 1,017 | ||||||||||||||||||||||
Deemed dividend related to beneficial conversion
feature of Series B convertible preferred stock
|
| | (1,017 | ) | | | | (1,017 | ) | ||||||||||||||||||||
Accretion to redemption value on Series A
redeemable convertible preferred stock
|
| | (253 | ) | | | | (253 | ) | ||||||||||||||||||||
Stock-based compensation
|
| | 4,501 | | | | 4,501 | ||||||||||||||||||||||
Put shares sold to majority stockholder
|
| | 623 | | | | 623 | ||||||||||||||||||||||
Net loss
|
| | | | | (65,879 | ) | (65,879 | ) | ||||||||||||||||||||
BALANCE, DECEMBER 31, 2003
|
19,975 | $ | 200 | $ | 433,141 | $ | (1,412 | ) | $ | (228 | ) | $ | (366,971 | ) | $ | 111,577 |
Series C | ||||||||||||||||||||||||
Series B | Series C | Series C | convertible | |||||||||||||||||||||
convertible | convertible | convertible | preferred | |||||||||||||||||||||
preferred stock | preferred stock | preferred | stock | |||||||||||||||||||||
stock | subscriptions | |||||||||||||||||||||||
Shares | Amount | Shares | Amount | issuable | receivable | |||||||||||||||||||
Issuance of Series C convertible preferred
stock for cash
|
| $ | | 356 | $ | 18,153 | $ | (18,153 | ) | $ | 18,153 | |||||||||||||
Issuance of Series C convertible preferred
stock for cash already received
|
| | 624 | 31,847 | (31,847 | ) | | |||||||||||||||||
Exercise of stock options
|
| | | | | | ||||||||||||||||||
Accrued interest on notes
|
| | | | | | ||||||||||||||||||
Repayment of notes receivable by stockholder
issued to officers
|
| | | | | | ||||||||||||||||||
Beneficial conversion feature of Series B
convertible preferred stock
|
| | | | | | ||||||||||||||||||
Deemed dividend related to beneficial conversion
feature of Series B convertible preferred stock
|
| | | | | | ||||||||||||||||||
Accretion to redemption value on Series A
redeemable convertible preferred stock
|
| | | | | | ||||||||||||||||||
Stock-based compensation
|
| | | | | | ||||||||||||||||||
Net loss
|
| | | | | | ||||||||||||||||||
BALANCE, MARCH 31, 2004 (UNAUDITED)
|
193 | $ | 15,000 | 980 | $ | 50,000 | $ | | $ | | ||||||||||||||
[Additional columns below]
[Continued from above table, first column(s) repeated]
Deficit | ||||||||||||||||||||||||||||
Notes | Notes | accumulated | ||||||||||||||||||||||||||
Common stock | Additional | receivable | receivable | during the | ||||||||||||||||||||||||
paid-in | from | from | development | |||||||||||||||||||||||||
Shares | Amount | capital | stockholders | officers | stage | Total | ||||||||||||||||||||||
Issuance of Series C convertible preferred
stock for cash
|
| $ | | $ | | $ | | $ | | $ | | $ | 18,153 | |||||||||||||||
Issuance of Series C convertible preferred
stock for cash already received
|
| | | | | | | |||||||||||||||||||||
Exercise of stock options
|
| | 5 | | | | 5 | |||||||||||||||||||||
Accrued interest on notes
|
| | | (26 | ) | | | (26 | ) | |||||||||||||||||||
Repayment of notes receivable by stockholder
issued to officers
|
| | (75 | ) | | 75 | | | ||||||||||||||||||||
Beneficial conversion feature of Series B
convertible preferred stock
|
| | 612 | | | | 612 | |||||||||||||||||||||
Deemed dividend related to beneficial conversion
feature of Series B convertible preferred stock
|
| | (612 | ) | | | | (612 | ) | |||||||||||||||||||
Accretion to redemption value on Series A
redeemable convertible preferred stock
|
| | (64 | ) | | | | (64 | ) | |||||||||||||||||||
Stock-based compensation
|
| | 1,195 | | | | 1,195 | |||||||||||||||||||||
Net loss
|
| | | | | (16,409 | ) | (16,409 | ) | |||||||||||||||||||
BALANCE, MARCH 31, 2004 (UNAUDITED)
|
19,975 | $ | 200 | $ | 434,202 | $ | (1,438 | ) | $ | (153 | ) | $ | (383,380 | ) | $ | 114,431 | ||||||||||||
MannKind Corporation and Subsidiary (A Development Stage Company)
Cumulative | Cumulative | |||||||||||||||||||||||||||||||
period from | period from | |||||||||||||||||||||||||||||||
February 14, | February 14, | |||||||||||||||||||||||||||||||
1991 (date of | Three months | 1991 (date of | ||||||||||||||||||||||||||||||
Years ended December 31, | inception) to | ended March 31, | inception) to | |||||||||||||||||||||||||||||
December 31, | March 31, | |||||||||||||||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2003 | 2004 | 2004 | ||||||||||||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||||||||||||||||||||||
Net loss
|
$ | (48,245 | ) | $ | (206,265 | ) | $ | (65,879 | ) | $ | (366,971 | ) | $ | (20,336 | ) | $ | (16,409 | ) | $ | (383,380 | ) | |||||||||||
Adjustments to reconcile net loss to net cash
used in operating activities:
|
||||||||||||||||||||||||||||||||
Depreciation and amortization
|
1,350 | 5,072 | 7,657 | 16,067 | 2,113 | 1,769 | 17,836 | |||||||||||||||||||||||||
In-process research and development
|
19,726 | 19,726 | 19,726 | |||||||||||||||||||||||||||||
Stock-based compensation expense
|
1,565 | 352 | 4,501 | 16,689 | 2,984 | 1,195 | 17,884 | |||||||||||||||||||||||||
Discount on stockholder notes below market rate
|
241 | 241 | ||||||||||||||||||||||||||||||
Non-cash compensation expense of officer
resulting from stockholder contribution
|
| | 70 | 70 | 70 | | 70 | |||||||||||||||||||||||||
Stock issued for services
|
60 | | | 747 | | | 747 | |||||||||||||||||||||||||
Loss (gain) on sale and abandonment/disposal
of property and equipment
|
(7 | ) | 27 | 2,803 | 2,823 | 648 | 42 | 2,865 | ||||||||||||||||||||||||
Accrued interest expense on notes payable to
stockholders
|
1,538 | 1,538 | ||||||||||||||||||||||||||||||
Accrued interest on notes
|
(189 | ) | (229 | ) | (105 | ) | (640 | ) | (25 | ) | (26 | ) | (666 | ) | ||||||||||||||||||
Goodwill impairment
|
151,428 | 151,428 | 151,428 | |||||||||||||||||||||||||||||
(Gain) loss on available-for-sale securities, net
|
67 | 76 | 143 | 12 | 25 | 168 | ||||||||||||||||||||||||||
Changes in assets and liabilities:
|
||||||||||||||||||||||||||||||||
Prepaid expenses and other current assets
|
(266 | ) | 1,402 | (910 | ) | (1,859 | ) | 218 | (58 | ) | (1,917 | ) | ||||||||||||||||||||
Restricted cash
|
(559 | ) | (559 | ) | (559 | ) | ||||||||||||||||||||||||||
Other assets
|
(227 | ) | 254 | (93 | ) | (190 | ) | 4 | 86 | (104 | ) | |||||||||||||||||||||
Accounts payable
|
5,034 | (1,157 | ) | (2,283 | ) | 1,926 | (869 | ) | 404 | 2,330 | ||||||||||||||||||||||
Accrued expenses and other current liabilities
|
56 | 387 | 2,258 | 4,015 | 387 | 932 | 4,947 | |||||||||||||||||||||||||
Other liabilities
|
(21 | ) | | (87 | ) | 120 | (32 | ) | 42 | 162 | ||||||||||||||||||||||
Payment of deferred compensation
|
| (5 | ) | (220 | ) | 1,644 | | | 1,644 | |||||||||||||||||||||||
Net cash used in operating activities
|
(21,164 | ) | (48,667 | ) | (52,771 | ) | (153,042 | ) | (14,826 | ) | (11,998 | ) | (165,040 | ) | ||||||||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||||||||||||||||||||||
Purchase of marketable securities
|
| (71,055 | ) | (50,060 | ) | (121,115 | ) | (13,341 | ) | (1,394 | ) | (122,509 | ) | |||||||||||||||||||
Sales of marketable securities
|
| 59,853 | 59,294 | 119,147 | 20,238 | 119,147 | ||||||||||||||||||||||||||
Purchase of property and equipment
|
(39,673 | ) | (34,147 | ) | (5,183 | ) | (86,305 | ) | (2,734 | ) | (1,369 | ) | (87,674 | ) | ||||||||||||||||||
Proceeds from sale of property and equipment
|
17 | 75 | 92 | 71 | 92 | |||||||||||||||||||||||||||
Net cash (used in) provided by investing
activities
|
(39,656 | ) | (45,349 | ) | 4,126 | (88,181 | ) | 4,234 | (2,763 | ) | (90,944 | ) | ||||||||||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||||||||||||||||||
Cash received for common stock to be issued
|
3,900 | | | 3,900 | | | 3,900 | |||||||||||||||||||||||||
Repurchase of common stock
|
(1,028 | ) | (1,028 | ) | (1,028 | ) | (1,028 | ) | ||||||||||||||||||||||||
Issuance of common stock for cash
|
78,043 | 58,913 | 50,000 | 235,840 | 20,000 | 5 | 235,845 | |||||||||||||||||||||||||
Put shares sold to majority stockholder
|
623 | 623 | | | 623 | |||||||||||||||||||||||||||
Borrowings under lines of credit
|
84 | 4,220 | | | 4,220 | |||||||||||||||||||||||||||
Proceeds from notes receivables
|
28 | 1,314 | | 1,742 | | | 1,742 | |||||||||||||||||||||||||
Principal payments on notes payable
|
(2,558 | ) | (24 | ) | | (1,667 | ) | | | (1,667 | ) | |||||||||||||||||||||
Payable to stockholder
|
1,406 | 1,406 | | (1,406 | ) | | ||||||||||||||||||||||||||
Issuance of Series B convertible preferred
stock for cash
|
| | | 15,000 | | | 15,000 | |||||||||||||||||||||||||
Collection of Series C convertible preferred
stock subscriptions receivable
|
| | 31,847 | 31,847 | | 18,153 | 50,000 | |||||||||||||||||||||||||
Borrowings on notes payable
|
| | | 3,460 | | | 3,460 | |||||||||||||||||||||||||
Net cash provided by financing activities
|
79,497 | 60,203 | 82,848 | 295,343 | 18,972 | 16,752 | 312,095 | |||||||||||||||||||||||||
Cumulative | Cumulative | ||||||||||||||||||||||||||||
period from | period from | ||||||||||||||||||||||||||||
February 14, | February 14, | ||||||||||||||||||||||||||||
1991 (date of | Three months | 1991 (date of | |||||||||||||||||||||||||||
Years ended December 31, | inception) to | ended March 31, | inception) to | ||||||||||||||||||||||||||
December 31, | March 31, | ||||||||||||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2003 | 2004 | 2004 | |||||||||||||||||||||||
(unaudited) | (unaudited) | ||||||||||||||||||||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
|
$ | 18,677 | $ | (33,813 | ) | $ | 34,203 | $ | 54,120 | $ | 8,380 | $ | 1,991 | $ | 56,111 | ||||||||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
35,053 | 53,730 | 19,917 | | 19,917 | 54,120 | | ||||||||||||||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 53,730 | $ | 19,917 | $ | 54,120 | $ | 54,120 | $ | 28,297 | $ | 56,111 | $ | 56,111 | |||||||||||||||
SUPPLEMENTAL CASH FLOWS DISCLOSURES:
|
|||||||||||||||||||||||||||||
Cash paid for income taxes
|
$ | 2 | $ | 2 | $ | 1 | $ | 14 | $ | | $ | | $ | 14 | |||||||||||||||
Interest paid in cash
|
55 | 16 | 4 | 75 | | | 75 | ||||||||||||||||||||||
Accretion on redeemable convertible preferred
stock
|
(239 | ) | (251 | ) | (253 | ) | (892 | ) | (60 | ) | (64 | ) | (956 | ) | |||||||||||||||
Issuance of common stock upon conversion of notes
payable
|
| | | 3,331 | | | 3,331 | ||||||||||||||||||||||
Increase in additional paid-in capital resulting
from merger
|
171,154 | | | 171,154 | | | 171,154 | ||||||||||||||||||||||
Issuance of common stock for notes receivable
|
| | | 2,758 | | | 2,758 | ||||||||||||||||||||||
Issuance of put option by stockholder
|
(2,949 | ) | | | (2,949 | ) | | | (2,949 | ) | |||||||||||||||||||
Put option redemption by stockholder
|
| 1,921 | | 1,921 | | | 1,921 | ||||||||||||||||||||||
Notes receivable by stockholder issued to officers
|
| | 225 | 225 | 225 | (75 | ) | 150 | |||||||||||||||||||||
Issuance of Series C convertible preferred
stock subscriptions
|
| | 50,000 | 50,000 | | | 50,000 | ||||||||||||||||||||||
Issuance of Series A redeemable convertible
preferred stock
|
| | | 4,296 | | | 4,296 |
See notes to financial statements.
MannKind Corporation and Subsidiary (A Development Stage Company)
1. | Description of business and basis of presentation |
BusinessMannKind Corporation (the Company) is a biopharmaceutical company focused on the development and commercialization of therapeutic products for diseases such as diabetes, cancer, inflammatory and autoimmune diseases. The Companys lead product, the Technosphere Insulin System, which is currently in late Phase II clinical trials for the treatment of diabetes, consists of our dry-powder Technosphere formulation of insulin and our MedTone inhaler through which the powder is inhaled into the deep lung.
Basis of PresentationThe Company is considered to be in the development stage as its primary activities since incorporation have been establishing its facilities, recruiting personnel, conducting research and development, business development, business and financial planning, and raising capital. Since its inception through March 31, 2004 the Company has reported accumulated net losses of $383,380,000 which include a goodwill impairment charge of $151,428,000 (see Note 2), and negative cash flow from operations of $165,040,000. It is costly to develop therapeutic products and conduct clinical trials for these products. Based upon the Companys current expectations, management believes the Companys existing capital resources will enable it to continue planned operations through the third quarter of 2004. Management plans to raise additional funds through the issuance of equity securities in an initial public offering of its common stock. Management believes the Companys existing capital resources together with proceeds anticipated from the initial public offering will enable it to continue planned operations into the second quarter of 2005. However, the Company cannot provide assurances that its plans will not change or that changed circumstances will not result in the depletion of its capital resources more rapidly than it currently anticipates. If planned operating results are not achieved or the Company is not successful in raising additional equity financing, management believes that planned expenditures could be reduced substantially; extending the time period over which the Companys currently available capital resources will be adequate to fund the Companys operations.
On December 12, 2001, the stockholders of AlleCure Corp. (AlleCure) and CTL ImmunoTherapies Corp. (CTL) voted to exchange their shares for shares of Pharmaceutical Discovery Corporation (PDC). Upon approval of the merger, PDC then changed its name to MannKind Corporation. PDC was incorporated in the State of Delaware on February 14, 1991. The stockholders of PDC did not vote on the merger. At the date of the merger, Mr. Alfred Mann owned 76% of PDC, 59% of AlleCure and 69% of CTL. Accordingly, only the minority interest of AlleCure and CTL was stepped up to fair value using the purchase method of accounting. As a result of this purchase accounting, in-process research and development of $19,726,000 and goodwill of $151,428,000 were recorded at the entity level. The historical basis of PDC and the historical basis relating to the ownership interests of Alfred Mann in AlleCure and CTL have been reflected in the financial statements. For periods prior to December 12, 2001, the results of operations have been presented on a combined basis. All references in the accompanying financial statements and notes to the financial statements to number of shares, sales price and per share amounts of the Companys capital stock have been retroactively restated to reflect the share exchange ratios for each of the entities that participated in the merger.
For periods subsequent to December 12, 2001, the accompanying financial statements have been presented on a consolidated basis and include the wholly-owned subsidiaries, AlleCure and CTL. On December 31, 2002, AlleCure and CTL merged with and into MannKind and ceased to be separate entities.
Reverse Stock Split On May 27, 2004, the Companys board of directors approved a one-for-three reverse stock split which was effected on July 22, 2004.
All common share and per common share amounts in the consolidated financial statements have been adjusted for all periods presented to give effect to the reverse stock split, including reclassifying an amount equal to the reduction in par value to additional paid-in capital.
2. | Summary of significant accounting policies |
Unaudited Interim Financial StatementsThe consolidated financial statements as of March 31, 2004 and for the three months ended March 31, 2003 and 2004, and the cumulative period from February 14, 1991 (date of inception) to March 31, 2004, are unaudited. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and include all adjustments necessary for a fair presentation of the financial statements. Results of interim periods are not necessarily indicative of the results to be expected for the entire fiscal year.
ReclassificationsCertain reclassifications have been made to the prior years financial statements to conform to the 2003 presentation.
Unaudited Pro Forma Stockholders Equity and Net Loss Per ShareThe unaudited pro forma stockholders equity at March 31, 2004 reflects the conversion, upon closing of an initial offering of the Companys common stock, all 267,212 shares of the Companys Series A redeemable convertible preferred stock, all 192,618 shares of the Companys Series B convertible preferred stock and all 980,392 shares of the Companys Series C convertible preferred stock, each outstanding as of March 31, 2004, at an assumed initial public offering price of $14.00 per shares, into 6,166,372 shares of common stock.
The Companys Series A, B and C preferred stock automatically convert, based on the criteria described in Note 9, into common stock upon the closing of an initial public offering of the Companys common stock. The unaudited pro forma net loss per share for the year ended December 31, 2003 and the three months ended March 31, 2004 is computed using the weighted average number of common shares outstanding during the respective periods, including the pro forma effects of the assumed conversion of the Companys Series A, B and C convertible preferred stock into shares of the Companys common stock upon the closing of the Companys proposed initial public offering. Conversion of the Series A, B and C convertible preferred stock reflects the weighted average effective conversion prices of the securities during the periods presented. Conversion of the Series A and B preferred stock is assumed to have occurred as of January 1, 2003. Conversion of the Series C preferred stock is assumed to have occurred as of January 19, 2004, the effective issuance date of the
Series C preferred stock. The following table summarizes the components of the unaudited pro forma net loss per share:
Three months | ||||||||
ended | ||||||||
Year ended | March 31, | |||||||
December 31, 2003 | 2004 | |||||||
(unaudited) | ||||||||
Net loss
|
$ | (65,879,000 | ) | $ | (16,409,000 | ) | ||
Deemed dividend related to beneficial conversion
features of convertible preferred stock
|
(1,017,000 | ) | (612,000 | ) | ||||
Accretion to preferred stockholders
|
(253,000 | ) | (64,000 | ) | ||||
Net loss attributable to common stockholders
|
$ | (67,149,000 | ) | $ | (17,085,000 | ) | ||
Weighted average shares used in computing basic
and diluted net loss per share
|
18,487,521 | 19,974,812 | ||||||
Adjusted to reflect the effect of the assumed
conversion of convertible preferred stock
|
1,619,076 | 4,243,506 | ||||||
Weighted average shares used in computing pro
forma basic and diluted net loss per share
|
20,106,597 | 24,218,318 | ||||||
Pro forma basic and diluted net loss per share
attributable to common stockholders
|
$ | (3.34 | ) | $ | (0.71 | ) | ||
Financial Statement EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash EquivalentsThe Company considers all highly liquid investments with a purchased maturity date of 90 days or less to be cash equivalents.
Concentration of Credit RiskFinancial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and marketable securities. Cash and cash equivalents consist primarily of interest-bearing accounts and are regularly monitored by management and held in high credit quality institutions.
Marketable SecuritiesThe Company accounts for marketable securities as available for sale, in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Debt and Equity Securities. Unrealized holding gains and losses for available-for-sale securities are reported as a separate component of stockholders equity until realized.
Deferred Offering CostsIn connection with its proposed initial public offering, the Company has $464,216 and $645,794 of deferred offering costs included in prepaid expenses and other current assets in the accompanying balance sheet at December 31, 2003 and March 31, 2004.
Fair Value of Financial InstrumentsThe carrying amounts of financial instruments, which include cash equivalents, marketable securities, accounts payable, accrued expenses and other current liabilities and payable to stockholder, approximate their fair values due to their relatively short maturities. The carrying amounts of the notes receivable from stockholders and officers reflect market rates of interest for similar loans of similar amounts and terms available from a third party (see Notes 6 and 7).
Goodwill and Identifiable IntangiblesAs of December 31, 2001, the Companys balance sheet included goodwill of $151,428,000, which resulted from the merger with AlleCure and CTL on December 12, 2001, as described in Note 1. Upon adoption of SFAS No. 142, Goodwill and Other Intangible Assets, on January 1, 2002, the Company, under the initial transitional test, determined there was no impairment of goodwill, principally because as of the date of the transitional impairment test management believed the basis to initially record the goodwill remained appropriate and did not indicate the goodwill was impaired. In connection with the implementation of SFAS No. 142, the Company adopted a policy of testing goodwill and intangible assets with indefinite lives for impairment at least annually, as of December 31, with any related impairment losses being recognized in earnings when identified. Toward the end of the third quarter of 2002, the Company initiated an internal study to assess whether the product development programs acquired in the merger with AlleCure and CTL were meeting their objectives. As a result of the internal study, the Companys management concluded in December 2002 that the major AlleCure product development program should be terminated and that the clinical trials of the CTL product should be halted and returned to the research stage. As a result of this determination, during the first quarter of 2003, the Company closed the CTL facility and reduced headcount for AlleCure and CTL by approximately 50%. In connection with the annual test for impairment of goodwill as of December 31, 2002, the Company determined that on the basis of the internal study the goodwill recorded for the AlleCure and CTL units was potentially impaired. The Company performed the second step of the annual impairment test as of December 31, 2002 for each of the potentially impaired reporting units and estimated the fair value of the AlleCure and CTL programs using the expected present value of future cash flows which were expected to be negligible. Accordingly, the goodwill balance of $151,428,000 was determined to be fully impaired and an impairment loss was recorded in the fourth quarter of 2002.
Property and EquipmentProperty and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the term of the lease or the service lives of the improvements, whichever is shorter. Assets under construction are not depreciated until placed into service.
Impairment of Long-Lived AssetsThe Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value. For the year ended December 31, 2003, the Company recorded a write-down of long-lived assets of approximately $2,154,000.
Income TaxesDeferred income tax assets and liabilities are recorded for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the income tax basis of assets and liabilities. A valuation allowance is recorded to reduce net deferred income tax assets to amounts that are more likely than not to be realized.
Stock-Based CompensationAt December 31, 2003 and March 31, 2004 the Company has three stock-based compensation plans, which are described more fully in Note 10. The Company accounts for employee stock options using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its interpretations, and has adopted the disclosure-only alternative of SFAS No. 123, Accounting for Stock-Based Compensation. Stock options issued to consultants are accounted for in accordance with the provisions of Emerging Issues Task Force Issue (EITF) No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, and FASB Interpretation No. 28 (FIN 28), Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.
Under SFAS No. 123 the Company estimates the fair value of each stock option at the grant date or modification date, if any, by using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Three months | ||||||||||||||||||||
Year ended December 31, | ended March 31, | |||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||
(unaudited) | ||||||||||||||||||||
Risk-free interest rate
|
4.94 | % | 3.53 | % | 2.90 | % | 2.71 | % | 2.28 | % | ||||||||||
Expected lives
|
8 years | 8 years | 4 years | 8 years | 4 years | |||||||||||||||
Volatility
|
100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
The weighted-average expected lives for the year ended December 31, 2003 decreased to approximately 4 years from 8 years for each of the years ended December 31, 2001 and 2002 primarily because options granted during 2003 under the re-pricing program described in Note 10 have a 4-year term.
Had compensation cost been determined under the accounting provisions of SFAS No. 123, the Companys net loss would have been adjusted to the pro forma amounts indicated below (in thousands):
Three months ended | ||||||||||||||||||||
Year ended December 31, | March 31, | |||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||
(unaudited) | ||||||||||||||||||||
Net lossas reported
|
$ | (48,245 | ) | $ | (206,265 | ) | $ | (65,879 | ) | $ | (20,336 | ) | $ | (16,409 | ) | |||||
Add: Stock-based employee compensation expense
included in reported net loss
|
1,565 | 352 | 4,501 | 2,984 | 1,195 | |||||||||||||||
Deduct: Total stock-based employee compensation
expense determined under the fair value based method for all
awards
|
(3,943 | ) | (5,724 | ) | (6,863 | ) | (7,685 | ) | (2,150 | ) | ||||||||||
Net losspro forma
|
(50,623 | ) | (211,637 | ) | (68,241 | ) | (25,037 | ) | (17,364 | ) | ||||||||||
Deemed dividend related to beneficial conversion
features of convertible preferred stock
|
| (1,421 | ) | (1,017 | ) | | (612 | ) | ||||||||||||
Accretion on redeemable preferred stock
|
(239 | ) | (251 | ) | (253 | ) | (60 | ) | (64 | ) | ||||||||||
Net loss applicable to common
stockholderspro forma
|
$ | (50,862 | ) | $ | (213,309 | ) | $ | (69,511 | ) | $ | (25,097 | ) | $ | (18,040 | ) | |||||
Basic and diluted loss attributable to common
stockholders per share, as reported
|
$ | (4.60 | ) | $ | (15.43 | ) | $ | (3.63 | ) | $ | (1.24 | ) | $ | (0.86 | ) | |||||
Basic and diluted loss attributable to common
stockholders per share, pro forma
|
$ | (4.83 | ) | $ | (15.83 | ) | $ | (3.76 | ) | $ | (1.52 | ) | $ | (0.90 | ) | |||||
Research and DevelopmentResearch and development expenses consist primarily of costs associated with the clinical trials of the Companys product candidates, manufacturing supplies and other development materials, compensation and other expenses for research and development personnel, costs for consultants and related contract research, facility costs and depreciation. Expenditures relating to research and development are expensed as incurred.
Net Loss Per Share Of Common StockBasic net loss per share excludes dilution for potentially dilutive securities and is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Potentially dilutive securities are excluded from the computation of diluted net loss per share for all of the periods presented in the accompanying statements of operations because the reported net loss in each of these periods results in their inclusion being antidilutive.
Potentially dilutive securities outstanding are summarized as follows:
December 31, | March 31, | |||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||
(unaudited) | ||||||||||||||||||||
Series A redeemable convertible preferred
stock on an as converted basis
|
890,706 | 890,706 | 890,706 | 890,706 | 890,706 | |||||||||||||||
Series B convertible preferred stock on an
as converted basis
|
642,060 | 702,867 | 746,408 | 702,867 | 772,623 | |||||||||||||||
Series C convertible preferred stock on an as
converted basis
|
| | | | 3,267,954 | |||||||||||||||
Stock warrants
|
282,108 | 289,401 | 174,917 | 170,983 | 175,227 | |||||||||||||||
Common stock options
|
775,268 | 1,904,603 | 2,099,824 | 2,145,561 | 2,149,953 |
Segment InformationOperating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed its operations and manages its business as one segment operating entirely in the United States of America.
Exit or Disposal ActivitiesSFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. FAS No. 146 addresses financial accounting and reporting for the costs associated with exit or disposal activities and EITF Issue No. 94-3 Liability Recognition for Certain Employee Termination Benefits and Costs to Exit and Disposal Activity (Including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred and establishes that fair value is the objective for initial measurements of the liability.
Included in general and administrative expense for the year ended December 31, 2003 are approximately $2,163,000 of costs related to the consolidation of the Companys separate California facilities into the Companys Valencia facility. The $2,163,000 consists of $1,077,000 in severance costs, $438,000 in office closure costs and $648,000 related to the abandonment of fixed assets. Payments of $1,406,000 have been made as of December 31, 2003. The remaining liability of $109,000 is included in accrued expenses and other current liabilities at December 31, 2003.
Recently Issued Accounting StandardsIn January 2003, the Financial Accounting Standards Board (FASB) issued Financial Interpretation Number 46, Consolidation of Variable Interest Entities (FIN 46) with the objective of improving financial reporting by companies involved with variable interest entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51 to certain entities, defined as variable interest entities, in which equity investors do not have characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. In December 2003, the FASB issued a revision to FIN 46 (FIN 46R) to clarify some of the provisions of FIN 46. The Company currently has no entities which have the characteristics of a variable interest equity. Furthermore, the Companys adoption of the remaining provisions of FIN 46R in the quarter ended March 31, 2004 did not have an impact on the Companys financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This statement establishes how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity, including redeemable preferred stock. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the interim period commencing July 1, 2003, except for mandatory redeemable financial instruments of nonpublic companies, which is effective for fiscal periods beginning after December 31, 2004. Adoption of this statement did not have a material impact on the Companys financial statements.
3. | Investment in securities |
The following is a summary of the available-for-sale securities classified as current assets (in thousands).
December 31, 2002 | December 31, 2003 | March 31, 2004 | ||||||||||||||||||||||
Cost basis | Fair value | Cost basis | Fair value | Cost basis | Fair value | |||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
US government securities
|
$ | 9,336 | $ | 9,336 | $ | 518 | $ | 518 | $ | 1,937 | $ | 1,937 | ||||||||||||
Corporate debt instruments
|
1,799 | 1,799 | 1,307 | 1,307 | 1,257 | 1,257 | ||||||||||||||||||
$ | 11,135 | $ | 11,135 | $ | 1,825 | $ | 1,825 | $ | 3,194 | $ | 3,194 | |||||||||||||
The maturity dates for debt securities at December 31, 2002 and 2003, and March 31, 2004, is less than one year. Proceeds from the sale and maturities of available-for-sale securities amounted to approximately $59,853,000, $59,294,000 and zero for the years ended December 31, 2002 and 2003, and for the three months ended March 31, 2004, respectively. Gross realized losses for available-for-sale securities were approximately $(67,000), $(76,000) and zero for the year ended December 31, 2002 and 2003, and for the three months ended March 31, 2004, respectively. Gross realized gains for available-for-sale securities were insignificant for the years ended December 31, 2002 and 2003, and for the three months ended March 31, 2004. Gross realized gains and losses for available-for-sale securities are recorded as other income (expense). Unrealized gains and losses for available-for-sale securities for all periods presented were not material.
4. | Property and equipment |
Property and equipment consist of the following (dollar amounts in thousands):
Estimated | December 31, | |||||||||||||||
useful | March 31, | |||||||||||||||
life | 2002 | 2003 | 2004 | |||||||||||||
(years) | (unaudited) | |||||||||||||||
Land
|
| $ | 5,273 | $ | 5,273 | $ | 5,273 | |||||||||
Buildings
|
39 | 9,566 | 9,566 | 9,566 | ||||||||||||
Building improvements
|
539 | 29,089 | 36,296 | 36,637 | ||||||||||||
Machinery and equipment
|
310 | 17,304 | 16,530 | 17,615 | ||||||||||||
Furniture, fixtures and office equipment
|
710 | 3,101 | 2,234 | 1,874 | ||||||||||||
Computer equipment and software
|
35 | 2,181 | 3,048 | 3,092 | ||||||||||||
Leasehold improvements
|
1,816 | 627 | 627 | |||||||||||||
Construction in progress
|
4,630 | 789 | 989 | |||||||||||||
Deposits on equipment
|
8,125 | 5,656 | 5,656 | |||||||||||||
81,085 | 80,019 | 81,329 | ||||||||||||||
Less accumulated depreciation and amortization
|
(8,410 | ) | (12,696 | ) | (14,448 | ) | ||||||||||
Property and equipment net
|
$ | 72,675 | $ | 67,323 | $ | 66,881 | ||||||||||
Depreciation and amortization expense for the years ended December 31, 2001, 2002, 2003, three months ended March 31, 2003 and 2004, and the cumulative period from February 14, 1991 (date of inception) to March 31, 2004 was $1,350,000, $5,072,000, $7,657,000, $2,113,000, $1,769,000 and $17,836,000, respectively.
5. | Accrued expenses and other current liabilities |
Accrued expenses and other current liabilities are comprised of the following (in thousands):
December 31, | ||||||||||||
March 31, | ||||||||||||
2002 | 2003 | 2004 | ||||||||||
(unaudited) | ||||||||||||
Salary and related expenses
|
$ | 846 | $ | 2,004 | $ | 2,403 | ||||||
Research and clinical trial costs
|
417 | 1,224 | 2,098 | |||||||||
Other
|
494 | 787 | 446 | |||||||||
Accrued expenses and other current liabilities
|
$ | 1,757 | $ | 4,015 | $ | 4,947 | ||||||
6. | Notes receivable from stockholders |
During the year ended December 31, 2000, the Company issued an aggregate of 238,000 shares of common stock to an executive of CTL and a consultant of CTL in exchange for full recourse notes receivable of $1,179,000 each, for an aggregate amount of $2,358,000. The notes bear interest at fixed rates and are payable in five years. The notes are prepayable at the option of the note holder. The notes are collateralized by the underlying common stock. The note holders have no further obligation
to provide services to the Company under the terms of the stock purchases. The notes bear fixed rates of interest that were less than market rates of interest available for similar loans of similar amounts and terms from a third party; consequently, the Company recognized compensation expense equal to the discount on the notes based on market rates of interest and the terms of the notes. The total discount on the notes of $241,000 was expensed to general and administrative expense during the year ended December 31, 2000 as the note holders had no further obligation to the Company. During the year ended December 31, 2002, the executive of CTL paid his $1,179,000 note in full along with $135,000 of accrued interest.
Notes receivable reflected in stockholders equity consist of the following:
December 31, | ||||||||||||
March 31, | ||||||||||||
2002 | 2003 | 2004 | ||||||||||
(unaudited) | ||||||||||||
Principal
|
$ | 1,179,000 | $ | 1,179,000 | $ | 1,179,000 | ||||||
Accrued interest
|
131,000 | 233,000 | 259,000 | |||||||||
Total
|
$ | 1,310,000 | $ | 1,412,000 | $ | 1,438,000 | ||||||
In December 2001, the Companys majority stockholder entered into an agreement (the Put agreement) with the executive of CTL that permits the executive to require the majority stockholder to purchase approximately 119,000 shares from the executive with the note receivable for a fixed price of approximately $2,949,000, or $24.75 per share. In accordance with SEC Staff Accounting Bulletin Topic 5.T, Accounting for Expenses or Liabilities Paid by Principal Stockholder, the Company recorded the Put obligation of the majority stockholder as common stock subject to repurchase and as a decrease in additional paid-in capital. In February 2002 the executive exercised a portion of the Put for approximately $1,921,000 (77,667 shares), which was paid in cash by the majority stockholder. The Company reflected the partial redemption of the Put by the majority stockholder as a decrease in common stock subject to repurchase and an increase in additional paid-in capital. The executive resigned in September 2002 and, pursuant to a post-employment agreement that was formalized and executed in January 2003, the Company modified the terms of options to purchase 30,317 shares of common stock held by the former executive (see Note 12Severance agreements) and assumed the majority stockholders remaining Put obligation of approximately $1,028,000. The remaining $1,028,000 of the Put (41,333 shares) was exercised in December 2002 and paid in cash by the Company in January 2003. During the year ended December 31, 2002, the estimated fair value per share of the Companys common stock declined below the exercise price of the Put. As a result, during the year ended December 31, 2002 the Company recorded $405,000 of stock-based compensation expense, which was the difference between the amount paid to the former executive and the amount received from the majority stockholder and represented the intrinsic value of the 41,333 shares subject to the Put. In December 2003, the majority stockholder purchased the 41,333 shares for an aggregate price of approximately $623,000.
The Company issued 110,000 shares of common stock to an executive of AlleCure in exchange for notes receivable, in the amounts of $1,214,000 during the year ended December 31, 2000 and $750,000 during the year ended December 31, 2001. The notes bear interest at fixed rates and are payable in five years. The notes are pre-payable at the option of the note holder. The notes are collateralized by the underlying common stock. The note holder has no further obligation to the Company under the terms of the stock purchase. During the first quarter of 2003, the executive was terminated by the Company (See Note 12Severance agreements). The note-for-stock transactions are
being accounted for as in-substance stock option grants to an employee. The in-substance stock option grants had no intrinsic value as of the transaction dates. The pre-payment feature of the notes results in the exercise price of the in-substance stock option being unknown until the notes are paid in full. Accordingly, the Company is required to measure the intrinsic value of the in-substance stock options on the balance sheet date of each financial reporting period. During 2001, the Company recorded approximately $815,000 of stock-based compensation expense, which is included in general and administrative expense, relating to the in-substance stock options. This amount was reversed in 2002 because the in-substance stock options had no intrinsic value as of December 31, 2002. There was no stock-based compensation expense recorded for the in-substance options in 2003 because they had no intrinsic value as of December 31, 2003.
During the year ended December 31, 2000 and during the year ended December 31, 2001, the Company issued an aggregate 701,333 shares of common stock to various consultants in exchange for notes receivable aggregating approximately $10,923,000. The notes bear interest at fixed rates and are payable in five years. The notes are pre-payable at the option of the note holders. The notes are collateralized by the underlying common stock. The note holders have no further obligation to the Company under the terms of the stock purchases. The note-for-stock transactions are being accounted for as in-substance stock option grants to non-employees. Since the in-substance stock options were 100% vested and nonforfeitable upon issuance, a measurement date is deemed to have occurred on the issuance date. Accordingly, the Company recorded stock-based compensation expense equal to the estimated fair value of the in-substance options of $8,372,000 in 2000 and $15,000 in 2001. These amounts, which are included in research and development expense in the accompanying statements of operations, were estimated using the Black-Scholes option-pricing model and the following weighted-average assumptions: volatility of 100%, term of five years, interest rate of 5.06%.
7. | Notes receivable from officers |
In March 2003, a limited liability company controlled by the Companys majority stockholder loaned the aggregate principal sum of $225,000 to two officers pursuant to promissory notes and purchased the principal residence owned by one officer as part of his relocation to California. In accordance with SEC Staff Accounting Bulletin Topic 5.T, Accounting for Expenses or Liabilities Paid by Principal Stockholder, the Company recorded the loans from the majority stockholder as an increase in additional paid-in capital and as a note receivable, which is classified within stockholders equity. In addition, $70,000 was recorded as compensation expense with a corresponding credit to additional paid-in capital representing the amount of the residential purchase price paid to one officer that exceeded the appraised value. This $70,000 is included in general and administrative expenses on the Companys statement of operations for the year ended December 31, 2003. The notes bear fixed rates of interest that were less than market rates of interest available for similar loans of similar amounts and terms from a third party. Consequently, the Company also recognized a non-cash compensation expense equal to the discount on the notes. The total discount on the notes of approximately $14,000 was amortized to compensation expense over the term of the note. The notes are secured by the officers title and interest in future bonus payments, if any, from the Company. As of March 31, 2004, the amount owed to the lender pursuant to the notes receivable was $153,000, including accrued interest. As of April 15, 2004, both notes had been fully repaid.
8. | Deferred compensation |
Certain stockholders and officers elected to defer part or all of their compensation from 1991 through 1998 due to cash flow difficulties in those years. The amounts due for deferred compensation are non interest-bearing with no repayment terms.
Deferred compensation consists of the following (in thousands):
December 31, | ||||||||||||
March 31, | ||||||||||||
2002 | 2003 | 2004 | ||||||||||
(unaudited) | ||||||||||||
Deferred compensation to stockholders and officers
|
$ | 1,864 | $ | 1,644 | $ | 1,644 | ||||||
Less non-current portion
|
| (284 | ) | (284 | ) | |||||||
Deferred compensationcurrent
|
$ | 1,864 | $ | 1,360 | $ | 1,360 | ||||||
In February 2003, pursuant to a settlement agreement with one of the officers, the Company agreed to pay the deferred compensation amount outstanding to the former officer in the amount of approximately $775,000 in three payments. As of December 31, 2003 the Company has paid approximately $220,000 of this amount. An additional $271,000 is due in April 2004 and the remaining $284,000 is due in April 2005. The settlement also obligated the Company to make certain severance related payments which are more fully described in Note 12Severance agreements.
9. | Common and preferred stock |
Common StockThe Company is authorized to issue 100,000,000 shares of common stock. As of March 31, 2004, 19,975,089 shares of common stock are issued and outstanding.
The Company had reserved shares of common stock for issuance as follows:
December 31, | March 31, | |||||||
2003 | 2004 | |||||||
(unaudited) | ||||||||
Common stock options
|
2,099,825 | 2,149,953 | ||||||
Conversion of Series A preferred stock
|
890,706 | 890,706 | ||||||
Conversion of Series B preferred stock
|
746,408 | 772,622 | ||||||
Conversion of Series C preferred stock
|
| 3,267,954 | ||||||
Exercise of warrants
|
174,917 | 175,227 | ||||||
3,911,856 | 7,256,462 | |||||||
Preferred StockThe Company is authorized to issue 5,000,000 shares of preferred stock.
Liquidation Preferences of Preferred StockIn the event of liquidation, dissolution or winding-up of the Company, the Series C convertible preferred stockholders shall be entitled to receive in preference to the common stockholders, Series A redeemable convertible preferred stockholders and the Series B convertible preferred stockholders, a per share amount equal to $51.00 plus all declared and unpaid dividends. After such distributions have been made, the Series A redeemable convertible preferred stockholders and the Series B convertible preferred stockholders shall be entitled to receive on an equal basis, in the case of the Series A redeemable convertible preferred stockholders, a per share amount equal to $16.22, plus all accrued and unpaid dividends (whether or not declared) and, in the case of
the Series B convertible preferred stockholders, a per share amount equal to $77.88, plus all declared and unpaid dividends. After such distributions have been made, the Series C convertible preferred stockholders and the common stockholders shall be entitled to receive on a pro rata basis a distribution per share equivalent to that made to the Series A redeemable convertible preferred stockholders. After such distributions have been made, any remaining assets of the Company will be distributed pro rata among the Series A redeemable convertible preferred stockholders, Series C convertible preferred stockholders and the common stockholders based on the number of common shares held by each, assuming conversion of all convertible preferred stock at the then applicable conversion rate.
Series A Redeemable Convertible Preferred StockAs of December 31, 2003, the Company had outstanding 267,212 shares of 5.12% cumulative dividend Series A redeemable convertible preferred stock. The rights, preferences and privileges of the holders of Series A redeemable convertible preferred stock are as follows:
| Each share of Series A redeemable convertible preferred stock is convertible into approximately 3.3 shares of common stock (subject to adjustment in the event of the issuance of common stock below a price per share of $4.86 and subject to proportionate adjustment for stock dividends, stock subdivisions, stock redivisions, reverse stock splits and stock consolidations). Shares will automatically be converted in the event of a public offering of common stock in which the aggregate net proceeds equal or exceed $20 million, the price paid in such offering reflects a pre-offering valuation of at least $30 million and the common stock is approved for quotation on the Nasdaq National Market or certain other stock exchanges. The Series A convertible preferred stock offering was determined not to contain a beneficial conversion feature on the offering commitment date. However, if the conversion price is adjusted downward at a future date a beneficial conversion charge would be recorded by the Company as a reduction in retained earnings or, in the absence of retained earnings, additional paid-in capital, and an increase in additional paid-in capital. In the period of the charge, if any, net income applicable to common stockholders and net income per share would be reduced. |
| At any time following September 30, 2002, within 30 days of a written request by a Series A redeemable convertible preferred stockholder, the Company shall redeem for cash a sum equal to the redemption value of $16.22 per share, together with all unpaid cumulative dividends. The cumulative dividends for Series A redeemable convertible preferred stock are accrued annually so that the carrying value will equal the redemption amount on September 30, 2002 and thereafter. In addition, differences between the redemption amount and the net proceeds received (i.e., the costs of financing) were accreted through September 30, 2002. |
| Each share of Series A redeemable convertible preferred stock has the same voting rights as the common stock into which it is convertible. |
| Dividends may be declared at the discretion of the board of directors and are cumulative. Per annum dividends of $0.83 per share of Series A redeemable convertible preferred stock must be declared and paid before any dividends on common stock may be declared or paid. |
Series B Convertible Preferred StockAs of December 31, 2003, the Company had outstanding 192,618 shares of Series B convertible preferred stock. The rights, preferences and privileges of the holders of Series B convertible preferred stock are as follows:
| Each share of Series B convertible preferred stock was initially convertible into approximately 3.3 shares of common stock, adjusted for dilution as defined. The holders of the Series B |
convertible preferred stock will be entitled to a weighted-average antidilution adjustment to the conversion price in the event that the Company issues equity securities for an effective purchase price of less than $23.37 per share (on an as-if-converted-to-common stock basis) in an equity financing. The conversion price will also be subject to proportionate adjustment for stock subdivisions, stock combinations and stock dividends. Shares will automatically be converted on the date of an underwritten public offering in which the gross proceeds are at least $15 million. The Series B convertible preferred stock offering was determined not to contain a beneficial conversion feature on the offering commitment date. However, during the years ended December 31, 2002 and 2003 and the three months ended March 31, 2004, the conversion price was adjusted downward to $21.33 per share as of December 12, 2002, $20.10 per share as of approximately December 31, 2003, and $19.41 per share as of approximately March 31, 2004 resulting in a beneficial conversion charge to common stockholders of approximately $1,421,000, $1,017,000, and $612,000, respectively. These charges have been reflected by the Company as both a reduction and increase in additional paid-in capital during the respective periods. Although the charges have no net effect on stockholders equity, they increase the net loss applicable to the common stockholders and net loss per share. If the conversion price is adjusted downward at a future date a beneficial conversion charge would be recorded by the Company as a reduction in retained earnings or, in the absence of retained earnings, additional paid-in capital, and an increase in additional paid-in capital. In the period of the charge, if any, net income applicable to common stockholders and net income per share would be reduced. | |
| Each share of Series B convertible preferred stock has the same voting rights as the common stock into which it is convertible. |
| Dividends may be declared at the discretion of the board of directors. Dividends are not cumulative but must be simultaneously declared and paid with dividends declared and paid on common stock. |
Series C Convertible Preferred StockIn December 2003, the Company issued stock subscriptions receivable in the aggregate amount of $50,000,000 for 980,392 shares of Series C convertible preferred stock. All of the 980,392 shares of Series C convertible preferred stock were issued in the first quarter of 2004. Approximately $31,847,000 of the $50,000,000 in stock subscriptions were collected in December 2003. The remaining stock subscription receivable of approximately $18,153,000 as of December 31, 2003 was collected during the first quarter of 2004. The rights, preferences and privileges of the holders of Series C convertible preferred stock are as follows:
| Each share of Series C is convertible into approximately 3.3 shares of common stock, adjusted for dilution as defined. Shares will automatically be converted on the date of an underwritten public offering of common stock in which the Company receives gross proceeds of $60 million or upon the affirmative election of the holders of a majority of the outstanding shares of the Series C convertible preferred stock. The holders of the Series C convertible preferred stock will be entitled to a weighted-average antidilution adjustment to the conversion price in the event that the Company issues equity securities for an effective purchase price of less than $15.30 per share (on an as-if-converted-to-common stock basis) in an equity financing. In addition, if, on or before May 1, 2005, the Company issues equity securities in one or more financings and the consideration to the Company in such financings, in the aggregate, is $60,000,000 or greater, then the conversion price of the Series C convertible preferred stock will automatically adjust to an adjusted price equal to 80% of the volume weighted-average sale price per share of all of the securities issued in such financing(s) (on an as-if-converted-to-common stock basis) if such adjusted |
price is less than the then-effective conversion price of the Series C convertible preferred stock. The conversion price will also be subject to proportional adjustment for stock splits, stock dividends and the like. The Series C convertible preferred stock was determined not to have any beneficial conversion value upon issuance since the initial effective conversion price of $15.30 per share on an as-if- converted-to-common stock basis was greater than the estimated fair value per share of the common stock into which the Series C convertible preferred stock was convertible offering commitment date. However, if the conversion price is adjusted downward at a future date a beneficial conversion charge would be recorded by the Company as a reduction in retained earnings or, in the absence of retained earnings, additional paid-in capital, and an increase in additional paid in-capital. In the period of the charge, if any, net income applicable common stockholders and net income per share would be reduced. | |
| Each share of Series C has the same voting rights as the common stock into which it is convertible. |
| Dividends may be declared at the discretion of the board of directors. Dividends are not cumulative but must be simultaneously declared and paid with dividends declared and paid on common stock. |
10. | Stock option plans |
The Companys 2001 Stock Awards Plan (the Plan) provides for the granting of stock options to directors, employees and consultants. The Company has reserved 5,000,000 shares of common stock for issuance under the Plan. During 2002, the Board approved the issuance of 3,333 shares of common stock to an employee. These shares, which were valued at $84,000 and recorded as compensation expense in 2002, reduced the number of shares available for issuance under the Plan. As of December 31, 2003, 1,299,262 options were outstanding under the Plan. As of March 31, 2004, 1,356,043 options were outstanding under the plan. The Company has two other stock award plans: the 1991 Stock Option Plan (the 1991 Plan) and the 1999 Stock Plan (the 1999 Plan). Both of these plans provide for the granting of stock options to directors, employees and consultants. As of both December 31, 2003 and March 31, 2004, 126,500, and 126,099, respectively, options were outstanding under the 1991 Plan and 305,430 options were outstanding under the 1999 Plan. There are no additional shares available for issuance under the 1991 Plan and the 1999 Plan at December 31, 2003 or March 31, 2004.
Prior to the merger of CTL and AlleCure into the Company, CTL had granted options to purchase shares of its common stock under its 2000 Stock Option and Stock Plan (the CTL Plan). Similarly, AlleCure had granted options to purchase shares of its common stock under its 2000 Stock Option and Stock Plan (the AlleCure Plan). Pursuant to the plans of reorganization and agreements of merger between the Company and each of CTL and AlleCure, the Company has assumed the obligation to issue shares of the Companys common stock, at the exchange ratio agreed to in the merger agreement, upon the exercise of options granted under the CTL Plan and the AlleCure Plan. After the merger date, no further options were granted under either the CTL Plan or AlleCure Plan. As of December 31, 2003 there were an aggregate of 127,661 options outstanding under these plans. As of March 31, 2004 there were an aggregate of 121,409 options outstanding under these plans. The assumption of options issued by CTL and AlleCure by the Company in connection with the merger on December 12, 2001 resulted in a new measurement date. On this date, the outstanding options had an intrinsic value of approximately $2,528,000. Approximately $632,000 of the $2,528,000 related to vested options and was therefore recorded immediately as compensation expense. The remaining amount of the $2,528,000 related to unvested options and is being amortized to stock-based
compensation expense over the remaining vesting period. During the years ended December 31, 2001, 2002, 2003, the cumulative period from February 14, 1991 (date of inception) to December 31, 2003 and the three months ended March 31, 2004, $632,038, $632,038, $274,532, $1,538,608 and $53,727, respectively, was recognized as stock-based compensation expense related to these options. As of March 31, 2004, assuming no options are cancelled or expired in future periods, the remaining intrinsic value to be amortized is approximately $161,000.
The Companys Board of Directors approved certain option grants outside of the Companys 2001 Stock Awards Plan. During the year ended December 31, 2002, an employee who is also a majority stockholder was granted 240,972 options at an exercise price of $25.23 per share. The options vest annually over four years. These options were outstanding at December 31, 2003 and March 31, 2004 and are included in the tables below.
The following table summarizes information about stock options outstanding:
Year ended December 31, | |||||||||||||||||||||||||||||||||
Three months ended | |||||||||||||||||||||||||||||||||
March 31, | |||||||||||||||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | ||||||||||||||||||||||||||||||
(unaudited) | |||||||||||||||||||||||||||||||||
Weighted | Weighted | Weighted | Weighted | ||||||||||||||||||||||||||||||
average | average | average | average | ||||||||||||||||||||||||||||||
exercise | exercise | exercise | exercise | ||||||||||||||||||||||||||||||
Options | price | Options | price | Options | price | Options | price | ||||||||||||||||||||||||||
Options outstanding at the beginning of the period
|
632,589 | 7.23 | 775,268 | 10.53 | 1,904,603 | 17.52 | 2,099,825 | 10.29 | |||||||||||||||||||||||||
Granted
|
174,172 | 23.28 | 1,222,675 | 22.11 | 1,664,886 | 9.36 | 74,333 | 8.61 | |||||||||||||||||||||||||
Exercised
|
(1,549 | ) | 8.49 | (17,771 | ) | 5.49 | (526 | ) | 7.80 | ||||||||||||||||||||||||
Canceled
|
(29,944 | ) | 15.12 | (75,569 | ) | 20.58 | (1,469,664 | ) | 18.57 | (23,679 | ) | 14.40 | |||||||||||||||||||||
Options outstanding at the end of the period
|
775,268 | 10.53 | 1,904,603 | 17.52 | 2,099,825 | 10.29 | 2,149,953 | 10.20 | |||||||||||||||||||||||||
Options exercisable at the end of the period
|
644,899 | 9.06 | 636,937 | 10.08 | 728,590 | 9.96 | 765,464 | 10.74 | |||||||||||||||||||||||||
The weighted-average exercise prices and weighted-average fair values of options granted are as follows:
Year ended December 31, | ||||||||||||||||||||||||||||||||
Three months ended | ||||||||||||||||||||||||||||||||
March 31, | ||||||||||||||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | |||||||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||||||
Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||||||||||
average | Weighted | average | Weighted | average | Weighted | average | Weighted | |||||||||||||||||||||||||
exercise | average | exercise | average | exercise | average | exercise | average | |||||||||||||||||||||||||
price | fair value | price | fair value | price | fair value | price | fair value | |||||||||||||||||||||||||
Option Price equal to estimated fair value
|
23.34 | 19.14 | 25.23 | 21.42 | | | | | ||||||||||||||||||||||||
Option Price greater than estimated fair value
|
25.23 | 20.22 | | | | | | | ||||||||||||||||||||||||
Option Price less than estimated fair value
|
13.23 | 20.22 | 12.75 | 13.11 | 9.36 | 11.55 | 8.61 | 11.07 |
The following table summarizes information about stock options outstanding at December 31, 2003:
Weighted- | ||||||||||||||||||||
average | ||||||||||||||||||||
remaining | Weighted- | Weighted- | ||||||||||||||||||
Options | contractual | average | Options | average | ||||||||||||||||
Grant price range | outstanding | life (years) | exercise price | exercisable | exercise price | |||||||||||||||
$0.33$7.95
|
1,636,568 | 5.66 | $7.29 | 478,792 | $5.70 | |||||||||||||||
$9.90$12.75
|
136,223 | 3.12 | $12.18 | 120,966 | $12.21 | |||||||||||||||
$12.99$15.57
|
4,744 | 7.62 | $14.64 | 3,460 | $14.40 | |||||||||||||||
$21.12$25.23
|
322,290 | 7.41 | $24.69 | 125,372 | $23.97 | |||||||||||||||
2,099,825 | 5.77 | $10.29 | 728,590 | $9.96 | ||||||||||||||||
The following table summarizes information about stock options outstanding at March 31, 2004 (unaudited):
Weighted- | ||||||||||||||||||||
average | ||||||||||||||||||||
remaining | Weighted- | Weighted- | ||||||||||||||||||
Options | contractual | average | Options | average | ||||||||||||||||
Grant price range | outstanding | life (years) | exercise price | exercisable | exercise price | |||||||||||||||
$0.33$7.95
|
1,657,914 | 5.50 | $7.29 | 478,559 | $5.70 | |||||||||||||||
$9.18$12.75
|
174,351 | 4.35 | $11.49 | 120,119 | $12.21 | |||||||||||||||
$12.99$15.57
|
4,744 | 7.37 | $14.64 | 3,460 | $14.40 | |||||||||||||||
$21.12$25.23
|
312,944 | 7.19 | $24.75 | 163,326 | $24.42 | |||||||||||||||
2,149,953 | 5.66 | $10.20 | 765,464 | $10.74 | ||||||||||||||||
For employee options, the difference between the estimated fair value of the underlying stock and the option exercise price is recognized as compensation expense over the vesting period in accordance with APB Opinion No. 25. For non-employee options, the Company recognizes stock-based compensation expense for the estimated fair value of the options, determined using the Black-Scholes option-pricing model, in accordance with EITF No. 96-18 and FIN 28. During the year ended December 31, 2001, non-employee stock-based compensation expense of approximately $75,000 was recognized for outstanding non-employee options. During the year ended December 31, 2002, previously recorded non-employee stock-based compensation expense of approximately $14,000 was reversed because of a decline in the estimated fair value of the Companys common stock underlying the non-employee options. During the year ended December 31, 2003, non-employee stock based compensation expense of approximately $277,000 was recognized for outstanding non-employee options. During the three months ended March 31, 2004, previously recorded non-employee stock based compensation expense of approximately $1,000 was reversed. As of December 31, 2003, non-employee options to purchase 36,837 shares of the Companys common stock at a weighted-average exercise price of $6.39 per share were outstanding and are reflected in the tables above. The in-substance stock options disclosed in Note 6, which resulted from the issuance of stock to certain individuals, are excluded from the tables above.
In January 2003, pursuant to a post-employment agreement with a former CTL executive, options to purchase 30,317 shares of common stock for $21.12 per share remain fully exercisable through January 2006. The change in option terms resulted in a new measurement date. Since the stock option
was modified in connection with the former executives post-employment activities to be provided through September 2003, stock-based compensation expense was recorded in 2003 in the amount of approximately $255,000, which was estimated using the Black-Scholes options pricing model.
In October 2003, pursuant to a settlement agreement with MannKinds former Chief Executive Officer, options to purchase 83,333 shares of common stock were immediately vested and remain fully exercisable through April 2005. The change in option terms resulted in a new measurement date. On the date of the agreement, the outstanding options had an intrinsic value of approximately $153,000 that was recorded immediately as compensation expense.
In November 2003, pursuant to a settlement agreement with a former employee, options to purchase 5,000 shares of common stock were immediately vested and remain fully exercisable through May 2004. The change in option terms resulted in a new measurement date. On the date of the agreement, the outstanding options had an intrinsic value of approximately $25,000 that was recorded immediately as compensation expense.
During the year ended December 31, 2003, the Company extended the exercise period for certain employee options to purchase 174,855 shares of common stock at an exercise price of $6.24 per share. Also, in February 2003, pursuant to a settlement agreement with a former executive, the Company agreed that options to purchase 124,553 shares of common stock would remain exercisable at least until April 2006 (see Note 12). The Company recorded compensation expense of approximately $2,502,000 in the year ended December 31, 2003 associated with all of these options. No additional compensation expense was incurred in the three months ended March 31, 2004.
On October 7, 2003, the Companys board of directors approved a re-pricing program for certain outstanding options to purchase shares of the Companys common stock granted under each of its stock plans. Under the re-pricing program, each holder of outstanding options granted under the stock plans who was an employee of the Company on November 5, 2003 could elect to exchange up to all of their outstanding options with an exercise price greater than $7.95 for re-priced stock options with an exercise price of $7.95 per share and a term of four years. The option re-pricing became effective on November 5, 2003. Vesting restarted immediately with 50% vesting in November 2004 and the remaining 50% vesting monthly until fully vested in November 2005. Employees who voluntarily resign in the 12-month period beginning November 5, 2003 will forfeit their re-priced options. Employees who are involuntarily terminated in the 12-month period beginning November 5, 2003 will vest 50% upon termination. In accordance with the terms of the re-pricing program, on November 5, 2003 the Company canceled 781,572 outstanding stock options with a weighted average exercise price of $19.83 per share and issued, in exchange for the canceled options, 781,572 new options with an exercise price of $7.95 per share. Compensation cost for all options re-priced under the re-pricing program will be re-measured, using the intrinsic value method proscribed by APB No. 25, on a quarterly basis until the options are exercised, canceled or expire. Compensation cost for these options are recognized in accordance with the method prescribed by FIN 28. Since the amount of compensation cost attributable to the re-priced options is dependent on the fair value of the Companys common stock underlying the options on the future re-measurement dates, the amount of stock-based compensation recognized in any given future period cannot be predicted and may have a material impact on the Companys results of operations. For the year ended December 31, 2003, the Company recorded $595,000 in stock-based compensation expense related to the re-pricing program. For the three months ended March 31, 2004, the Company recorded approximately $955,000 in stock based compensation expense relating to the re-pricing program.
Total stock-based compensation expense recognized in the accompanying statements of operations is as follows (in thousands):
Three months ended | ||||||||||||||||||||
Year ended December 31, | March 31, | |||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||
(unaudited) | ||||||||||||||||||||
Employee related
|
$1,445 | $366 | $4,224 | $3,060 | $1,196 | |||||||||||||||
Consultant related
|
120 | (14 | ) | 277 | (76 | ) | (1 | ) | ||||||||||||
Total
|
$1,565 | $352 | $4,501 | $2,984 | $1,195 | |||||||||||||||
Total stock-based compensation expense recognized in the accompanying statements of operations is included in the following categories (in thousands):
Three months ended | ||||||||||||||||||||
Year ended December 31, | March 31, | |||||||||||||||||||
2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||
(unaudited) | ||||||||||||||||||||
Research and development
|
$ | 562 | $ | 602 | $ | 961 | $ | 444 | $ | 386 | ||||||||||
General and administrative
|
1,003 | (250 | ) | 3,540 | $ | 2,540 | 809 | |||||||||||||
Total
|
$ | 1,565 | $ | 352 | $ | 4,501 | $ | 2,984 | $ | 1,195 | ||||||||||
11. | Warrants |
Warrants were issued during the years ended December 31, 1995 and 1996 to purchase shares of common stock. As of December 31, 2003 and March 31, 2004, warrants to purchase 175,227 shares of common stock were outstanding and exercisable at a weighted average exercise price of $12.54 per share. The outstanding warrants range in price from $12.53 to $12.70 per share and expire at various dates through 2007. Each warrant contains provisions for the adjustment of the exercise price and the number of shares issuable upon the exercise of the warrant in the event the Company declares and issues any stock dividends or effects any stock split, reclassification or consolidation of its common stock. The warrants also contain a provision that provides for an adjustment to the exercise price and the number of shares issuable in the event that the Company issues securities for a per share price less than a specified price. In addition to these provisions, holders of warrants to purchase 39,899 shares of the Companys common stock have rights to convert the warrants into shares of common stock.
On March 30, 2001, CTL issued a warrant to its majority stockholder in conjunction with the purchase of the Companys common stock. Pursuant to the plan of reorganization and agreement of merger between the Company and CTL, the Company assumed an obligation to issue 118,424 shares of its common stock upon the exercise of this warrant. The exercise price of the warrant, as adjusted by the merger, is $21.12 per share of common stock. The warrants remained outstanding as of December 31, 2002 and expired unexercised on March 31, 2003.
12. | Commitments and contingencies |
Operating LeasesThe Company leases certain facilities and equipment under various operating leases, which expire at various dates through December 31, 2005. Future minimum rental payments, required under operating leases, are as follows at December 31, 2003 (in thousands):
Year ending December 31,
|
||||||
2004
|
$ | 596 | ||||
2005
|
61 | |||||
2006
|
36 | |||||
Total minimum lease payments
|
$ | 693 | ||||
Rent expense under all operating leases for the years ended December 31, 2001, 2002 and 2003, was approximately $849,000, $851,000 and $1,241,195, respectively.
Capital LeasesThe Companys capital leases were not material for the years ended December 31, 2001, 2002 and 2003.
LitigationThe Company is subject to various claims and legal actions that arise in the ordinary course of business. In the opinion of management, the ultimate resolution of such matters will not have a material adverse impact on the Companys financial position or results of operations.
Guarantees and IndemnificationsThe 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 Companys request in such capacity. The term of the indemnification period is for the officers or directors lifetime. The Company may terminate the indemnification agreements with its officers and directors upon 90 days written notice, but termination will not affect claims for indemnification relating to events occurring prior to the effective date of termination. 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. Accordingly, the Company has not recorded any liabilities for these agreements as of December 31, 2003.
Severance AgreementsIn February 2003, pursuant to a settlement agreement, the Company is obligated to pay a former executive approximately $1,049,000 over three years, comprised of approximately $775,000 in deferred compensation (see Note 8) from prior years and the remainder comprised of other severance-related items. As of December 31, 2003 the Company has paid approximately $451,000 of this amount. An additional $271,000 is due in April 2004, $43,000 is due in September 2004 and the remaining $284,000 is due in April 2005. The settlement agreement further provides that the options held by the former executive to purchase up to 46,585 shares of the Companys common stock remain fully exercisable through April 2007, and options to purchase up to 124,553 shares of the Companys common stock remain fully exercisable until at least April 2006. The change in option terms resulted in a new measurement date. On the date of the agreement, the outstanding options had an intrinsic value of approximately $1,091,000, which was immediately expensed as part of the $2,502,000 charge more fully described in Note 10.
In February 2003, pursuant to a settlement agreement, the Company became obligated to pay a former employee his base salary at the rate of approximately $22,000 per month through December 2003, and a lump sum payment of $67,000 in February 2005, which is included in accrued expenses in the accompanying balance sheet at December 31, 2003.
In October 2003, under the terms of a severance agreement with its former Chief Executive Officer, the Company paid a severance payment of $165,000 and agreed to pay his base salary at the rate of approximately $28,000 per month through April 2005. The agreement also provides for accelerated vesting of an option held by the former executive permitting him to purchase up to 83,333 shares of the Companys common stock until April 7, 2005 (see Note 10).
13. | Employee benefit plans |
During 1999, CTL established a 401(k) Savings Retirement Plan (the CTL Retirement Plan) for CTL. The CTL Retirement Plan covered substantially all full-time employees who met the CTL Retirement Plans eligibility requirements and provides for employee elective contributions with a Company-match provision. For the year ended December 31, 2001, the Company contributed $60,000 to the CTL Retirement Plan.
During 2000, AlleCure established a 401(k) Savings Retirement Plan (the AlleCure Retirement Plan) for AlleCure. The AlleCure Retirement Plan covered substantially all full-time employees who met the AlleCure Retirement Plans eligibility requirements and provided for employee elective contributions with a Company-match provision. For the year ended December 31, 2001, the Company contributed $29,000 to the AlleCure Retirement Plan.
During the year ended December 31, 2002, PDC established a 401(k) Savings Retirement Plan (the PDC Retirement Plan) for PDC. Immediately after its establishment, the PDC Retirement Plan, CTL Retirement Plan and AlleCure Retirement Plan were converted to the 401(k) Savings Retirement Plan (the MannKind Retirement Plan) for the Company. For the years ended December 31, 2003 and 2002 and three months ended March 31, 2004, the Company contributed $235,000, $224,000, and $62,000, respectively, to the MannKind Retirement Plan.
14. | Income taxes |
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established when uncertainty exists as to whether all or a portion of the net deferred tax assets will be realized. Components of the net deferred tax asset as of December 31, 2002 and 2003, are approximately as follows (in thousands):
2002 | 2003 | ||||||||
Deferred Tax Assets:
|
|||||||||
Net operating loss carryforwards
|
$ | 44,962 | $ | 66,921 | |||||
Research and development credits
|
3,357 | 3,494 | |||||||
Accrued expenses
|
2,066 | 7,592 | |||||||
Start-up costs deduction
|
12 | | |||||||
Non-qualified stock option expense
|
532 | 2,442 | |||||||
Depreciation
|
(232 | ) | (416 | ) | |||||
Total gross deferred tax assets
|
50,697 | 80,033 | |||||||
Valuation allowance
|
(50,697 | ) | (80,033 | ) | |||||
Net deferred tax assets
|
$ | | $ | | |||||
The Companys effective income tax rate differs from the statutory federal income tax rate as follows for the years ended December 31, 2002 and 2003:
December 31, | ||||||||
2002 | 2003 | |||||||
Federal tax benefit rate
|
34.0 | % | 34.0 | % | ||||
State tax benefit, net of federal benefit
|
| | ||||||
Permanent items
|
(24.9 | ) | (0.1 | ) | ||||
Other
|
| 1.6 | ||||||
Valuation allowance
|
(9.1 | ) | (35.5 | ) | ||||
Effective income tax rate
|
0.0 | % | 0.0 | % | ||||
As required by SFAS No. 109, management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Management has concluded, in accordance with the applicable accounting standards, that it is more likely than not that the Company may not realize the benefit of its deferred tax assets. Accordingly, the deferred tax assets have been fully reserved. Management reevaluates the positive and negative evidence on an annual basis. During the years ended December 31, 2002 and 2003, the change in the valuation allowance was $24,216,000 and $29,336,000, respectively, for income taxes.
At December 31, 2003, the Company had federal and state net operating loss carryforwards of approximately $172,507,000 and $97,008,000 available, respectively, to reduce future taxable income and which will expire at various dates beginning in 2013 through 2023. At December 31, 2003, the Company had research and development credits of $3,494,000 that expire at various dates through 2017. Ownership changes, as defined in the Internal Revenue Code, including those resulting from the issuance of common stock in connection with the Companys planned initial public offering, may limit the amount of net operating loss and tax credit carryforwards that can be utilized to offset future taxable income or tax liability. The amount of the limitation is determined in accordance with Section 382 of the Internal Revenue Code. Approximately $16,579,000 of the federal and state net operating loss carryforwards is estimated to be limited under Internal Revenue Code Section 382.
15. | Related party transactions |
The Company issued 1,773,234 shares of its common stock to related parties during the year ended December 31, 2002 for proceeds of approximately $27,450,000. The Company issued 3,016,834 shares of its common stock to its majority stockholder during the year ended December 31, 2001 for proceeds of approximately $76,000,000. In connection with certain of these issuances, the board of directors approved the issuance of a warrant to purchase 118,424 shares of the Companys common stock at $21.12 per share, which expired unexercised on March 31, 2003.
During the years ended December 31, 2001, 2002 and 2003, the Company paid $426,000, $406,000, and $497,000, respectively, to certain universities to conduct sponsored research programs, including clinical research. Certain stockholders of the Company are employees of these universities and oversee the sponsored research programs.
One stockholder was paid $242,000 and $48,000 for consulting services during the years ended December 31, 2002 and 2001, respectively.
In December 2001, the Companys majority stockholder entered into an agreement with an executive of CTL that permitted the executive to require the majority stockholder to purchase shares of the Companys stock held by the executive, for a fixed price of approximately $2,949,000 (see Note 6).
From September 2001 to December 2002, the Company leased property located in Sylmar, California from Sylmar Biomedical Park LLC, a company controlled by the Companys majority stockholder. During the years ended December 31, 2002 and 2003 and for the period from February 14, 1991 (date of inception) to December 31, 2003, approximately $39,000, $20,000 and $59,000, respectively, was expensed to general and administrative in the accompanying statements of operations in connection with the property leased from Sylmar Biomedical Park LLC.
During the year ended December 31, 2002, while he was one of the Companys directors, MannKinds former Chief Executive Officer provided the Company with consulting services relating to its research and development programs. The Company paid the executive approximately $124,000 for his services.
In connection with certain meetings of the Companys board of directors and on other occasions when the Companys business necessitated air travel for the Companys majority stockholder and other Company employees, the Company utilized the majority stockholders private aircraft and the Company paid the charter company that manages the aircraft on behalf of the Companys majority stockholder approximately $441,000 and $321,000, respectively, for the years ended December 31, 2002 and 2003.
In 2004, the Company engaged one of its directors to provide consulting services related to seeking potential partners in the development and commercialization of the Companys technology. As of March 31, 2004, the Company paid approximately $37,000 for consulting services rendered.
The Company has entered into indemnification agreements with each of its directors and executive officers, in addition to the indemnification provided for in its amended and restated certificate of incorporation and amended and restated bylaws (see Note 12Guarantees and indemnifications).
16. | Selected quarterly financial data (unaudited) |
Quarter ended | ||||||||||||||||
Mar 31 | Jun 30 | Sep 30 | Dec 31 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
2002
|
||||||||||||||||
Net loss
|
$ | (9,985 | ) | $ | (12,262 | ) | $ | (15,560 | ) | $ | (168,458 | ) | ||||
Net loss attributable to common stockholders
|
$ | (10,046 | ) | $ | (12,913 | ) | $ | (15,790 | ) | $ | (169,188 | ) | ||||
Basic and diluted net loss per share
|
$ | (0.82 | ) | $ | (1.03 | ) | $ | (1.10 | ) | $ | (11.48 | ) | ||||
Weighted average common shares used to compute
net loss per share
|
12,305 | 12,491 | 14,324 | 14,732 | ||||||||||||
Mar 31 | Jun 30 | Sep 30 | Dec 31 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
2003
|
||||||||||||||||
Net loss
|
$ | (20,336 | ) | $ | (13,109 | ) | $ | (13,870 | ) | $ | (18,564 | ) | ||||
Net loss attributable to common stockholders
|
$ | (20,396 | ) | $ | (14,046 | ) | $ | (14,078 | ) | $ | (18,629 | ) | ||||
Basic and diluted net loss per share
|
$ | (1.24 | ) | $ | (0.79 | ) | $ | (0.71 | ) | $ | (0.93 | ) | ||||
Weighted average common shares used to compute
net loss per share
|
16,466 | 17,760 | 19,697 | 19,975 | ||||||||||||
Mar 31 | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||
2004
|
||||||||||||||||
Net loss
|
$ | (16,409 | ) | |||||||||||||
Net loss attributable to common stockholders
|
$ | (17,085 | ) | |||||||||||||
Basic and diluted net loss per share
|
$ | (0.86 | ) | |||||||||||||
Weighted average common shares used to compute
net loss per share
|
19,975 | |||||||||||||||
17. | Subsequent events |
On March 23, 2004, the following actions were approved by the stockholders:
| An amendment and restatement of the Companys 2001 Stock Awards Plan as the 2004 Equity Incentive Plan, which would become effective upon the closing of the IPO. |
| The adoption of the 2004 Employee Stock Purchase Plan, which would become effective upon the closing of the IPO. |
| The adoption of the 2004 Non-Employee Directors Stock Option Plan, which would become effective upon the closing of the IPO. |
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other expenses of issuance and distribution.
The following table sets forth all costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of the common stock being registered. All the amounts shown are estimates except for the SEC registration fee, the NASD filing fee and The Nasdaq National Market listing fee.
Amount | |||||
Description | to be paid | ||||
SEC registration fee
|
$12,021 | ||||
NASD filing fee
|
9,988 | ||||
Nasdaq Stock Market Listing Application fee
|
100,000 | ||||
Blue sky qualification fees and expenses
|
20,000 | ||||
Printing and engraving expenses
|
310,000 | ||||
Legal fees and expenses
|
775,000 | ||||
Accounting fees and expenses
|
560,000 | ||||
Transfer agent and registrar fees
|
5,000 | ||||
Miscellaneous
|
7,991 | ||||
Total
|
$1,800,000 | ||||
Item 14. Indemnification of directors and officers.
We were incorporated under the laws of the State of Delaware. Section 145 of the Delaware General Corporation Law, or DGCL, generally provides that a Delaware corporation may indemnify any person who is, or is threatened to be made, a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person is or was an officer, director, employee or agent of such corporation, or is or was serving at the request of such corporation as an officer, director, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided that such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporations best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was illegal. A Delaware corporation may also indemnify any person who is, or is threatened to be made, a party to any threatened, pending or completed action or suit by or in the right of the corporation by reason of the fact that such person was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit, provided such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporations best interests, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful
on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him or her against the expenses which such officer or director has actually and reasonably incurred. The Registrants amended and restated certificate of incorporation and amended and restated bylaws provide for the indemnification of directors and officers of the Registrant to the fullest extent permitted under the DGCL and other applicable laws.
Section 102(b)(7) of the DGCL permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duties as a director, except for liability:
| for any transaction from which the director derives an improper personal benefit; |
| for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; |
| for improper payment of dividends or redemptions of shares; or |
| for any breach of a directors duty of loyalty to the corporation or its stockholders. |
The Registrants amended and restated certificate of incorporation and amended and restated bylaws include such a provision. Expenses incurred by any officer or director in defending any such action, suit or proceeding in advance of its final disposition shall be paid by the Registrant upon delivery to the Registrant of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified by the Registrant.
As permitted by Delaware law, the Registrant has entered into indemnity agreements with each of its directors and executive officers that require the Registrant to indemnify such persons against any and all expenses (including attorneys fees), witness fees, damages, judgments, fines, settlements and other amounts incurred (including expenses of a derivative action) in connection with any action, suit or proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact that such person is or was a director, an officer or an employee of the Registrant or any of its affiliated enterprises, provided that such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Registrant and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder.
At present, there is no pending litigation or proceeding involving a director, officer or key employee of the Registrant as to which indemnification is being sought, nor is the Registrant aware of any threatened litigation that may result in claims for indemnification by any officer or director of the Registrant.
The Registrant has an insurance policy covering its officers and directors with respect to certain liabilities, including liabilities arising under the Securities Act of 1933, as amended, or otherwise.
In connection with this offering, the Registrant entered into an underwriting agreement which provides that the underwriters are obligated, under some circumstances, to indemnify the Registrants directors, officers and controlling persons against specified liabilities, including liabilities under the Securities Act.
Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:
Exhibit document | Number | |||
Form of Underwriting Agreement
|
1.1 | |||
Amended and Restated Certificate of Incorporation
|
3.1 | |||
Amended and Restated Bylaws
|
3.3 | |||
Form of Indemnity Agreement
|
10.1 |
Item 15. Recent Sales of Unregistered Securities.
The following list sets forth information regarding all securities sold by us since January 2001. All share amounts give effect to the one-for-three reverse stock split of our common stock effected on July 22, 2004.
(1) | In June and August 2001 we issued and sold an aggregate of 1,351,909 shares of our common stock to the Alfred E. Mann Living Trust for aggregate consideration of $34 million. | |
(2) | In December 2001, in connection with our acquisition of CTL, we issued 2,504,928 shares of our common stock to former common stockholders of CTL and 267,212 shares of our Series A preferred stock to the Alfred E. Mann Living Trust and McLean Watson Advisory Inc. in exchange for all of the outstanding shares of Series A preferred stock of CTL ImmunoTherapies Corp. Upon the closing of this offering at an assumed initial public offering price of $14.00 per share, these shares of Series A preferred stock will be converted into 890,706 shares of our common stock. | |
(3) | In December 2001, in connection with our acquisition of AlleCure, we issued 3,697,275 shares of our common stock to former common stockholders of AlleCure and 192,618 shares of our Series B preferred stock to the Alfred E. Mann Living Trust in exchange for all of the outstanding shares of Series A preferred stock of AlleCure Corp. Upon the closing of this offering at an assumed initial public offering price of $14.00 per share, these shares of Series B preferred stock will be converted into 811,400 shares of our common stock. | |
(4) | In May 2002 we issued and sold an aggregate of 233,849 shares of our common stock to ten accredited investors for aggregate consideration of $5.9 million. | |
(5) | In June through December 2002 we issued and sold an aggregate of 3,921,767 shares of our common stock to 93 accredited investors for aggregate consideration of $58 million. | |
(6) | In May 2003 we issued and sold an aggregate of 2,838,315 shares of our common stock to Biomed Partners and Biomed Partners II for aggregate consideration of $40 million. | |
(7) | In August 2003 we issued and sold an aggregate of 654,879 shares of our common stock to Biomed Partners and Biomed Partners II for aggregate consideration of $10 million. | |
(8) | In December 2003 we issued 41,534 shares of our common stock to the Alfred E. Mann Living Trust for aggregate consideration of $0.6 million. | |
(9) | In January to March 2004 we issued and sold an aggregate of 980,392 shares of our Series C preferred stock to 38 accredited investors for aggregate consideration of $50 million. Upon the closing of this offering at an assumed initial public offering price of $14.00 per share, these shares will be converted into 4,464,266 shares of our common stock. |
(10) | On July 22, 2004, we issued an aggregate of 22,309 shares of our common stock upon the conversion of warrants held by six warrantholders. We relied upon the exemption contained in Section 3(a)(9) of the Securities Act for this issuance. |
(11) | Since January 2001, we have granted options under our equity incentive plans to purchase 1,537,210 shares of common stock (net of expirations and cancellations) to employees, directors and consultants, having exercise prices ranging from $7.95 to $25.23 per share. Of these, options to purchase 19,846 shares of common stock have been exercised for aggregate consideration of $115,018, at exercise prices ranging from $4.95 to $21.12 per share. |
The offers, sales, and issuances of the securities described in paragraphs (1) through (9) were deemed to be exempt from registration under the Securities Act in reliance on Rule 506 of Regulation D in that the issuance of securities to the accredited investors did not involve a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions was an accredited investor under Rule 501 of Regulation D.
The offers, sales and issuances of the securities described in paragraph (11) were deemed to be exempt from registration under the Securities Act in reliance on Rule 701 in that the transactions were under compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of such securities were our employees, directors or bona fide consultants and received the securities under our equity incentive plans. Appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions had adequate access, through employment, business or other relationships, to information about us.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
Exhibit | ||||
number | Description of document | |||
1.1(a | ) | Form of Underwriting Agreement. | ||
3.1 | Registrants Restated Certificate of Incorporation, as currently in effect. | |||
3.2(a | ) | Registrants Certificate of Designation, Preferences and Rights of Series A Preferred Stock, as currently in effect. | ||
3.3 | Registrants Certificate of Designation, Preferences and Rights of Series B Preferred Stock, as currently in effect. | |||
3.4(a | ) | Registrants Certificate of Designation, Preferences and Rights of Series C Preferred Stock, as currently in effect. | ||
3.5 | Form of Registrants Amended and Restated Certificate of Incorporation, to be effective upon completion of the offering. | |||
3.6(a | ) | Amended and Restated By-Laws, as currently in effect. | ||
3.7(a | ) | Form of Registrants Amended and Restated Bylaws, to be effective upon completion of the offering. | ||
4.1(a | ) | Form of Common Stock Certificate. | ||
4.2(a | ) | Registration Rights Agreement made and entered into as of October 15, 1998 by and among CTL ImmunoTherapies Corp., Medical Research Group, LLC, McLean Watson Advisory Inc. and Alfred E. Mann, as amended. | ||
5.1 | Opinion of Cooley Godward LLP. | |||
10.1(a | )(b) | Form of Indemnity Agreement entered into between the Registrant and its directors and officers. |
Exhibit | ||||
number | Description of document | |||
10.2(b | ) | 2004 Equity Incentive Plan and Form of Stock Option Agreement thereunder. | ||
10.3 | 2004 Non-Employee Directors Stock Option Plan and Form of Stock Option Agreement thereunder. | |||
10.4(b | ) | 2004 Employee Stock Purchase Plan and Form of Offering Document thereunder. | ||
10.5(a | )(b) | Executive Severance Agreement, dated August 1, 2003, between the Registrant and Wendell Cheatham. | ||
10.6(a | )(b) | Executive Severance Agreement, dated August 1, 2003, between the Registrant and Hakan Edstrom. | ||
10.7(a | )(b) | Executive Severance Agreement, dated August 1, 2003, between the Registrant and David Thomson. | ||
10.8(a | )(b) | Executive Severance Agreement, dated August 1, 2003, between the Registrant and Dick Anderson. | ||
10.9(a | )(b) | Executive Severance Agreement, dated August 1, 2003, between the Registrant and Dan Burns. | ||
10.10( | a)(b) | Change of Control Agreement, dated August 1, 2003, between the Registrant and Wendell Cheatham. | ||
10.11( | a)(b) | Change of Control Agreement, dated August 1, 2003, between the Registrant and Hakan Edstrom. | ||
10.12( | a)(b) | Change of Control Agreement, dated August 1, 2003, between the Registrant and David Thomson. | ||
10.13( | a)(b) | Change of Control Agreement, dated August 1, 2003, between the Registrant and Dick Anderson. | ||
10.14( | a)(b) | Change of Control Agreement, dated August 1, 2003, between the Registrant and Dan Burns. | ||
10.15( | a)(c) | Supply Agreement made on January 1, 2000 by and between Diosynth B.V. and Pharmaceutical Discovery Corporation. | ||
10.16( | a) | Pharmaceutical Discovery Corporation 1991 Stock Option Plan. | ||
10.17( | a) | Pharmaceutical Discovery Corporation 1999 Stock Plan and Form of Stock Option Plan thereunder. | ||
10.18( | a) | AlleCure Corp. 2000 Stock Option and Stock Plan. | ||
10.19( | a) | CTL Immunotherapies Corp. 2000 Stock Option and Stock Plan. | ||
10.20( | a) | 2001 Stock Awards Plan. | ||
21.1(a | ) | Subsidiary of the Registrant. | ||
23.1 | Consent of Deloitte & Touche LLP, Independent Registered Accounting Firm. | |||
23.2 | Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1. | |||
24.1(a | ) | Power of Attorney. Reference is made to the signature page. |
(a) | Previously filed. |
(b) | Indicates management contract or compensatory plan. |
(c) | Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. |
(b) Financial Statement Schedules.
All schedules are omitted because they are not required, are not applicable or the information is included in the financial statements or notes thereto.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) | For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
(2) | For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
Signatures
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 3 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Valencia, State of California, on the 23rd day of July, 2004.
MANNKIND CORPORATION |
By: | /s/ ALFRED E. MANN |
|
|
Alfred E. Mann | |
Chief Executive Officer and Chairman | |
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 3 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated. | |
Signature | Title | Date | ||
/s/ ALFRED E. MANN Alfred E. Mann |
Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) | July 23, 2004 | ||
/s/ HAKAN S. EDSTROM Hakan S. Edstrom |
President, Chief Operating Officer and Director | July 23, 2004 | ||
/s/ RICHARD L. ANDERSON Richard L. Anderson |
Corporate Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | July 23, 2004 | ||
* Kathleen Connell, Ph.D. |
Director | July 23, 2004 | ||
* Ronald Consiglio |
Director | July 23, 2004 | ||
* Llew Keltner M.D., Ph.D. |
Director | July 23, 2004 | ||
* Michael Friedman, M.D. |
Director | July 23, 2004 | ||
* Kent Kresa |
Director | July 23, 2004 | ||
* David MacCallum |
Director | July 23, 2004 | ||
*By: /s/ HAKAN S. EDSTROM Hakan S. Edstrom Attorney-in-fact |
Exhibit Index
Exhibit | ||||
number | Description of document | |||
1.1(a | ) | Form of Underwriting Agreement. | ||
3.1 | Registrants Restated Certificate of Incorporation, as currently in effect. | |||
3.2(a | ) | Registrants Certificate of Designation, Preferences and Rights of Series A Preferred Stock, as currently in effect. | ||
3.3 | Registrants Certificate of Designation, Preferences and Rights of Series B Preferred Stock, as currently in effect. | |||
3.4(a | ) | Registrants Certificate of Designation, Preferences and Rights of Series C Preferred Stock, as currently in effect. | ||
3.5 | Form of Registrants Amended and Restated Certificate of Incorporation, to be effective upon completion of the offering. | |||
3.6(a | ) | Amended and Restated By-Laws, as currently in effect. | ||
3.7(a | ) | Form of Registrants Amended and Restated Bylaws, to be effective upon completion of the offering. | ||
4.1(a | ) | Form of Common Stock Certificate. | ||
4.2(a | ) | Registration Rights Agreement made and entered into as of October 15, 1998 by and among CTL ImmunoTherapies Corp., Medical Research Group, LLC, McLean Watson Advisory Inc. and Alfred E. Mann, as amended. | ||
5.1 | Opinion of Cooley Godward LLP. | |||
10.1(a | )(b) | Form of Indemnity Agreement entered into between the Registrant and its directors and officers. | ||
10.2(b | ) | 2004 Equity Incentive Plan and Form of Stock Option Agreement thereunder. | ||
10.3 | 2004 Non-Employee Directors Stock Option Plan and Form of Stock Option Agreement thereunder. | |||
10.4(b | ) | 2004 Employee Stock Purchase Plan and Form of Offering Document thereunder. | ||
10.5(a | )(b) | Executive Severance Agreement, dated August 1, 2003, between the Registrant and Wendell Cheatham. | ||
10.6(a | )(b) | Executive Severance Agreement, dated August 1, 2003, between the Registrant and Hakan Edstrom. | ||
10.7(a | )(b) | Executive Severance Agreement, dated August 1, 2003, between the Registrant and David Thomson. | ||
10.8(a | )(b) | Executive Severance Agreement, dated August 1, 2003, between the Registrant and Dick Anderson. | ||
10.9(a | )(b) | Executive Severance Agreement, dated August 1, 2003, between the Registrant and Dan Burns. | ||
10.10( | a)(b) | Change of Control Agreement, dated August 1, 2003, between the Registrant and Wendell Cheatham. | ||
10.11( | a)(b) | Change of Control Agreement, dated August 1, 2003, between the Registrant and Hakan Edstrom. | ||
10.12( | a)(b) | Change of Control Agreement, dated August 1, 2003, between the Registrant and David Thomson. | ||
10.13( | a)(b) | Change of Control Agreement, dated August 1, 2003, between the Registrant and Dick Anderson. | ||
10.14( | a)(b) | Change of Control Agreement, dated August 1, 2003, between the Registrant and Dan Burns | ||
10.15( | a)(c) | Supply Agreement made on January 1, 2000 by and between Diosynth B.V. and Pharmaceutical Discovery Corporation. |
Exhibit | ||||
number | Description of document | |||
10.16( | a) | Pharmaceutical Discovery Corporation 1991 Stock Option Plan. | ||
10.17( | a) | Pharmaceutical Discovery Corporation 1999 Stock Plan and Form of Stock Option Plan thereunder. | ||
10.18( | a) | AlleCure Corp. 2000 Stock Option and Stock Plan. | ||
10.19( | a) | CTL Immunotherapies Corp. 2000 Stock Option and Stock Plan. | ||
10.20( | a) | 2001 Stock Awards Plan. | ||
21.1(a | ) | Subsidiary of the Registrant. | ||
23.1 | Consent of Deloitte & Touche LLP, Independent Registered Accounting Firm. | |||
23.2 | Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1. | |||
24.1(a | ) | Power of Attorney. Reference is made to the signature page. |
(a) Previously filed. | ||
(b) Indicates management contract or compensatory plan. | ||
(c) Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. |
EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF PHARMACEUTICAL DISCOVERY CORPORATION The undersigned, Per Fog, in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware, hereby certifies that: 1. He is the duly elected and acting President of Pharmaceutical Discovery Corporation, a Delaware corporation (the "Corporation"). 2. The Corporation was originally incorporated under the name Pharmaceutical Discovery Corporation on February 14, 1991. 3. This Restated Certificate of Incorporation restates and integrates and further amends the provisions of the Certificate of Incorporation of the Corporation and was duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware. 4. The text of the Restated Certificate of Incorporation, as heretofore amended or supplemented, is hereby restated and further amended to read in its entirety as follows: ARTICLE FIRST The name of this corporation is MannKind Corporation (the "Corporation"). ARTICLE SECOND The address of the Corporation's registered office in the State of Delaware is 2711 Centerville Road, Suite 400, in the City of Wilmington, County of New Castle 19808, and the name of its registered agent at that address is Corporation Service Company. ARTICLE THIRD The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE FOURTH The total number of shares that the Corporation may issue is 105,000,000, of which 100,000,000 shall be shares of Common Stock, $0.01 par value per share, and 5,000,000 shall be shares of Preferred Stock, $0.01 par value per share. The Preferred Stock authorized by this Certificate of Incorporation may be issued from time to time in one or more series as the Board of Directors, by resolution or resolutions, may from time to time determine, each of said series to be distinctively designated. The voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions thereof, if any, of each such series may differ from those of any and all other series of Preferred Stock at any time outstanding, and the Board of Directors is hereby expressly granted authority to fix and alter, by resolution or resolutions, the designation, number, voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof, of each such series, including, but without limiting the generality of the foregoing, the following: (a) The distinctive designation of, and the number of shares of Preferred Stock that shall constitute, such series, which number (except as otherwise provided by the Board of Directors in the resolution establishing such series) may be increased or decreased (but not below the number of shares of such series then outstanding) from time to time by like actions of the Board of Directors; (b) The rights in respect of dividends, if any, of such series of Preferred Stock, the extent of the preference or relation, if any, of such dividends to the dividends payable on any other class or classes of any other series of the same or other class or classes of capital stock of the Corporation, and whether such dividends shall be cumulative or noncumulative; (c) The right, if any, of the holders of such series of Preferred Stock to convert the same into, or exchange the same for, shares of any other class or classes or of any other series of the same or any other class or classes of capital stock of the Corporation and the terms and conditions of such conversion or exchange, including, without limitation, whether or not the number of shares of such other class or series into which shares of such series may be converted or exchanged shall be adjusted in the event of any stock split, stock dividend, subdivision, combination, reclassification or other transaction or series of transactions affecting the class or series into which such series of Preferred Stock may be converted or exchanged; (d) Whether or not shares of such series of Preferred Stock shall be subject to redemption, and the redemption price or prices and the time or times at which, the terms and conditions on which, shares of such series of Preferred Stock may be redeemed; (e) The rights, if any, of the holders of such series of Preferred Stock upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation or in the event of any merger or consolidation of or sale of assets by the Corporation; (f) The terms of any sinking fund or redemption or purchase account, if any, to be provided for shares of such series of Preferred Stock; (g) The voting powers, if any, of the holders of any series of Preferred Stock generally or with respect to any particular matter, which may be less than, equal to or greater than one vote per share, and which may, without limiting the generality of the foregoing, include the right, voting as a series by itself or together with the holders of any other series of Preferred Stock or all series of Preferred Stock as a class, or together with the holders of any other class of the capital stock of the Corporation to elect one or more directors of the Corporation (which, without limiting the generality of the foregoing, may 2 include a specified number or portion of the then-existing number of authorized directorships of the Corporation, or a specified number or portion of directorships in addition to the then-existing number of authorized directorships of the Corporation), generally or under such specific circumstances and on such conditions, as shall be provided in the resolution or resolutions of the Board of Directors adopted pursuant hereto; and (h) Such other powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof, as the Board of Directors shall determine. Each outstanding share of Common Stock, $0.01 par value per share, of the Corporation (the "Pre-Split Common Stock") shall, automatically and without any action on the part of the holder and effective upon the filing of this Restated Certificate of Incorporation with the Secretary of State of Delaware (the "Effective Time"), be reclassified and become and thereafter continue to be ..240958 of a share of Common Stock of this Corporation, $0.01 par value per share (the "Post-Split Common Stock"), provided that the shares of Pre-Split Common Stock issued in the name of any holder as of such time shall be converted only into a whole number of shares at the rate of .240958 of a share for each share theretofore outstanding and any fractional shares thus resulting shall be treated in the manner specified below. Each holder of record of outstanding shares of this Corporation's Pre-Split Common Stock, at the close of business on said date, shall be entitled to receive, upon surrender of his, her or its stock certificate or certificates, a new certificate representing the number of shares of Post-Split Common Stock of which he, she or it is the owner after giving effect to the provisions of this Article Fourth. Each Stockholder who has an aggregate number of shares of Pre-Split Common Stock registered in his, her or its name as of the Effective Time so that he, she or it would otherwise, after giving effect to all such shares so registered, be entitled to receive a fraction of a share of the Post-Split Common Stock as a result of the reverse stock split will be entitled to receive from the Corporation cash equal to the fair market value of the fractional share in accordance with Section 155 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, this Corporation has caused this certificate to be signed by Per Fog, its President, this 12th day of December, 2001. /s/ Per B. Fog --------------------------- Per Fog, President 3 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF MANNKIND CORPORATION MANNKIND CORPORATION, a Delaware corporation (the "CORPORATION"), does hereby certify that: FIRST: The original name of the Corporation is PHARMACEUTICAL DISCOVERY CORPORATION. SECOND: The date on which the original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware is February 14, 1991. THIRD: The Board of Directors of the Corporation, acting in accordance with the provisions of Sections 141 and 242 of the General Corporation Law of the State of Delaware, adopted resolutions amending the Corporation's Restated Certificate of Incorporation as follows: ARTICLE FOURTH of the Restated Certificate of Incorporation shall be amended and restated in its entirety as follows: "Effective upon the filing of this Certificate of Amendment of Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, every 3 shares of Common Stock issued and outstanding shall, automatically and without any action on the part of the respective holders thereof, be combined and converted into 1 share of Common Stock (the "REVERSE SPLIT"); provided however, that the Corporation shall issue no fractional shares of Common Stock as a result of the Reverse Split, but shall instead pay to any stockholder who would be entitled to receive a fractional share as a result of the actions set forth herein a sum in cash equal to the fair market value of the shares constituting such fractional share as determined by the Board of Directors of the Corporation." FOURTH: Thereafter, pursuant to a resolution of the Board of Directors, this Certificate of Amendment was submitted to the stockholders of the Corporation for their approval, and was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, MannKind has caused this Certificate of Amendment to be signed by its Vice President and Associate General Counsel this 20 day of July, 2004. MANNKIND CORPORATION By: /s/ David Thomson ------------------------- DAVID THOMSON Vice President and Associate General Counsel
EXHIBIT 3.3 CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES B PREFERRED STOCK OF MANNKIND CORPORATION Pursuant to Section 151 of the General Corporation Law of the State of Delaware MANNKIND CORPORATION, a Delaware corporation (the "Corporation"), certifies that pursuant to the authority contained in Article Fourth of its Certificate of Incorporation, and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, its Board of Directors has adopted the following resolution creating a series of its preferred Stock designated as Series B Preferred Stock; RESOLVED, that a series of the class of authorized Preferred Stock of the Corporation be hereby created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of each such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. Designation and Amount. The shares of one such series shall be designated as "Series B Preferred Stock" (the "Series B Preferred Stock") and the number of shares constituting such series shall be 192,618, par value $0.01 per share. Section 2. Dividends. No dividend shall be declared or paid, during any fiscal year, on the Common Stock, par value $0.01 per share, of the Corporation (the "Common Stock") (other than dividends payable solely on the Common Stock in Common Stock of the Corporation or rights to acquire Common Stock for no consideration in respect of which an adjustment is made under Section 5(c)), unless there is simultaneously declared and paid to the holder or holders of each share of the Series B Preferred Stock an identical dividend determined as if each holder of Series B Preferred Stock had converted such holder's shares of Series B Preferred Stock into Common Stock. Section 3. Preference. (a) In the event of any liquidation, dissolution, or winding-up of the Corporation, (i) holders of shares of Series B Preferred Stock shall be entitled to receive, out of the assets of the Corporation legally available therefor, on a parity with the holders of the Series A Preferred Stock, par value $0.01 per share, of the Corporation (the "Series A Preferred Stock") and prior and in preference to the holders of Common Stock an amount (the "Series B Liquidation Preference") equal to the sum of (i) $77.875 per share of Series B Preferred Stock (subject to proportionate adjustment in the event of any stock dividend, stock split, combination, reorganization, recapitalization, reclassification, or other similar event), plus (ii) all accrued or declared but unpaid dividends thereon, if any. If, upon any liquidation, dissolution, or winding-up, whether voluntary or involuntary, the assets thus distributed among the holders of Series B Preferred Stock shall be insufficient to permit payment to such holders of the full Series B Liquidation Preference amounts to which they are entitled, then the entire assets of the Corporation to be distributed shall be distributed ratably among the holders of Series A Preferred Stock and Series B Preferred Stock in proportion to the respective unpaid balances owing to them in respect of such preferential amounts. At the option of the holders of at least a majority of the then outstanding shares of Series B Preferred Stock, a consolidation or merger of the Corporation with or into any other corporation or corporations (except the merger of a wholly owned subsidiary of the Corporation into the Corporation) or a sale of all or substantially all of the assets of the Corporation, shall be deemed to be a liquidation, dissolution, or winding-up within the meaning of this Section 3. (b) After payment or setting apart for payment of the Series B Liquidation Preference and the preference of any other series of preferred stock, the remaining assets and funds of the Corporation shall be distributed ratably among the holders of Common Stock in proportion to the amount of Common Stock owned by each such holder. Section 4. Voting Rights. The holders of the Series B Preferred Stock shall have the voting rights set forth in this Section 4. (a) Each share of Series B Preferred Stock shall entitle the holder thereof to one vote for each share of Common Stock into which it is then convertible (whether or not it is then immediately convertible) on all matters submitted to a vote of the Corporation's stockholders. (b) Except as otherwise provided by law, the holders of the Series B Preferred Stock and the holders of Common Stock shall vote together as one class on all matters submitted to a vote of the Corporation's stockholders. Section 5. Conversion Rights. (a) Automatic Conversion. Each share of Series B Preferred Stock shall automatically be converted into full shares of Common Stock at the then effective Conversion Price upon the closing of a firm commitment underwritten public offering covering the Corporation's Common Stock pursuant to an effective registration statement under the Securities Act of 1933, as amended, where the gross proceeds to the Corporation and the holders of the Series B Preferred Stock are at least $15,000,000. The term "Conversion Price" as used herein shall mean the price per share at which the Series B Preferred Stock is convertible into Common Stock which initially shall be equal to $7.7875 per share and shall be adjusted as provided herein. The term "Sale Price" shall mean the price per share at which the Series A Convertible Preferred Stock of AlleCure Corp. was originally issued, as adjusted in the merger of AlleCure Acquisition, Inc., a wholly-owned subsidiary of the Corporation, into AlleCure Corp., equal in the case of all shares of the Series B Preferred Stock to $77.875. Each share of Preferred Stock shall be convertible into that number of full shares of Common Stock which results from dividing the applicable Sale Price by the applicable Conversion Price in effect at the time of conversion. (b) Conversion Procedure. Upon the closing of a public offering described in Section 5(a), the holders of Series B Preferred Stock shall surrender the certificate or certificates therefor, duly endorsed in blank or accompanied by proper instruments of transfer, at the office of the Corporation or of any transfer agent for the shares of the Series B Preferred Stock. The 2 Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of shares of the Preferred Stock, or to such holder's nominee or nominees, certificates for the number of full shares of Common Stock to which such holder shall be entitled. Such conversion shall be deemed to have been made as of the date of the closing of the public offering referred to above, regardless of the date of surrender of the shares of the Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the date the conversion shall be deemed to have been made. Any declared but unpaid dividends due on the shares of Series B Preferred Stock to be converted shall be paid by the Corporation to the holders thereof on the date such shares are surrendered for conversion. (c) Anti-Dilution of Preferred Stock. In order to prevent dilution of the conversion rights granted in this Section 5, the Conversion Price shall be subject to adjustment from time to time as provided in this Section 5(c). (i) Subdivision or Combination of Stock. If the Corporation shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, if the outstanding shares of Common Stock of the Corporation shall be combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased, in each case so that the holders of shares of the Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock which such holders would have owned or been entitled to receive after the happening of either of such events if such shares of the Series B Preferred Stock had been converted immediately prior to the happening of such event on the day upon which such subdivision or combination, as the case may be, becomes effective. (ii) Stock Dividends. If the Corporation shall declare and pay to the holders of Common Stock a dividend or other distribution payable in shares of Common Stock, the Conversion Price in effect immediately prior thereto shall be adjusted so that the holders of shares of the Series B Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock which such holders would have owned or been entitled to receive after the declaration and payment of such dividend or other distribution if such shares of the Series B Preferred Stock had been converted immediately prior to the record date for the determination of shareholders entitled to receive such dividend or other distribution. (iii) Issuance of Common Stock. Subject to the provisions of subparagraph (vi) of this Section 5(c), if the Corporation shall issue or sell shares of Common Stock at a price per share below the applicable Conversion Price, as the same may have been adjusted pursuant to this Section 5(c), the Conversion Price of the Series B Preferred Stock shall be adjusted so that it shall equal the price (calculated to the nearest cent) determined by multiplying the Conversion Price of the Series B Preferred Stock in effect immediately prior to the date of issuance of such shares of Common Stock by a fraction, the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issuance plus (ii) the number of shares of Common Stock which the aggregate consideration to be received by the Corporation for the total number of shares of Common Stock to be so issued 3 would purchase at the Conversion Price of such class in effect immediately prior to the date of issuance of such shares of Common Stock, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of additional shares of Common Stock to be so issued. (iv) Issuance of Convertible Securities or Warrants. Subject to the provisions of subparagraph (vi) of Section 5(c), if the Corporation shall (a) issue or sell securities which are convertible into or exchangeable for shares of Common Stock ("Convertible Securities"), or (b) issue or sell any warrants or other rights entitling the holders thereof to subscribe for or purchase shares of Common Stock or Convertible Securities at a price per share (taking into account the consideration, if any, received by the Corporation for such Convertible Securities, warrants or other rights) below the applicable Conversion Price, as the same may have been adjusted pursuant to this Section 5(c), the Conversion Price of the Series B Preferred Stock shall be adjusted so that it shall equal the price determined by multiplying the Conversion Price of the Series B Preferred Stock in effect immediately prior to the date of issuance of such Convertible Securities or such warrants or other rights by a fraction the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding on the date of issuance of such Convertible Securities or such warrants or other rights plus (ii) the number of shares of Common Stock which the aggregate offering price (as calculated pursuant to the last sentence of this subparagraph) of the total number of shares of Common Stock offered pursuant to such Convertible Securities or such warrants or other rights would purchase at the Conversion Price in effect immediately prior to the date of issuance of such Convertible Securities or such warrants or other rights, and the denominator of which shall be the number of shares of Common Stock outstanding on the date of issuance of such Convertible Securities or such warrants or other rights plus the number of additional shares of Common Stock offered for subscription or purchase pursuant to such Convertible Securities or such warrants or other rights. No adjustment of the Conversion Price shall be made upon the actual issuance of shares of Common Stock pursuant to such Convertible Securities or such warrants or other rights except as otherwise provided in Section 5(c)(v). The "aggregate offering price," as used above in this Section 5(c)(iv), shall equal the sum of the consideration paid to the Corporation for such Convertible Securities or such warrants or other rights plus the minimum consideration receivable by the Corporation for the issuance of additional shares of Common Stock pursuant to such Convertible Securities, warrants or other rights. (v) Additional Adjustments to Conversion Prices Rules of Interpretation (A) Change in Exercise Price or Conversion Rate. If the purchase or conversion price provided for in any Convertible Securities or warrants or other rights, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities or warrants or other rights, or the rate at which any Convertible Securities or warrants or other rights are convertible into or exchangeable for shares of Common Stock shall change at any time (other than under provisions designed to protect against dilution), the Conversion Price in effect at the time of such change shall forthwith be adjusted to the Conversion Price which would have been in effect at such time had such Convertible Securities or warrants or other rights then outstanding provided for such changed purchase price, additional consideration or conversion rate, as the 4 case may be, at the time initially issued, granted or sold. If the purchase price provided for in any Convertible Securities or warrants or other rights or the rate at which any Convertible Securities or warrants or other rights are convertible into or exchangeable for shares of Common Stock shall be reduced at any time under provisions designed to protect against dilution, then in case of delivery of shares of Common Stock upon the exercise of or upon conversion or exchange of such Convertible Securities or such warrants or other rights, the Conversion Price then in effect hereunder shall be adjusted to the amount which would have been obtained had such Convertible Securities or other such warrants or other rights never been issued as to such Common Stock and had an adjustment of the Conversion Price been made upon the issuance of such shares of Common Stock to be so delivered. (B) Treatment of Expired Options and Unexercised Convertible Securities. On the expiration of any option granted by the Corporation in respect of its Common Stock or the termination of any right to convert or exchange any Convertible Securities, the Conversion Price then in effect hereunder shall be increased to the Conversion Price which would have been in effect at the time of such expiration or termination had such option or Convertible Securities never been issued. (C) Internal Transaction. In case any Convertible Securities, warrants or other rights issued, sold or granted by the Corporation in respect of its Common Stock shall be issued in connection with the issue or sale of other securities of the Corporation, together comprising one integral transaction in which no specified consideration is allocated to such Convertible Securities, warrants or other rights by the parties thereto, such Convertible Securities, warrants or other rights shall be deemed to have been issued without consideration; provided, however, that the Corporation's Board of Directors at the time of any such issuance of Convertible Securities shall determine whether to allocate specified consideration to the Convertible Securities. (D) Consideration for Stock. In case any shares of Common Stock, Convertible Securities, warrants or other rights shall be issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Corporation therefor. In case any shares of Common Stock, Convertible Securities, warrants or other rights shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation shall be the fair value of such consideration as determined reasonably and in good faith by a majority of the Board. (E) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Corporation, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock for the purposes of Section 5(c)(iii). 5 (F) Record Date. For purposes of this Section 5(c), if the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock, Convertible Securities, warrants or other rights, or (ii) to subscribe for or purchase the same, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right or subscription or purchase, as the case may be. (vi) Exclusion of Certain Issuances. The Corporation shall be permitted to issue or grant rights to acquire Additional Shares of Common Stock (as defined in the next sentence) and to issue such shares of Common Stock upon the exercise of such rights without giving rise to an adjustment under the provisions of this Section 5(c). The term "Additional Shares of Common Stock" as used herein shall mean: (a) shares of Common Stock issued upon conversion of the Series A or Series B Preferred Stock; (b) shares of Common Stock (or rights to acquire Common Stock) issued pursuant to stock option plans, stock purchase plans, stock bonus plans or other forms of stock incentive plans for officers, employees, consultants or directors of the Corporation, provided that each such plan and issuance or grant has been approved by the Corporation's Board of Directors by unanimous vote of all members; and (c) shares of Common Stock issued as a dividend or distribution on the Series B Preferred Stock. (vii) Reorganization, Reclassification, Consolidation, Merger or Sale. If any capital reorganization or reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holders of the Series B Preferred Stock shall thereafter have the right to acquire and receive upon conversion of the Series B Preferred Stock such shares of stock, securities or assets as would have been issuable or payable (as part of the reorganization, reclassification, consolidation, merger or sale) with respect to or in exchange for such number of outstanding shares of the Corporation's Common Stock as would have been received upon conversion of the Preferred Stock immediately before such reorganization, reclassification, consolidation, merger or sale. In any such case appropriate provision shall be made with respect to the rights and interests of the holders of the Preferred Stock to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Conversion Price and of the number of shares acquirable and receivable upon the conversion of the Preferred stock) shall thereafter be applicable as nearly as possible, in relation to any shares of stock, securities or assets thereafter deliverable upon the conversion of the Preferred Stock (including an immediate adjustment of the Conversion Price under Section 5(c)(i) if the value for the Common Stock, as reflected by the terms of such consolidation, merger or sale is less than the Conversion Price in effect immediately prior to such consolidation, merger or sale). The Corporation will not effect any such consolidation, merger or sale unless prior to the consummation thereof the successor corporation (if other than the Corporation) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument mailed or delivered to the holders of the Preferred Stock at the last address of each such holder appearing on the books of 6 the Corporation the obligation to deliver to each such holder such shares of stock, securities or assets to which, in accordance with the foregoing provisions, such holder may be entitled. (d) Fractional Shares. No fractional share shall be issued upon the conversion of any share or shares of Series B Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Series B Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Corporation's Board of Directors). IN WITNESS WHEREOF, MannKind Corporation has caused this Certificate of Designation, Preferences and Rights of Series B Preferred Stock to be signed this 12th day of December 2001. MANNKIND CORPORATION By: /s/ Per B. Fog ------------------------ Per B. Fog, President 7 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES B PREFERRED STOCK OF MANNKIND CORPORATION MANNKIND CORPORATION, a Delaware corporation (the "CORPORATION"), does hereby certify that: FIRST: The original name of the Corporation is PHARMACEUTICAL DISCOVERY CORPORATION. SECOND: The date on which the original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware is February 14, 1991. The date on which the original Certificate of Designation, Preferences and Rights of Series B Preferred Stock of the Corporation was filed with the Secretary of State of the State of Delaware is December 12, 2001. THIRD: The Board of Directors of the Corporation, acting in accordance with the provisions of Sections 141 and 242 of the General Corporation Law of the State of Delaware, adopted resolutions amending the Certificate of Designation, Preferences and Rights of Series B Preferred Stock of the Restated Certificate of Incorporation of the Corporation, as follows: Section 5(a) of Certificate of Designation, Preferences and Rights of Series B Preferred Stock of the Restated Certificate of Incorporation shall be amended and restated in its entirety as follows: "AUTOMATIC CONVERSION. Each share of Series B Preferred Stock shall automatically be converted into full shares of Common Stock at the then effective Conversion Price immediately prior to the closing of a firm commitment underwritten public offering covering the Corporation's Common Stock pursuant to an effective registration statement under the Securities Act of 1933, as amended, where the gross proceeds to the Corporation are at least $15,000,000. The term "Conversion Price" as used herein shall mean the price per share at which the Series B Preferred Stock is convertible into Common Stock which initially shall be equal to $7.7875 per share and shall be adjusted as provided herein. The term "Sale Price" shall mean the price per share at which the Series A Convertible Preferred Stock of AlleCure Corp. was originally issued, as adjusted in the merger of AlleCure Acquisition, Inc., a wholly-owned subsidiary of the Corporation, into AlleCure Corp., equal in the case of all shares of the Series B Preferred Stock to $77.875. Each share of Preferred Stock shall be convertible into that number of full shares of Common Stock which results from dividing the applicable Sale Price by the applicable Conversion Price in effect at the time of conversion." FOURTH: Thereafter, pursuant to a resolution of the Board of Directors, this Certificate of Amendment was submitted to the stockholders of the Corporation for their approval, and was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, MannKind has caused this Certificate of Amendment to be signed by its Vice President and Associate General Counsel this 20 day of July, 2004. MANNKIND CORPORATION By: /s/ David Thomson --------------------------------- DAVID THOMSON Vice President and Associate General Counsel
Exhibit 3.5 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF MANNKIND CORPORATION The undersigned, Alfred E. Mann, in accordance with the provisions of Sections 242 and 245 of the Delaware General Corporation Law ("DGCL") hereby certifies that: FIRST: He is the duly elected and acting Chairman of the Board and Chief Executive Officer of MannKind Corporation, a Delaware corporation (the "CORPORATION"). SECOND: The original name of this Corporation was Pharmaceutical Discovery Corporation and the date of filing of the original Certificate of Incorporation of this Corporation with the Secretary of State of the State of Delaware was February 14, 1991. THIRD: This Amended and Restated Certificate of Incorporation (the "AMENDED AND RESTATED CERTIFICATE") has been duly approved and adopted by the Board of Directors of the Corporation (the "BOARD") in accordance with the applicable provisions of Sections 242 and 245 of the DGCL. FOURTH: This Amended and Restated Certificate has been duly approved and adopted by the stockholders of the Corporation in accordance with the applicable provisions of Sections 228, 242 and 245 of the DGCL. FIFTH: The text of the Restated Certificate of Incorporation, as heretofore amended or supplemented, is hereby amended and restated in its entirety to read as follows: I. The name of this corporation is MannKind Corporation (the "CORPORATION"). II. The address of the registered office of the corporation in the State of Delaware is 2711 Centerville Road, Suite 400, City of Wilmington, County of New Castle, 19808 and the name of the registered agent of the Corporation in the State of Delaware at such address is the Corporation Service Company. III. The purpose of this Corporation is to engage in any lawful act or activity for which a corporation may be organized under the DGCL. IV. 1. A. This Corporation is authorized to issue two classes of stock to be designated, respectively, "COMMON STOCK" and "PREFERRED STOCK." The total number of shares which the Corporation is authorized to issue is one hundred million (100,000,000) shares. Ninety million (90,000,000) shares shall be Common Stock, each having a par value of one cent ($.01). Ten million (10,000,000) shares shall be Preferred Stock, each having a par value of one cent ($.01). B. The Preferred Stock may be issued from time to time in one or more series. The Board is hereby expressly authorized to provide for the issue of all or any of the remaining shares of the Preferred Stock in one or more series, and to fix the number of shares and to determine or alter for each such series, such voting powers, full or limited, or no voting powers, and such designation, preferences, and relative, participating, optional, or other rights and such qualifications, limitations, or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board providing for the issuance of such shares and as may be permitted by the DGCL. The Board is also expressly authorized to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the terms of any certificate of designation filed with respect to any series of Preferred Stock. C. Each outstanding share of Common Stock shall entitle the holder thereof to one vote on each matter properly submitted to the stockholders of the Corporation for their vote; provided, however, that, except as otherwise required by law, holders of Common Stock shall not be entitled to vote on any amendment to this Certificate of Incorporation (including any certificate of designation filed with respect to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or more other such series, to vote thereon by law or pursuant to this Certificate of Incorporation (including any certificate of designation filed with respect to any series of Preferred Stock). V. For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: A. BOARD OF DIRECTORS 1. The management of the business and the conduct of the affairs of the Corporation shall be vested in the Board. The number of directors which shall constitute the 2. Board shall be fixed exclusively by resolutions adopted by a majority of the authorized number of directors constituting the Board. 2. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, directors shall be elected at each annual meeting of stockholders for a term of one year. Each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board shall shorten the term of any incumbent director. 3. Subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall, unless the Board determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. 4. The directors of the Corporation need not be elected by written ballot unless the Bylaws so provide. B. BYLAW AMENDMENTS. The Board is expressly empowered to adopt, amend or repeal the Bylaws of the Corporation. The stockholders shall also have power to adopt, amend or repeal the Bylaws of the Corporation; provided, however, that, in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to adopt, amend or repeal any provision of the Bylaws of the Corporation. C. STOCKHOLDER ACTION. No action shall be taken by the stockholders of the Corporation except at an annual or special meeting of stockholders called in accordance with the Bylaws. No action shall be taken by the stockholders by written consent or electronic transmission. D. ADVANCE NOTICE. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the Bylaws of the Corporation. VI. A. The liability of the directors for monetary damages shall be eliminated to the fullest extent under applicable law. If the DGCL is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated to the fullest extent permitted by the DGCL, as so amended. 3. B. Any repeal or modification of this Article VI shall be prospective and shall not affect the rights under this Article VI in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. VII. A. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph B. of this Article VII, and all rights conferred upon the stockholders herein are granted subject to this reservation. B. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Corporation required by law or by this Certificate of Incorporation or any certificate of designation filed with respect to a series of Preferred Stock, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend or repeal Articles V, VI, and VII. 4. IN WITNESS WHEREOF, MANNKIND CORPORATION has caused this Amended and Restated Certificate of Incorporation to be signed on this ____ day of __________, 2004 by the undersigned who affirms that the statements made herein are true and correct. ______________________________________ ALFRED E. MANN Chairman of the Board and Chief Executive Officer 5.
[COOLEY GODWARD LLP LETTERHEAD] July ___, 2004 MannKind Corporation 28903 North Avenue Paine Valencia, CA 91355 Ladies and Gentlemen: You have requested our opinion with respect to certain matters in connection with the filing by MannKind Corporation (the "Company") of a Registration Statement (No. 333-115020) on Form S-1 (the "Registration Statement") with the Securities and Exchange Commission, including a related prospectus filed with the Registration Statement (the "Prospectus"), covering an underwritten public offering of up to 6,325,000 shares (the "Shares") of the Company's common stock, par value $.01, including 825,000 shares of common stock that may be sold pursuant to the exercise of an over-allotment option. In connection with this opinion, we have examined and relied upon the Registration Statement and Prospectus, the Company's Restated Certificate of Incorporation, as amended, and Amended and Restated Bylaws, its form of Amended and Restated Certificate of Incorporation to be filed prior to effectiveness of the Registration Statement and Amended and Restated Bylaws to be effective following the closing of the offering of the Shares in accordance with the Registration Statement and Prospectus, and the originals or copies certified to our satisfaction of such records, documents, certificates, memoranda and other instruments as in our judgment are necessary or appropriate to enable us to render the opinion expressed below. On the basis of the foregoing, and in reliance thereon, we are of the opinion that the Shares, when sold and issued in accordance with the Registration Statement and the Prospectus, will be validly issued, fully paid and nonassessable. We consent to the reference to our firm under the caption "Legal Matters" in the Prospectus and to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, Cooley Godward LLP By: /s/ JEREMY D. GLASER ------------------------------- Jeremy D. Glaser
Exhibit 10.2 MANNKIND CORPORATION 2004 EQUITY INCENTIVE PLAN ORIGINALLY ADOPTED AS THE 2001 STOCK AWARDS PLAN ON OCTOBER 7, 2001 ORIGINALLY APPROVED BY STOCKHOLDERS ON OCTOBER 7, 2001 AMENDED AND RESTATED ON MARCH 23, 2004 APPROVED BY STOCKHOLDERS ON MARCH 23, 2004 TERMINATION DATE: MARCH 22, 2014 1. PURPOSES. (a) AMENDMENT AND RESTATEMENT. The Plan amends and restates the MannKind Corporation 2001 Stock Awards Plan adopted October 7, 2001 (the "PRIOR PLAN"). All outstanding awards granted under the Prior Plan shall remain subject to the terms of the Prior Plan. All options granted subsequent to the effective date of this Plan shall be subject to the terms of this Plan. (b) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive Stock Awards are Employees, Directors and Consultants. (c) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a means by which eligible recipients of Stock Awards may be given an opportunity to benefit from increases in value of the Common Stock through the granting of the following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) Restricted Stock Awards, (iv) Stock Appreciation Rights, (v) Phantom Stock Awards and (vi) Other Stock Awards. (d) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain the services of the group of persons eligible to receive Stock Awards, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CAPITALIZATION ADJUSTMENT" has the meaning ascribed to that term in Section 11(a). (d) "CAUSE" means, with respect to a Participant, the occurrence of any of the following: (i) such Participant's conviction of any felony or any crime involving fraud or dishonesty which, in the Board's sole discretion, materially affects the business of the Company; (ii) such Participant's participation (whether by affirmative act or omission) in a fraud, act of dishonesty or other act of misconduct against the Company and/or its Affiliates which, in the 1. Board's sole discretion, materially affects the business of the Company; (iii) conduct by such Participant which, based upon a good faith and reasonable factual investigation by the Company (or, if such Participant is an Officer, by the Board), demonstrates such Participant's gross unfitness to serve; (iv) such Participant's violation of any statutory or fiduciary duty, or duty of loyalty, owed to the Company and/or its Affiliates; (v) such Participant's breach of any material term of any material contract between such Participant and the Company and/or its Affiliates; and (vi) such Participant's repeated violation of any material Company policy. Notwithstanding the foregoing, such Participant's Disability shall not constitute Cause as set forth herein. The determination that a termination is for Cause shall be by the Committee in its sole and exclusive judgment and discretion. (e) "CHANGE IN CONTROL" means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events: (i) any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities other than by virtue of a merger, consolidation or similar transaction. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur (A) on account of an Exchange Act Person as described in Section 2(s) (E) transferring in a single act or series of related acts more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities (1) by gift, (2) for estate planning purposes or (3) to any entity controlled directly or indirectly by such Exchange Act Person, (B) on account of the acquisition of securities of the Company by an investor, any affiliate thereof or any other Exchange Act Person from the Company in a transaction or series of related transactions the primary purpose of which is to obtain financing for the Company through the issuance of equity securities or (C) solely because the level of Ownership held by any Exchange Act Person (the "SUBJECT PERSON") exceeds the designated percentage threshold of the outstanding voting securities as a result of a repurchase or other acquisition of voting securities by the Company reducing the number of shares outstanding, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Company, and after such share acquisition, the Subject Person becomes the Owner of any additional voting securities that, assuming the repurchase or other acquisition had not occurred, increases the percentage of the then outstanding voting securities Owned by the Subject Person over the designated percentage threshold, then a Change in Control shall be deemed to occur; (ii) there is consummated a merger, consolidation or similar transaction involving (directly or indirectly) the Company and, immediately after the consummation of such merger, consolidation or similar transaction, the stockholders of the Company immediately prior thereto do not Own, directly or indirectly, either (A) outstanding voting securities representing more than fifty percent (50%) of the combined outstanding voting power of the surviving Entity in such merger, consolidation or similar transaction or (B) more than fifty percent (50%) of the combined outstanding voting power of the parent of the surviving Entity in such merger, consolidation or similar transaction, in each case in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such transaction; 2. (iii) there is consummated a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries, other than a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries to an Entity, more than fifty percent (50%) of the combined voting power of the voting securities of which are Owned by stockholders of the Company in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such sale, lease, license or other disposition; or (iv) individuals who, on the date this Plan is adopted by the Board, are members of the Board (the "INCUMBENT BOARD") cease for any reason to constitute at least a majority of the members of the Board; provided, however, that if the appointment or election (or nomination for election) of any new Board member was approved or recommended by a majority vote of the members of the Incumbent Board then still in office, such new member shall, for purposes of this Plan, be considered as a member of the Incumbent Board. Notwithstanding the foregoing or any other provision of this Plan, the definition of Change in Control (or any analogous term) in an individual written agreement between the Company or any Affiliate and the Participant shall supersede the foregoing definition with respect to Stock Awards subject to such agreement (it being understood, however, that if no definition of Change in Control or any analogous term is set forth in such an individual written agreement, the foregoing definition shall apply). (f) "CODE" means the Internal Revenue Code of 1986, as amended. (g) "COMMITTEE" means a committee of one or more members of the Board appointed by the Board in accordance with Section 3(c). (h) "COMMON STOCK" means the common stock of the Company. (i) "COMPANY" means MannKind Corporation, a Delaware corporation. (j) "CONSULTANT" means any person, including an advisor, who (i) is engaged by the Company or an Affiliate to render consulting or advisory services and is compensated for such services or (ii) is serving as a member of the Board of Directors of an Affiliate and is compensated for such services. However, service solely as a Director, or payment of a fee for such services, shall not cause a Director to be considered a "Consultant" for purposes of the Plan. (k) "CONTINUOUS SERVICE" means that the Participant's service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. A change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant's service with the Company or an Affiliate, shall not terminate a Participant's Continuous Service. For example, a change in status from an Employee of the Company to a Consultant of an Affiliate or to a Director shall not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that party's sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. Notwithstanding 3. the foregoing, a leave of absence shall be treated as Continuous Service for purposes of vesting in a Stock Award only to such extent as may be provided in the Company's leave of absence policy or in the written terms of the Participant's leave of absence. (l) "CORPORATE TRANSACTION" means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events: (i) a sale or other disposition of all or substantially all, as determined by the Board in its discretion, of the consolidated assets of the Company and its Subsidiaries; (ii) a sale or other disposition of at least ninety percent (90%) of the outstanding securities of the Company; (iii) a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or (iv) a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise. (m) "COVERED EMPLOYEE" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to stockholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. (n) "DIRECTOR" means a member of the Board. (o) "DISABILITY" means the permanent and total disability of a person within the meaning of Section 22(e)(3) of the Code. (p) "EMPLOYEE" means any person employed by the Company or an Affiliate. However, service solely as a Director, or payment of a fee for such services, shall not cause a Director to be considered an "Employee" for purposes of the Plan. (q) "ENTITY" means a corporation, partnership or other entity. (r) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (s) "EXCHANGE ACT PERSON" means any natural person, Entity or "group" (within the meaning of Section 13(d) or 14(d) of the Exchange Act), except that "Exchange Act Person" shall not include (A) the Company or any Subsidiary of the Company, (B) any employee benefit plan of the Company or any Subsidiary of the Company or any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary of the Company, (C) an underwriter temporarily holding securities pursuant to an offering of such securities, (D) an Entity Owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their Ownership of stock of the Company; or (E) any natural person, Entity 4. or "group" (within the meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of the effective date of the Plan as set forth in Section 14, is the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities. (t) "FAIR MARKET VALUE" means, as of any date, the value of the Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable. (ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board. (u) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (v) "IPO DATE" means the effective date of the initial public offering of the Common Stock. (w) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a current Employee or Officer of the Company or an Affiliate, does not receive compensation, either directly or indirectly, from the Company or an Affiliate for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("REGULATION S-K")), does not possess an interest in any other transaction for which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship for which disclosure would be required pursuant to Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (x) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (y) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (z) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock Option to purchase shares of Common Stock granted pursuant to the Plan. (aa) "OPTION AGREEMENT" means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. 5. (bb) "OPTIONHOLDER" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (cc) "OTHER STOCK AWARD" means an award based in whole or in part by reference to the Common Stock which is granted pursuant to the terms and conditions of Section 7(d). (dd) "OTHER STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of an Other Stock Award evidencing the terms and conditions of an Other Stock Award grant. Each Other Stock Award Agreement shall be subject to the terms and conditions of the Plan. (ee) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of Treasury Regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year, has not been an officer of the Company or an "affiliated corporation", and does not receive remuneration from the Company or an "affiliated corporation," either directly or indirectly, in any capacity other than as a Director or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (ff) "OWN," "OWNED," "OWNER," "OWNERSHIP" A person or Entity shall be deemed to "Own," to have "Owned," to be the "Owner" of, or to have acquired "Ownership" of securities if such person or Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to such securities. (gg) "PARTICIPANT" means a person to whom a Stock Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award. (hh) "PHANTOM STOCK AWARD" means a right to receive shares of Common Stock which is granted pursuant to the terms and conditions of Section 7(b). (ii) "PHANTOM STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Phantom Stock Award evidencing the terms and conditions of a Phantom Stock Award grant. Each Phantom Stock Award Agreement shall be subject to the terms and conditions of the Plan. (jj) "PLAN" means this MannKind Corporation 2003 Equity Incentive Plan. (kk) "RESTRICTED STOCK AWARD" means an award of shares of Common Stock which is granted pursuant to the terms and conditions of Section 7(a). (ll) "RESTRICTED STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Restricted Stock Award evidencing the terms and conditions of a Restricted Stock Award grant. Each Restricted Stock Award Agreement shall be subject to the terms and conditions of the Plan. 6. (mm) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time. (nn) "SECURITIES ACT" means the Securities Act of 1933, as amended. (oo) "STOCK APPRECIATION RIGHT" means a right to receive the appreciation of Common Stock that is granted pursuant to the terms and conditions of Section 7(c). (pp) "STOCK APPRECIATION RIGHT AGREEMENT" means a written agreement between the Company and a holder of a Stock Appreciation Right evidencing the terms and conditions of a Stock Appreciation Right grant. Each Stock Appreciation Right Agreement shall be subject to the terms and conditions of the Plan. (qq) "STOCK AWARD" means any right granted under the Plan, including an Option, a Restricted Stock Award, a Stock Appreciation Right, a Phantom Stock Award or any Other Stock Award. (rr) "STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Stock Award Participant evidencing the terms and conditions of a Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. (ss) "SUBSIDIARY" means, with respect to the Company, (i) any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company, and (ii) any partnership in which the Company has a direct or indirect interest (whether in the form of voting or participation in profits or capital contribution) of more than fifty percent (50%). (tt) "TEN PERCENT STOCKHOLDER" means a person who Owns (or is deemed to Own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates. 3. ADMINISTRATION. (a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in Section 3(c). (b) POWERS OF BOARD. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; what type or combination of types of Stock Award shall be granted; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive Common Stock pursuant to a Stock Award; and the number of shares of Common Stock with respect to which a Stock Award shall be granted to each such person. 7. (ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To effect, at any time and from time to time, with the consent of any adversely affected Optionholder, (1) the reduction of the exercise price of any outstanding Option under the Plan, (2) the cancellation of any outstanding Option under the Plan and the grant in substitution therefor of (A) a new Option under the Plan or another equity plan of the Company covering the same or a different number of shares of Common Stock, (B) a Restricted Stock Award (including a stock bonus), (C) a Stock Appreciation Right, (D) a Phantom Stock Award (E) an Other Stock Award, (F) cash and/or (G) other valuable consideration (as determined by the Board, in its sole discretion), or (3) any other action that is treated as a repricing under generally accepted accounting principles. (iv) To amend the Plan or a Stock Award as provided in Section 12. (v) To terminate or suspend the Plan as provided in Section 13. (vi) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company and that are not in conflict with the provisions of the Plan. (vii) To adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the Plan by Employees who are foreign nationals or employed outside the United States. (c) DELEGATION TO COMMITTEE. (i) GENERAL. The Board may delegate administration of the Plan to a Committee or Committees of one or more members of the Board, and the term "COMMITTEE" shall apply to any person or persons to whom such authority has been delegated. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. (ii) SECTION 162(m) AND RULE 16b-3 COMPLIANCE. In the discretion of the Board, the Committee may consist solely of two or more Outside Directors, in accordance with Section 162(m) of the Code, and/or solely of two or more Non-Employee Directors, in accordance with Rule 16b-3. In addition, the Board or the Committee, in its sole discretion, may (1) delegate to a committee of one or more members of the Board who need not be Outside Directors the authority to grant Stock Awards to eligible persons who are either (a) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of 8. income resulting from such Stock Award, or (b) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code, and/or (2) delegate to a committee of one or more members of the Board who need not be Non-Employee Directors the authority to grant Stock Awards to eligible persons who are not then subject to Section 16 of the Exchange Act. (d) DELEGATION TO AN OFFICER. The Board may delegate to one or more Officers of the Company the authority to do one or both of the following (i) designate Officers and Employees of the Company or any of its Subsidiaries to be recipients of Stock Awards and (ii) determine the number of shares of Common Stock to be subject to such Stock Awards granted to such Officers and Employees of the Company; provided, however, that the Board resolutions regarding such delegation shall specify the total number of shares of Common Stock that may be subject to the Stock Awards granted by such Officer and that such Officer may not grant a Stock Award to himself or herself. Notwithstanding anything to the contrary in this Section 3(d), the Board may not delegate to an Officer authority to determine the Fair Market Value of the Common Stock pursuant to Section 2(t)(ii) above. (e) EFFECT OF BOARD'S DECISION. All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons. 4. SHARES SUBJECT TO THE PLAN. (a) SHARE RESERVE. Subject to the provisions of Section 11(a) relating to Capitalization Adjustments, the shares of Common Stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate five million (5,000,000) shares of Common Stock. (b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, or if any shares of Common Stock issued to a Participant pursuant to a Stock Award are forfeited to or repurchased by the Company, including, but not limited to, any repurchase or forfeiture caused by the failure to meet a contingency or condition required for the vesting of such shares, then the shares of Common Stock not issued under such Stock Award, or forfeited to or repurchased by the Company, shall revert to and again become available for issuance under the Plan. If any shares subject to a Stock Award are not delivered to a Participant because such shares are withheld for the payment of taxes or the Stock Award is exercised through a reduction of shares subject to the Stock Award (i.e., "net exercised"), the number of shares that are not delivered to the Participant shall remain available for issuance under the Plan. If the exercise price of any Stock Award is satisfied by tendering shares of Common Stock held by the Participant (either by actual delivery or attestation), then the number of shares so tendered shall remain available for issuance under the Plan. Notwithstanding anything to the contrary in this Section 4(b), subject to the provisions of Section 11(a) relating to Capitalization Adjustments the aggregate maximum number of shares of Common Stock that may be issued as Incentive Stock Options shall be seven million (7,000,000) shares of Common Stock. (c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 9. 5. ELIGIBILITY. (a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options may be granted only to Employees. Stock Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants. (b) TEN PERCENT STOCKHOLDERS. A Ten Percent Stockholder shall not be granted an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock on the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant. (c) SECTION 162(m) LIMITATION ON ANNUAL GRANTS. Subject to the provisions of Section 11(a) relating to Capitalization Adjustments, at such time as the Company may be subject to the applicable provisions of Section 162(m) of the Code, no Employee shall be eligible to be granted Options or Stock Appreciation Rights covering more than two million (2,000,000) shares of Common Stock during any calendar year. (d) CONSULTANTS. A Consultant shall not be eligible for the grant of a Stock Award if, at the time of grant, a Form S-8 Registration Statement under the Securities Act ("FORM S-8") is not available to register either the offer or the sale of the Company's securities to such Consultant because of the nature of the services that the Consultant is providing to the Company, because the Consultant is not a natural person, or because of any other rule governing the use of Form S-8. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates shall be issued for shares of Common Stock purchased on exercise of each type of Option. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. The Board shall determine the term of an Option; provided however that, subject to the provisions of Section 5(b) regarding Ten Percent Stockholders, no Incentive Stock Option shall be exercisable after the expiration of ten (10) years from the date on which it was granted. (b) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the provisions of Section 5(b) regarding Ten Percent Stockholders, the exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Incentive Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. 10. (c) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. The Board, in its discretion, shall determine the exercise price of each Nonstatutory Stock Option. (d) CONSIDERATION. The purchase price of Common Stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable law, either (i) in cash at the time the Option is exercised or (ii) at the discretion of the Board at the time of the grant of the Option (or subsequently in the case of a Nonstatutory Stock Option) (1) by delivery to the Company (either by actual delivery or attestation) of other Common Stock at the time the Option is exercised, (2) according to a deferred payment or other similar arrangement with the Optionholder, (3) by a "net exercise" of the Option (as further described below), (4) pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds or (5) in any other form of legal consideration that may be acceptable to the Board. Unless otherwise specifically provided in the Option, the purchase price of Common Stock acquired pursuant to an Option that is paid by delivery to the Company of other Common Stock acquired, directly or indirectly from the Company, shall be paid only by shares of the Common Stock of the Company that have been held for more than six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes). At any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid (1) the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement and (2) the treatment of the Option as a variable award for financial accounting purposes. In the case of a "net exercise" of an Option, the Company will not require a payment of the exercise price of the Option from the Participant but will reduce the number of shares of Common Stock issued upon the exercise by the largest number of whole shares that has a Fair Market Value that does not exceed the aggregate exercise price. With respect to any remaining balance of the aggregate exercise price, the Company shall accept a cash payment from the Participant. Shares of Common Stock will no longer be outstanding under an Option (and will therefore not thereafter be exercisable) following the exercise of such Option to the extent of (i) shares used to pay the exercise price of an Option under the "net exercise", (ii) shares actually delivered to the Participant as a result of such exercise and (iii) shares withheld for purposes of tax withholding. (e) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form provided by or otherwise satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. 11. (f) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory Stock Option shall be transferable to the extent provided in the Option Agreement. If the Nonstatutory Stock Option does not provide for transferability, then the Nonstatutory Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form provided by or otherwise satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (g) VESTING GENERALLY. The total number of shares of Common Stock subject to an Option may, but need not, vest and therefore become exercisable in periodic installments that may, but need not, be equal. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary. The provisions of this Section 6(g) are subject to any Option provisions governing the minimum number of shares of Common Stock as to which an Option may be exercised. (h) TERMINATION OF CONTINUOUS SERVICE. In the event that an Optionholder's Continuous Service terminates (for reasons other than Cause or upon the Optionholder's death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholder's Continuous Service (or such longer or shorter period specified in the Option Agreement or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination of Continuous Service, the Optionholder does not exercise his or her Option within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate. (i) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionholder's Continuous Service (for reasons other than Cause or upon the Optionholder's death or Disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in the Option Agreement or (ii) the expiration of a period of three (3) months after the termination of the Optionholder's Continuous Service during which the exercise of the Option would not be in violation of such registration requirements. (j) DISABILITY OF OPTIONHOLDER. In the event that an Optionholder's Continuous Service terminates as a result of the Optionholder's Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination of Continuous Service, the Optionholder does not exercise his or her Option within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate. 12. (k) DEATH OF OPTIONHOLDER. In the event that (i) an Optionholder's Continuous Service terminates as a result of the Optionholder's death or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder's Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionholder's death pursuant to Section 6(e) or 6(f), but only within the period ending on the earlier of (1) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement or (2) the expiration of the term of such Option as set forth in the Option Agreement. If, after the Optionholder's death, the Option is not exercised within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate. (l) RETIREMENT. Notwithstanding the foregoing, if at the time of termination of an Optionholder's Continuous Service for any reason other than Cause, the Optionholder is at least fifty five (55) years old, then the Optionholder (or such person or person(s) as may be entitled to exercise such Option pursuant to Section 6(k) in the event of the Optionholder's death) may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination) within such period of time ending on the earlier of (i) the date twenty four (24) months following such termination or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Option is not exercised within the time specified herein, the Option shall terminate. (m) TERMINATION FOR CAUSE. In the event an Optionholder's Continuous Service is terminated for Cause, the Option shall terminate upon the termination date of such Optionholder's Continuous Service and the Optionholder shall be prohibited from exercising his or her Option from and after the time of such termination of Continuous Service. (n) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholder's Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option. Any unvested shares of Common Stock so purchased may be subject to a repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate. The Company shall not be required to exercise its repurchase option until at least six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes) have elapsed following exercise of the Option unless the Board otherwise specifically provides in the Option. 7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS. (a) RESTRICTED STOCK AWARDS. Each Restricted Stock Award Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. At the Board's election, shares of Common Stock may be (i) held in book entry form subject to the Company's instructions until any restrictions relating to the Restricted Stock Award lapse; or (ii) evidenced by a certificate, which certificate shall be held in such form and manner as determined by the Board. The terms and conditions of Restricted Stock Award Agreements may change from time to time, and the terms and conditions of separate Restricted Stock Award Agreements 13. need not be identical, provided, however, that each Restricted Stock Award Agreement shall include (through incorporation of the provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) PURCHASE PRICE. At the time of the grant of a Restricted Stock Award, the Board will determine the price to be paid by the Participant for each share subject to the Restricted Stock Award. To the extent required by applicable law, the price to be paid by the Participant for each share of the Restricted Stock Award will not be less than the par value of a share of Common Stock. A Restricted Stock Award may be awarded as a stock bonus (i.e., with no cash purchase price to be paid) to the extent permissible under applicable law. (ii) CONSIDERATION. At the time of the grant of a Restricted Stock Award, the Board will determine the consideration permissible for the payment of the purchase price of the Restricted Stock Award. The purchase price of Common Stock acquired pursuant to the Restricted Stock Award shall be paid in one of the following ways: (i) in cash at the time of purchase; (ii) at the discretion of the Board, according to a deferred payment or other similar arrangement with the Participant; (iii) by services previously rendered to the Company in the case of a stock bonus; or (iv) in any other form of legal consideration that may be acceptable to the Board and permissible under the Delaware Corporation Law. (iii) VESTING. Shares of Common Stock acquired under a Restricted Stock Award may, but need not, be (i) subject to a share repurchase right or option in favor of the Company or (ii) subject to a forfeiture right in favor of the Company, each in accordance with a vesting schedule to be determined by the Board. (iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the event that a Participant's Continuous Service terminates, the Company shall have the right, but not the obligation, to repurchase, otherwise reacquire or receive by a forfeiture right, any or all of the shares of Common Stock held by the Participant that have not vested as of the date of termination under the terms of the Restricted Stock Award Agreement. At the Board's election, the repurchase right may be at the least of: (i) the Fair Market Value on the relevant date; (ii) the Participant's original cost; or (iii) if the Participant paid the purchase price for the shares of Common Stock with services rendered, then for no consideration. The Company shall not be required to exercise its repurchase option until at least six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes) have elapsed following the purchase of the restricted stock unless otherwise determined by the Board or provided in the Restricted Stock Award Agreement. (v) TRANSFERABILITY. Rights to purchase or receive shares of Common Stock granted under a Restricted Stock Award shall be transferable by the Participant only upon such terms and conditions as are set forth in the Restricted Stock Award Agreement, as the Board shall determine in its discretion, and so long as Common Stock awarded under the Restricted Stock Award remains subject to the terms of the Restricted Stock Award Agreement. (b) PHANTOM STOCK. Each Phantom Stock Award Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of Phantom Stock Award Agreements may change from time to time, and the terms 14. and conditions of separate Phantom Stock Award Agreements need not be identical, provided, however, that each Phantom Stock Award Agreement shall include (through incorporation of the provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) CONSIDERATION. At the time of grant of a Phantom Stock Award, the Board will determine the consideration, if any, to be paid by the Participant upon delivery of each share of Common Stock subject to the Phantom Stock Award. To the extent required by applicable law, the consideration to be paid by the Participant for each share of Common Stock subject to a Phantom Stock Award will not be less than the par value of a share of Common Stock. Such consideration may be paid in any form permitted under applicable law. (ii) VESTING. At the time of the grant of a Phantom Stock Award, the Board may impose such restrictions or conditions to the vesting of the Phantom Stock Award as it, in its absolute discretion, deems appropriate. (iii) PAYMENT. A Phantom Stock Award may be settled by the delivery of shares of Common Stock, their cash equivalent, any combination thereof or in any other form of consideration as determined by the Board and contained in the Phantom Stock Award Agreement. (iv) ADDITIONAL RESTRICTIONS. At the time of the grant of a Phantom Stock Award, the Board, as it deems appropriate, may impose such restrictions or conditions that delay the delivery of the shares of Common Stock (or their cash equivalent) subject to a Phantom Stock Award after the vesting of such Phantom Stock Award. (v) DIVIDEND EQUIVALENTS. Dividend equivalents may be credited in respect of shares of Common Stock covered by a Phantom Stock Award, as determined by the Board and contained in the Phantom Stock Award Agreement. At the discretion of the Board, such dividend equivalents may be converted into additional shares of Common Stock covered by the Phantom Stock Award in such manner as determined by the Board. Any additional shares covered by the Phantom Stock Award credited by reason of such dividend equivalents will be subject to all the terms and conditions of the underlying Phantom Stock Award Agreement to which they relate. (vi) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Except as otherwise provided in the applicable Phantom Stock Award Agreement, such portion of the Phantom Stock Award that has not vested will be forfeited upon the Participant's termination of Continuous Service for any reason. (c) STOCK APPRECIATION RIGHTS. Each Stock Appreciation Right Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of Stock Appreciation Right Agreements may change from time to time, and the terms and conditions of separate Stock Appreciation Right Agreements need not be identical, provided, however, that each Stock Appreciation Right Agreement shall include (through incorporation of the provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: 15. (i) STRIKE PRICE AND CALCULATION OF APPRECIATION. Each Stock Appreciation Right will be denominated in share of Common Stock equivalents. The appreciation distribution payable on the exercise of a Stock Appreciation Right will be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Stock Appreciation Right) of a number of shares of Common Stock equal to the number of share of Common Stock equivalents in which the Participant is vested under such Stock Appreciation Right, and with respect to which the Participant is exercising the Stock Appreciation Right on such date, over (B) an amount (the strike price) that will be determined by the Board at the time of grant of the Stock Appreciation Right. (ii) VESTING. At the time of the grant of a Stock Appreciation Right, the Board may impose such restrictions or conditions to the vesting of such Stock Appreciation Right as it, in its absolute discretion, deems appropriate. (iii) EXERCISE. To exercise any outstanding Stock Appreciation Right, the Participant must provide written notice of exercise to the Company in compliance with the provisions of the Stock Appreciation Right Agreement evidencing such Stock Appreciation Right. (iv) PAYMENT. The appreciation distribution in respect to a Stock Appreciation Right may be paid in Common Stock, in cash, in any combination thereof or in any other form of consideration as determined by the Board and contained in the Stock Appreciation Right Agreement evidencing such Stock Appreciation Right. (v) TERMINATION OF CONTINUOUS SERVICE. In the event that a Participant's Continuous Service terminates, the Participant may exercise his or her Stock Appreciation Right (to the extent that the Participant was entitled to exercise such Stock Appreciation Right as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Participant's Continuous Service (or such longer or shorter period specified in the Stock Appreciation Right Agreement) or (ii) the expiration of the term of the Stock Appreciation Right as set forth in the Stock Appreciation Right Agreement. If, after termination, the Participant does not exercise his or her Stock Appreciation Right within the time specified herein or in the Stock Appreciation Right Agreement (as applicable), the Stock Appreciation Right shall terminate. (d) OTHER STOCK AWARDS. Other forms of Stock Awards valued in whole or in part by reference to, or otherwise based on, Common Stock may be granted either alone or in addition to Stock Awards provided for under Section 6 and the preceding provisions of this Section 7. Subject to the provisions of the Plan, the Board shall have sole and complete authority to determine the persons to whom and the time or times at which such Other Stock Awards will be granted, the number of shares of Common Stock (or the cash equivalent thereof) to be granted pursuant to such Other Stock Awards and all other terms and conditions of such Other Stock Awards. 16. 8. COVENANTS OF THE COMPANY. (a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Stock Awards. (b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such authority is obtained. 9. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of Common Stock pursuant to Stock Awards shall constitute general funds of the Company. 10. MISCELLANEOUS. (a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest. (b) STOCKHOLDER RIGHTS. No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Stock Award unless and until such Participant has satisfied all requirements for exercise of the Stock Award pursuant to its terms. (c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant's agreement with the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be. (d) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any 17. calendar year (under all plans of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or portions thereof that exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options, notwithstanding any contrary provision of the applicable Option Agreement(s). (e) INVESTMENT ASSURANCES. The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participant's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participant's own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (1) the issuance of the shares of Common Stock upon the exercise or acquisition of Common Stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act or (2) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock. (f) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a Stock Award Agreement, the Company may in its sole discretion, satisfy any federal, state or local tax withholding obligation relating to a Stock Award by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) causing the Participant to tender a cash payment; (ii) withholding shares of Common Stock from the shares of Common Stock issued or otherwise issuable to the Participant in connection with the Stock Award; or (iii) by such other method as may be set forth in the Stock Award Agreement. 11. ADJUSTMENTS UPON CHANGES IN STOCK. (a) CAPITALIZATION ADJUSTMENTS. If any change is made in, or other event occurs with respect to, the Common Stock subject to the Plan or subject to any Stock Award without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company (each a "CAPITALIZATION ADJUSTMENT"), the Plan will be appropriately adjusted in the class(es) and maximum number of securities subject to the Plan pursuant to Sections 4(a) and 4(b) and the maximum number of securities subject to award to any person pursuant to Section 5(c), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of securities and price per share of Common Stock subject to such outstanding Stock Awards. The 18. Board shall make such adjustments, and its determination shall be final, binding and conclusive. (Notwithstanding the foregoing, the conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.) (b) DISSOLUTION OR LIQUIDATION. In the event of a dissolution or liquidation of the Company, then all outstanding Stock Awards shall terminate immediately prior to the completion of such dissolution or liquidation. (c) CORPORATE TRANSACTION. In the event of a Corporate Transaction, any surviving corporation or acquiring corporation may assume or continue any or all Stock Awards outstanding under the Plan or may substitute similar stock awards for Stock Awards outstanding under the Plan (including, but not limited to, awards to acquire the same consideration paid to the stockholders of the Company, as the case may be, pursuant to the Corporate Transaction), and any reacquisition or repurchase rights held by the Company in respect of Common Stock issued pursuant to Stock Awards may be assigned by the Company to the successor of the Company (or the successor's parent company), if any, in connection with such Corporate Transaction. In the event that any surviving corporation or acquiring corporation does not assume or continue all such outstanding Stock Awards or substitute similar stock awards for all such outstanding Stock Awards, then with respect to Stock Awards that have been not assumed, continued or substituted and that are held by Participants whose Continuous Service has not terminated prior to the effective time of the Corporate Transaction, the vesting of such Stock Awards (and, if applicable, the time at which such Stock Awards may be exercised) shall (contingent upon the effectiveness of the Corporate Transaction) be accelerated in full to a date prior to the effective time of such Corporate Transaction as the Board shall determine (or, if the Board shall not determine such a date, to the date that is five (5) days prior to the effective time of the Corporate Transaction), and such Stock Awards shall terminate if not exercised (if applicable) at or prior to such effective time, and any reacquisition or repurchase rights held by the Company with respect to such Stock Awards shall (contingent upon the effectiveness of the Corporate Transaction) lapse. With respect to any other Stock Awards outstanding under the Plan that have not been assumed, continued or substituted, the vesting of such Stock Awards (and, if applicable, the time at which such Stock Award may be exercised) shall not be accelerated, unless otherwise provided in a written agreement between the Company or any Affiliate and the holder of such Stock Award, and such Stock Awards shall terminate if not exercised (if applicable) prior to the effective time of the Corporate Transaction. (d) CHANGE IN CONTROL. A Stock Award may be subject to additional acceleration of vesting and exercisability upon or after a Change in Control as may be provided in the Stock Award Agreement for such Stock Award or as may be provided in any other written agreement between the Company or any Affiliate and the Participant, but in the absence of such provision, no such acceleration shall occur. 12. AMENDMENT OF THE PLAN AND STOCK AWARDS. (a) AMENDMENT OF PLAN. Subject to the limitations, if any, of applicable law, the Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 11(a) relating to Capitalization Adjustments, no amendment shall be effective unless 19. approved by the stockholders of the Company to the extent stockholder approval is necessary to satisfy applicable law. (b) STOCKHOLDER APPROVAL. The Board, in its sole discretion, may submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to Covered Employees. (c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. (e) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to time, may amend the terms of any one or more Stock Awards, including, but not limited to, amendments to provide terms more favorable than previously provided in the agreement evidencing a Stock Award, subject to any specified limits in the Plan that are not subject to Board discretion; provided, however, that the rights under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. 13. TERMINATION OR SUSPENSION OF THE PLAN. (a) PLAN TERM. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. (b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the Participant. 14. EFFECTIVE DATE OF PLAN. The Plan shall become effective on the IPO Date, but no Stock Award shall be exercised (or, in the case of a stock bonus, shall be granted) unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 20. 15. CHOICE OF LAW. The laws of the State of California shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state's conflict of laws rules. 21. MANNKIND CORPORATION 2004 EQUITY INCENTIVE PLAN STOCK OPTION AGREEMENT (INCENTIVE STOCK OPTION OR NONSTATUTORY STOCK OPTION) Pursuant to your Stock Option Grant Notice ("GRANT NOTICE") and this Stock Option Agreement, MannKind Corporation (the "COMPANY") has granted you an option under its 2004 Equity Incentive Plan (the "PLAN") to purchase the number of shares of the Company's Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly defined in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your option are as follows: 1. VESTING. Subject to the limitations contained herein, your option will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service. 2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your option and your exercise price per share referenced in your Grant Notice may be adjusted from time to time for Capitalization Adjustments. 3. EXERCISE PRIOR TO VESTING ("EARLY EXERCISE"). If permitted in your Grant Notice (i.e., the "EXERCISE SCHEDULE" indicates that "EARLY EXERCISE" of your option is permitted) and subject to the provisions of your option, you may elect at any time that is both (i) during the period of your Continuous Service and (ii) during the term of your option, to exercise all or part of your option, including the nonvested portion of your option; provided, however, that: a. a partial exercise of your option shall be deemed to cover first vested shares of Common Stock and then the earliest vesting installment of unvested shares of Common Stock; b. any shares of Common Stock so purchased from installments that have not vested as of the date of exercise shall be subject to the purchase option in favor of the Company as described in the Company's form of Early Exercise Stock Purchase Agreement; c. you shall enter into the Company's form of Early Exercise Stock Purchase Agreement with a vesting schedule that will result in the same vesting as if no early exercise had occurred; and d. if your option is an Incentive Stock Option, then, to the extent that the aggregate Fair Market Value (determined at the time of grant) of the shares of Common Stock with respect to which your option plus all other Incentive Stock Options you hold are exercisable for the first time by you during any calendar year (under all plans of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), your option(s) or portions thereof 22. that exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. 4. METHOD OF PAYMENT. Payment of the exercise price is due in full upon exercise of all or any part of your option. You may elect to make payment of the exercise price in cash or by check or in any other manner PERMITTED BY YOUR GRANT NOTICE, which may include one or more of the following: a. In the Company's sole discretion at the time your option is exercised and provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds. Payment of the exercise price pursuant to this Section 5(a) must comply with applicable law, including the Sarbanes-Oxley Act of 2002. b. Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, by delivery of already-owned shares of Common Stock either that you have held for the period required to avoid a charge to the Company's reported earnings (generally six (6) months) or that you did not acquire, directly or indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of exercise. "DELIVERY" for these purposes, in the sole discretion of the Company at the time you exercise your option, shall include delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. Notwithstanding the foregoing, you may not exercise your option by tender to the Company of Common Stock to the extent such tender would violate the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. c. Pursuant to the following deferred payment alternative: 1) Not less than one hundred percent (100%) of the aggregate exercise price, plus accrued interest, shall be due four (4) years from date of exercise or, at the Company's election, upon termination of your Continuous Service. 2) Interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid (1) the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement and (2) the treatment of the Option as a variable award for financial accounting purposes. 3) At any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall be made in cash and not by deferred payment. 4) In order to elect the deferred payment alternative, you must, as a part of your written notice of exercise, give notice of the election of this payment alternative and, 23. in order to secure the payment of the deferred exercise price to the Company hereunder, if the Company so requests, you must tender to the Company a promissory note and a pledge agreement covering the purchased shares of Common Stock, both in form and substance satisfactory to the Company, or such other or additional documentation as the Company may request. 5. WHOLE SHARES. You may exercise your option only for whole shares of Common Stock. 6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you may not exercise your option unless the shares of Common Stock issuable upon such exercise are then registered under the Securities Act or, if such shares of Common Stock are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your option also must comply with other applicable laws and regulations governing your option, and you may not exercise your option if the Company determines that such exercise would not be in material compliance with such laws and regulations. 7. TERM. You may not exercise your option before the commencement or after the expiration of its term. The term of your option commences on the Date of Grant and expires upon the earliest of the following: a. if you are less than fifty five (55) years old at the time of such termination of your Continuous Service, three (3) months after the termination of your Continuous Service for any reason other than Cause or upon your Disability or death, provided that if during any part of such three (3) month period your option is not exercisable solely because of the condition set forth in Section 7, your option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service; b. if you are less than fifty five (55) years old at the time of such termination of your Continuous Service, twelve (12) months after the termination of your Continuous Service due to your Disability; c. if you are less than fifty five (55) years old at the time of such termination of your Continuous Service, eighteen (18) months after your death if you die either during your Continuous Service or within three (3) months after your Continuous Service terminates; d. if you are fifty five (55) years or older at the time of termination of your Continuous Service for any reason other than Cause, twenty four (24) months after such termination of your Continuous Service; e. the Expiration Date indicated in your Grant Notice; or f. the day before the tenth (10th) anniversary of the Date of Grant. If your option is an Incentive Stock Option, note that to obtain the federal income tax advantages associated with an Incentive Stock Option, the Code requires that at all times 24. beginning on the date of grant of your option and ending on the day three (3) months before the date of your option's exercise, you must be an employee of the Company or an Affiliate, except in the event of your death or your permanent and total disability, as defined in Section 22(e) of the Code. The Company has provided for extended exercisability of your option under certain circumstances for your benefit but cannot guarantee that your option will necessarily be treated as an Incentive Stock Option if you continue to provide services to the Company or an Affiliate as a Consultant or Director after your employment terminates or if you otherwise exercise your option more than three (3) months after the date your employment with the Company or an Affiliate terminates. 8. EXERCISE. a. You may exercise the vested portion of your option (and the unvested portion of your option if your Grant Notice so permits) during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require. b. By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are subject at the time of exercise, or (3) the disposition of shares of Common Stock acquired upon such exercise. c. If your option is an Incentive Stock Option, by exercising your option you agree that you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of your option that occurs within two (2) years after the date of your option grant or within one (1) year after such shares of Common Stock are transferred upon exercise of your option. 9. TRANSFERABILITY. Your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your option. 10. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your option shall obligate the Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate. 25. 11. WITHHOLDING OBLIGATIONS. a. At the time you exercise your option, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a "cashless exercise" pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with the exercise of your option. b. Upon your request and subject to approval by the Company, in its sole discretion, and compliance with any applicable legal conditions or restrictions, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the date of exercise, not in excess of the minimum amount of tax required to be withheld by law (or such lower amount as may be necessary to avoid variable award accounting). If the date of determination of any tax withholding obligation is deferred to a date later than the date of exercise of your option, share withholding pursuant to the preceding sentence shall not be permitted unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Common Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding obligation to the date of exercise of your option. Notwithstanding the filing of such election, shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined as of the date of exercise of your option that are otherwise issuable to you upon such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole responsibility. c. You may not exercise your option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested, and the Company shall have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow provided for herein unless such obligations are satisfied. 12. NOTICES. Any notices provided for in your option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. 13. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations, which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your option and those of the Plan, the provisions of the Plan shall control. 26. 14. CHANGE IN CONTROL. a. If a Change in Control occurs and as of, or within thirteen (13) months after, the effective time of such Change in Control your Continuous Service terminates due to an involuntary termination (not including death or Disability) without Cause or due to a voluntary termination with Good Reason, then, as of the date of termination of Continuous Service, the vesting and exercisability of your option shall be accelerated in full. b. "GOOD REASON" means that one or more of the following are undertaken by the Company without your express written consent: (i) the assignment to you of any duties or responsibilities that results in a material diminution in your function as in effect immediately prior to the effective date of the Change in Control; provided, however, that a change in your title or reporting relationships shall not provide the basis for a voluntary termination with Good Reason; (ii) a material reduction by the Company in your annual base salary, as in effect on the effective date of the Change in Control or as increased thereafter; provided, however, that Good Reason shall not be deemed to have occurred in the event of a reduction in your annual base salary that is pursuant to a salary reduction program affecting substantially all of the employees of the Company and that does not adversely affect you to a greater extent than other similarly situated employees; (iii) any failure by the Company to continue in effect any benefit plan or program, including incentive plans or plans with respect to the receipt of securities of the Company, in which you were participating immediately prior to the effective date of the Change in Control (hereinafter referred to as "BENEFIT PLANS"), or the taking of any action by the Company that would adversely affect your participation in or reduce your benefits under the Benefit Plans or deprive you of any fringe benefit that you enjoyed immediately prior to the effective date of the Change in Control; provided, however, that Good Reason shall not be deemed to have occurred if the Company provides for your participation in benefit plans and programs that, taken as a whole, are comparable to the Benefit Plans; (iv) a relocation of your business office to a location more than fifty (50) miles from the location at which you performed your duties as of the effective date of the Change in Control, except for required travel by you on the Company's business to an extent substantially consistent with your business travel obligations prior to the effective date of the Change in Control; or (v) a material breach by the Company of any provision of the Plan or the Option Agreement or any other material agreement between you and the Company concerning the terms and conditions of your employment. c. If any payment or benefit you would receive pursuant to a Change in Control from the Company or otherwise ("PAYMENT") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the "EXCISE Tax"), then such Payment shall be equal to the Reduced Amount. The "REDUCED AMOUNT" shall be either (x) the largest portion of the Payment that would result in no portion of the Payment being subject to the Excise Tax or (y) the largest portion, up to and including the total, of the Payment, whichever amount, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in your receipt, on an after-tax basis, of the greater amount of the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in payments or benefits constituting "parachute payments" is necessary so that the Payment equals the Reduced Amount, reduction shall occur in the following order unless you elect in writing a different order 27. (provided, however, that such election shall be subject to Company approval if made on or after the effective date of the event that triggers the Payment): reduction of cash payments; cancellation of accelerated vesting of Stock Awards; reduction of employee benefits. In the event that acceleration of vesting of Stock Award compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the date of grant of your Stock Awards (i.e., earliest granted Stock Award cancelled last) unless you elect in writing a different order for cancellation. The accounting firm engaged by the Company for general audit purposes as of the day prior to the effective date of the Change in Control shall perform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Company shall appoint a nationally recognized accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the determinations by such accounting firm required to be made hereunder. The accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to you and the Company within fifteen (15) calendar days after the date on which your right to a Payment is triggered (if requested at that time by you or the Company) or such other time as requested by you or the Company. If the accounting firm determines that no Excise Tax is payable with respect to a Payment, either before or after the application of the Reduced Amount, it shall furnish you and the Company with an opinion reasonably acceptable to you that no Excise Tax will be imposed with respect to such Payment. Any good faith determinations of the accounting firm made hereunder shall be final, binding and conclusive upon you and the Company. 28.
Exhibit 10.3 MANNKIND CORPORATION 2004 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN ADOPTED MARCH 23, 2004 APPROVED BY STOCKHOLDERS MARCH 23, 2004 EFFECTIVE DATE: _______________, 2004 1. PURPOSES. (a) ELIGIBLE OPTION RECIPIENTS. The persons eligible to receive Options are the Non-Employee Directors of the Company. (b) AVAILABLE OPTIONS. The purpose of the Plan is to provide a means by which Non-Employee Directors may be given an opportunity to benefit from increases in value of the Common Stock through the granting of Nonstatutory Stock Options. (c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain the services of its current Non-Employee Directors, to secure and retain the services of new Non-Employee Directors and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "ANNUAL GRANT" means an Option granted annually to all Non-Employee Directors who meet the specified criteria pursuant to Section 6(b). (c) "ANNUAL MEETING" means the annual meeting of the stockholders of the Company. (d) "BOARD" means the Board of Directors of the Company. (e) "CAPITALIZATION ADJUSTMENT" has the meaning ascribed to that term in Section 11(a). (f) "CODE" means the Internal Revenue Code of 1986, as amended. (g) "COMMITTEE" means a committee of one or more members of the Board appointed by the Board in accordance with Section 3(c). 1. (h) "COMMITTEE GRANT" means an Option granted annually to all Non-Employee Directors who meet the specified criteria pursuant to Section 6(c). (i) "COMMON STOCK" means the common stock of the Company. (j) "COMPANY" means MannKind Corporation, a Delaware corporation. (k) "CONSULTANT" means any person, including an advisor, who (i) is engaged by the Company or an Affiliate to render consulting or advisory service and is compensated for such service or (ii) is serving as a member of the Board of Directors of an Affiliate and is compensated for such service. However, service solely as a Director, or payment of a fee for such service, shall not cause a Director to be considered a "Consultant" for purposes of the Plan. (l) "CONTINUOUS SERVICE" means that the Optionholder's service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Optionholder's Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionholder renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Optionholder renders such service, provided that there is no interruption or termination of the Optionholder's Continuous Service. For example, a change in status from a Non-Employee Director of the Company to a Consultant of an Affiliate or an Employee of the Company will not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that party's sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. Notwithstanding the foregoing, a leave of absence shall be treated as Continuous Service for purposes of vesting in an Option only to such extent as may be provided in the Company's leave of absence policy or in the written terms of the Optionholders's leave of absence. (m) "CORPORATE TRANSACTION" means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events: (i) a sale or other disposition of all or substantially all, as determined by the Board in its discretion, of the consolidated assets of the Company and its Subsidiaries; (ii) a sale or other disposition of at least ninety percent (90%) of the outstanding securities of the Company; (iii) a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or (iv) a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise. (n) "DIRECTOR" means a member of the Board of Directors of the Company. 2. (o) "DISABILITY" means the inability of a person, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of that person's position with the Company or an Affiliate of the Company because of the sickness or injury of the person. (p) "EMPLOYEE" means any person employed by the Company or an Affiliate. However, service solely as a Director, or payment of a fee for such service, shall not cause a Director to be considered an "Employee" for purposes of the Plan. (q) "ENTITY" means a corporation, partnership or other entity. (r) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (s) "FAIR MARKET VALUE" means, as of any date, the value of the Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable. (ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board. (t) "INITIAL GRANT" means an Option granted to a Non-Employee Director who meets the specified criteria pursuant to Section 6(a). (u) "IPO DATE" means the closing date of the initial public offering of the Common Stock. (v) "NON-EMPLOYEE DIRECTOR" means a Director who is not an Employee. (w) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (x) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (y) "OPTION" means a Nonstatutory Stock Option granted pursuant to the Plan. (z) "OPTION AGREEMENT" means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. 3. (aa) "OPTIONHOLDER" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (bb) "OWN," "OWNED," "OWNER," "OWNERSHIP" A person or Entity shall be deemed to "Own," to have "Owned," to be the "Owner" of, or to have acquired "Ownership" of securities if such person or Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to such securities. (cc) "PLAN" means this MannKind Corporation 2003 Non-Employee Directors' Stock Option Plan. (dd) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time. (ee) "SECURITIES ACT" means the Securities Act of 1933, as amended. (ff) "SUBSIDIARY" means, with respect to the Company, (i) any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company, and (ii) any partnership in which the Company has a direct or indirect interest (whether in the form of voting or participation in profits or capital contribution) of more than fifty percent (50%). 3. ADMINISTRATION. (a) ADMINISTRATION BY BOARD. The Plan shall be administered by the Board unless and until the Board delegates administration of the Plan to a Committee, as provided in Section 3(c). (b) POWERS OF BOARD. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine the provisions of each Option to the extent not specified in the Plan. (ii) To construe and interpret the Plan and Options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Option Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To effect, at any time and from time to time, with the consent of any adversely affected Optionholder, (1) the reduction of the exercise price of any outstanding Option under the Plan, (2) the cancellation of any outstanding Option under the Plan and the grant in substitution therefor of (A) a new Option under the Plan or another equity plan of the 4. Company covering the same or a different number of shares of Common Stock, (B) cash and/or (C) other valuable consideration (as determined by the Board, in its sole discretion), or (3) any other action that is treated as a repricing under generally accepted accounting principles. (iv) To amend the Plan or an Option as provided in Section 12. (v) To terminate or suspend the Plan as provided in Section 13. (vi) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company and that are not in conflict with the provisions of the Plan. (c) DELEGATION TO COMMITTEE. The Board may delegate administration of the Plan to a Committee or Committees of one or more members of the Board, and the term "COMMITTEE" shall apply to any person or persons to whom such authority has been delegated. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. (d) EFFECT OF BOARD'S DECISION. All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons. 4. SHARES SUBJECT TO THE PLAN. (a) SHARE RESERVE. Subject to the provisions of Section 11(a) relating to Capitalization Adjustments, the shares of Common Stock that may be issued pursuant to Options shall not exceed in the aggregate eight hundred thousand (800,000) shares of Common Stock. (b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Option shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the shares of Common Stock not acquired under such Option shall revert to and again become available for issuance under the Plan. If any shares subject to an Option are not delivered to an Optionholder because such shares are withheld for the payment of taxes or the Option is exercised through a reduction of shares subject to the Option (i.e., "net exercised"), the number of shares that are not delivered to the Optionholder as a result thereof shall remain available for issuance under the Plan. If the exercise price of an Option is satisfied by tendering shares of Common Stock held by the Optionholder (either by actual delivery or attestation), then the number of shares so tendered shall remain available for issuance under the Plan. (c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. 5. ELIGIBILITY. The Options, as set forth in Section 6, automatically shall be granted under the Plan to all Non-Employee Directors who meet the criteria specified in Section 6. 6. NON-DISCRETIONARY GRANTS. (a) INITIAL GRANTS. Without any further action of the Board, each person who is serving as a Non-Employee Director on the IPO Date automatically shall, on the IPO Date, be granted an Initial Grant to purchase thirty thousand (30,000) shares of Common Stock on the terms and conditions set forth herein. Additionally, without any further action of the Board, each person who after the IPO Date is elected or appointed for the first time to be a Non-Employee Director automatically shall, upon the date of his or her initial election or appointment to be a Non-Employee Director, be granted an Initial Grant to purchase thirty thousand (30,000) shares of Common Stock on the terms and conditions set forth herein. (b) ANNUAL GRANTS. Without any further action of the Board, on the date of each Annual Meeting, commencing with the Annual Meeting in 2005, each person who is then a Non-Employee Director automatically shall be granted an Annual Grant to purchase ten thousand (10,000) shares of Common Stock on the terms and conditions set forth herein; provided, however, that if the person has not been serving as a Non-Employee Director for the entire period since the preceding Annual Meeting, then the number of shares subject to such Annual Grant shall be reduced pro rata for each full quarter prior to the date of grant during which such person did not serve as a Non-Employee Director. 7. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as required by the Plan. Each Option shall contain such additional terms and conditions, not inconsistent with the Plan, as the Board shall deem appropriate. Each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. No Option shall be exercisable after the expiration of ten (10) years from the date on which it was granted. (b) EXERCISE PRICE. The exercise price of each Option shall be one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. (c) CONSIDERATION. The purchase price of Common Stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable law, either (i) in cash at the time the Option is exercised or (ii) at the discretion of the Board either at the time of the grant of the Option or subsequent thereto (1) by delivery to the Company of other Common Stock at the time the Option is exercised, (2) by a "net exercise" of the Option (as further described below), (3) pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to 6. the Company from the sales proceeds or (4) in any other form of legal consideration that may be acceptable to the Board. Unless otherwise specifically provided in the Option, the purchase price of Common Stock acquired pursuant to an Option that is paid by delivery to the Company of other Common Stock acquired, directly or indirectly from the Company, shall be paid only by shares of the Common Stock of the Company that have been held for more than six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes). In the case of a "net exercise" of an Option, the Company will not require a payment of the exercise price of the Option from the Participant but will reduce the number of shares of Common Stock issued upon the exercise by the largest number of whole shares that has a Fair Market Value that does not exceed the aggregate exercise price. With respect to any remaining balance of the aggregate exercise price, The Company shall accept a cash payment from the Participant. Shares of Common Stock will no longer be outstanding under an Option (and will therefore not thereafter be exercisable) following the exercise of such Option to the extent of (i) shares used to pay the exercise price of an Option under a "net exercise", (ii) shares actually delivered to the Participant as a result of such exercise and (iii) shares withheld for purposes of tax withholding. (d) TRANSFERABILITY. An Option is transferable by will or by the laws of descent and distribution. An Option also may be transferable upon written consent of the Company if, at the time of transfer, a Form S-8 registration statement under the Securities Act is available for the exercise of the Option and the subsequent resale of the underlying securities. In addition, an Optionholder may, by delivering written notice to the Company, in a form provided by or otherwise satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (e) VESTING. Initial Grants shall vest in three, equal annual installments on each anniversary of the IPO Date, in the case of each person who is serving as a Non-Employee Director on the IPO Date, or on each anniversary of his or her initial election or appointment to be a Non-Employee Director, in the case of each person who after the IPO Date is elected or appointment for the first time to be a Non-Employee Director. Annual Grants shall vest in full immediately upon grant. (f) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's Continuous Service terminates for any reason, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise it as of the date of termination) but only within such period of time ending on the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate. 8. SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Options and to issue and sell shares of Common Stock upon exercise of the Options; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Option or any 7. Common Stock issued or issuable pursuant to any such Option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Options unless and until such authority is obtained. 9. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of Common Stock pursuant to Options shall constitute general funds of the Company. 10. MISCELLANEOUS. (a) STOCKHOLDER RIGHTS. No Optionholder shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Option unless and until such Optionholder has satisfied all requirements for exercise of the Option pursuant to its terms. (b) NO SERVICE RIGHTS. Nothing in the Plan or any instrument executed or Option granted pursuant thereto shall confer upon any Optionholder any right to continue to serve the Company as a Non-Employee Director or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant's agreement with the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be. (c) INVESTMENT ASSURANCES. The Company may require an Optionholder, as a condition of exercising or acquiring Common Stock under any Option, (i) to give written assurances satisfactory to the Company as to the Optionholder's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Option; and (ii) to give written assurances satisfactory to the Company stating that the Optionholder is acquiring the Common Stock subject to the Option for the Optionholder's own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (1) the issuance of the shares of Common Stock upon the exercise or acquisition of Common Stock under the Option has been registered under a then currently effective registration statement under the Securities Act or (2) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock. 8. (d) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of an Option Agreement, the Company may in its sole discretion, satisfy any federal state or local tax withholding obligation relating to an Option by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) causing the Optionholder to tender a cash payment; (ii) withholding shares of Common Stock from the shares of Common Stock issued or otherwise issuable to the Optionholder in connection with the Option; or (iii) via such other method as may be set forth in the Option Agreement. 11. ADJUSTMENTS UPON CHANGES IN COMMON STOCK. (a) CAPITALIZATION ADJUSTMENTS. If any change is made in, or other event occurs with respect to, the Common Stock subject to the Plan, or subject to any Option, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company (each a "CAPITALIZATION ADJUSTMENT"), the Plan will be appropriately adjusted in the class(es) and maximum number of securities subject both to the Plan pursuant to Section 4 and to the nondiscretionary Options specified in Section 6, and the outstanding Options will be appropriately adjusted in the class(es) and number of securities and price per share of Common Stock subject to such outstanding Options. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (Notwithstanding the foregoing, the conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.) (b) DISSOLUTION OR LIQUIDATION. In the event of a dissolution or liquidation of the Company, then all outstanding Options shall terminate immediately prior to the completion of such dissolution or liquidation. (c) CORPORATE TRANSACTION. In the event of a Corporate Transaction, any surviving corporation or acquiring corporation may assume or continue any or all Options outstanding under the Plan or may substitute similar stock options for Options outstanding under the Plan (including, but not limited to, options to acquire the same consideration paid to the stockholders of the Company, as the case may be, pursuant to the Corporate Transaction). In the event that any surviving corporation or acquiring corporation does not assume or continue all such outstanding Options or substitute similar stock options for all such outstanding Options, then with respect to Options that have been not assumed, continued or substituted, the Options shall terminate if not exercised (if applicable) at or prior to the effective time of such Corporate Transaction. 12. AMENDMENT OF THE PLAN AND OPTIONS. (a) AMENDMENT OF PLAN. Subject to the limitations, if any, of applicable law, the Board, at any time and from time to time, may amend the Plan. However, except as provided in Section 11(a) relating to Capitalization Adjustments, no amendment shall be effective unless 9. approved by the stockholders of the Company to the extent stockholder approval is necessary to satisfy the requirements of applicable law. (b) STOCKHOLDER APPROVAL. The Board, in its sole discretion, may submit any other amendment to the Plan for stockholder approval. (c) NO IMPAIRMENT OF RIGHTS. Rights under any Option granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the Optionholder and (ii) the Optionholder consents in writing. (d) AMENDMENT OF OPTIONS. The Board, at any time, and from time to time, may amend the terms of any one or more Options, including, but not limited to, amendments to provide terms more favorable than previously provided in the agreement evidencing an Option, subject to any specified limits in the Plan that are not subject to Board discretion; provided, however, that the rights under any Option shall not be impaired by any such amendment unless (i) the Company requests the consent of the Optionholder and (ii) the Optionholder consents in writing. 13. TERMINATION OR SUSPENSION OF THE PLAN. (a) PLAN TERM. The Board may suspend or terminate the Plan at any time. No Options may be granted under the Plan while the Plan is suspended or after it is terminated. (b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall not impair rights and obligations under any Option granted while the Plan is in effect except with the written consent of the Optionholder. 14. EFFECTIVE DATE OF PLAN. The Plan shall become effective on the IPO Date, but no Option shall be exercised unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 15. CHOICE OF LAW. The law of the state of California shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state's conflict of laws rules. 10. MANNKIND CORPORATION 2004 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN STOCK OPTION AGREEMENT Pursuant to your Stock Option Grant Notice ("Grant Notice") and this Stock Option Agreement, MannKind Corporation (the "Company") has granted you an option under its 2004 Non-Employee Directors' Stock Option Plan (the "Plan") to purchase the number of shares of the Company's Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly defined in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your option are as follows: 1. VESTING. Subject to the limitations contained herein, your option will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service. 2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your option and your exercise price per share referenced in your Grant Notice may be adjusted from time to time for Capitalization Adjustments, as provided in the Plan. 3. METHOD OF PAYMENT. Payment of the exercise price is due in full upon exercise of all or any part of your option. You may elect to make payment of the exercise price in cash or by check or in any other manner PERMITTED BY YOUR GRANT NOTICE, which may include one or more of the following: (a) In the Company's sole discretion at the time your option is exercised and provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds. (b) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, by delivery of already-owned shares of Common Stock either that you have held for the period required to avoid a charge to the Company's reported earnings (generally six months) or that you did not acquire, directly or indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of exercise. "Delivery" for these purposes, in the sole discretion of the Company at the time you exercise your option, shall include delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. Notwithstanding the foregoing, you may not exercise your option by tender to the Company of Common Stock to the extent such tender would violate the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. 11. 4. WHOLE SHARES. You may exercise your option only for whole shares of Common Stock. 5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you may not exercise your option unless the shares of Common Stock issuable upon such exercise are then registered under the Securities Act or, if such shares of Common Stock are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your option must also comply with other applicable laws and regulations governing your option, and you may not exercise your option if the Company determines that such exercise would not be in material compliance with such laws and regulations. 6. TERM. You may not exercise your option before the commencement of its term or after its term expires. The term of your option commences on the Date of Grant and expires upon the EARLIEST of the following: (a) three (3) months after the termination of your Continuous Service for any reason other than your Disability or death, provided that if during any part of such three- (3-) month period your option is not exercisable solely because of the condition set forth in the preceding paragraph relating to "Securities Law Compliance," your option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service; (b) twelve (12) months after the termination of your Continuous Service due to your Disability; (c) eighteen (18) months after your death if you die either during your Continuous Service or within three (3) months after your Continuous Service terminates; (d) the Expiration Date indicated in your Grant Notice; or (e) the day before the tenth (10th) anniversary of the Date of Grant. 7. EXERCISE. (a) You may exercise your option during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require. (b) By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are subject at the time of exercise, or (3) the disposition of shares of Common Stock acquired upon such exercise. 12. 8. TRANSFERABILITY. Your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your option. 9. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your option shall obligate the Company or an Affiliate, their respective shareholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate. 10. WITHHOLDING OBLIGATIONS. (a) At the time you exercise your option, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a "cashless exercise" pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with your option. (b) Upon your request and subject to approval by the Company, in its sole discretion, and compliance with any applicable conditions or restrictions of law, the Company may withhold from shares of Common Stock otherwise issuable to you upon the exercise of your option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the date of exercise, not in excess of the minimum amount of tax required to be withheld by law. If the date of determination of any tax withholding obligation is deferred to a date later than the date of exercise of your option, share withholding pursuant to the preceding sentence shall not be permitted unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Common Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding obligation to the date of exercise of your option. Notwithstanding the filing of such election, shares of Common Stock shall be withheld solely from shares of Common Stock determined as of the date of exercise of your option that are otherwise issuable to you upon such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole responsibility. (c) You may not exercise your option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired, and the Company shall have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow provided for herein. 13.
Exhibit 10.4 MANNKIND CORPORATION 2004 EMPLOYEE STOCK PURCHASE PLAN ADOPTED BY THE BOARD OF DIRECTORS MARCH 23, 2004 APPROVED BY STOCKHOLDERS MARCH 23, 2004 1. PURPOSE. (a) The purpose of the Plan is to provide a means by which Employees of the Company and certain designated Related Corporations may be given an opportunity to purchase shares of the Common Stock of the Company. (b) The Company, by means of the Plan, seeks to retain the services of such Employees, to secure and retain the services of new Employees and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Related Corporations. (c) The Company intends that the Purchase Rights be considered options issued under an Employee Stock Purchase Plan. 2. DEFINITIONS. As used in the Plan and any Offering, unless otherwise specified, the following terms have the meanings set forth below: (a) "BOARD" means the Board of Directors of the Company. (b) "CODE" means the Internal Revenue Code of 1986, as amended. (c) "COMMITTEE" means a committee appointed by the Board in accordance with Section 3(c) of the Plan. (d) "COMMON STOCK" means the common stock of the Company. (e) "COMPANY" means MannKind Corporation, a Delaware corporation. (f) "CONTRIBUTIONS" means the payroll deductions and other additional payments that a Participant contributes to fund the exercise of a Purchase Right. A Participant may make payments not through payroll deductions only if specifically provided for in the Offering, and then only if the Participant has not already had the maximum permitted amount withheld through payroll deductions during the Offering. 1 (g) "CORPORATE TRANSACTION" means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events: (i) a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company; (ii) a sale or other disposition of at least ninety percent (90%) of the outstanding securities of the Company; (iii) a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or (iv) a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise. (h) "DIRECTOR" means a member of the Board. (i) "ELIGIBLE EMPLOYEE" means an Employee who meets the requirements set forth in the Offering for eligibility to participate in the Offering, provided that such Employee also meets the requirements for eligibility to participate set forth in the Plan. (j) "EMPLOYEE" means any person, including Officers and Directors, who is employed for purposes of Section 423(b)(4) of the Code by the Company or a Related Corporation. Neither service as a Director nor payment of a director's fee shall be sufficient to make an individual an Employee of the Company or a Related Corporation. (k) "EMPLOYEE STOCK PURCHASE PLAN" means a plan that grants Purchase Rights intended to be options issued under an "employee stock purchase plan," as that term is defined in Section 423(b) of the Code. (l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (m) "FAIR MARKET VALUE" means the value of a security, as determined in good faith by the Board. If the security is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of the security, unless otherwise determined by the Board, shall be the closing sales price (rounded up where necessary to the nearest whole cent) for such security (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the relevant security of the Company) on the Trading Day prior to the relevant determination date, as reported in The Wall Street Journal or such other source as the Board deems reliable. 2 (n) "OFFERING" means the grant of Purchase Rights to purchase shares of Common Stock under the Plan to Eligible Employees. (o) "OFFERING DATE" means a date selected by the Board for an Offering to commence. (p) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (q) "PARTICIPANT" means an Eligible Employee who holds an outstanding Purchase Right granted pursuant to the Plan. (r) "PLAN" means this MannKind Corporation 2003 Employee Stock Purchase Plan. (s) "PURCHASE DATE" means one or more dates during an Offering established by the Board on which Purchase Rights shall be exercised and as of which purchases of shares of Common Stock shall be carried out in accordance with such Offering. (t) "PURCHASE PERIOD" means a period of time specified within an Offering beginning on the Offering Date or on the next day following a Purchase Date within an Offering and ending on a Purchase Date. An Offering may consist of one or more Purchase Periods. (u) "PURCHASE RIGHT" means an option to purchase shares of Common Stock granted pursuant to the Plan. (v) "RELATED CORPORATION" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (w) "SECURITIES ACT" means the Securities Act of 1933, as amended. (x) "TRADING DAY" means any day on which the exchange(s) or market(s) on which shares of Common Stock are listed, whether it be an established stock exchange, the Nasdaq National Market, the Nasdaq SmallCap Market or otherwise, is open for trading. 3. ADMINISTRATION. (a) The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in Section 3(c). Whether or not the Board has delegated administration, the Board shall have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan. (b) The Board (or the Committee) shall have the power, subject to, and within the limitations of, the express provisions of the Plan: 3 (i) To determine when and how Purchase Rights to purchase shares of Common Stock shall be granted and the provisions of each Offering of such Purchase Rights (which need not be identical). (ii) To designate from time to time which Related Corporations of the Company shall be eligible to participate in the Plan. (iii) To construe and interpret the Plan and Purchase Rights, and to establish, amend and revoke rules and regulations for the administration of the Plan. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iv) To amend the Plan as provided in Section 15. (v) Generally, to exercise such powers and to perform such acts as it deems necessary or expedient to promote the best interests of the Company and its Related Corporations and to carry out the intent that the Plan be treated as an Employee Stock Purchase Plan. (vi) To adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the Plan by Employees who are foreign nationals or employed outside the United States. (c) The Board may delegate administration of the Plan to a Committee of the Board composed of one (1) or more members of the Board. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. If administration is delegated to a Committee, references to the Board in this Plan and in the Offering document shall thereafter be deemed to be to the Board or the Committee, as the case may be. (d) All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons. 4. SHARES OF COMMON STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 14(a) relating to adjustments upon changes in Common Stock, the stock that may be sold pursuant to Purchase Rights granted under the Plan (the "RESERVED SHARES"), shall not exceed in the aggregate two million (2,000,000) shares of the Common Stock. As of each January 1, beginning with January 1, 2005, and continuing through and including January 1, 2014 (each such January 1, a "CALCULATION DATE"), the number of Reserved Shares will be increased automatically by the lesser of (i) one percent (1%) of the total number of shares of Common Stock outstanding on such Calculation Date or (ii) seven hundred 4 thousand (700,000) shares of Common Stock; provided, however, that in no event will such annual increase cause the total number of shares of Common Stock remaining available for issuance under the Plan to exceed ten percent (10%) of the number of outstanding shares of capital stock of the Company at the end of the prior fiscal year. Notwithstanding the foregoing, the Board may act, prior to the first day of any fiscal year of the Company, to increase the share reserve by such number of shares of Common Stock as the Board shall determine, which number shall be less than each of (i) and (ii). 5. GRANT OF PURCHASE RIGHTS; OFFERING. (a) The Board may from time to time grant or provide for the grant of Purchase Rights to purchase shares of Common Stock under the Plan to Eligible Employees in an Offering (consisting of one or more Purchase Periods) on an Offering Date or Offering Dates selected by the Board. Each Offering shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate, which shall comply with the requirement of Section 423(b)(5) of the Code that all Employees granted Purchase Rights shall have the same rights and privileges. The terms and conditions of an Offering shall be incorporated by reference into the Plan and treated as part of the Plan. The provisions of separate Offerings need not be identical, but each Offering shall include (through incorporation of the provisions of this Plan by reference in the document comprising the Offering or otherwise) the period during which the Offering shall be effective, which period shall not exceed twenty-seven (27) months beginning with the Offering Date, and the substance of the provisions contained in Sections 6 through 9, inclusive. (b) If a Participant has more than one Purchase Right outstanding under the Plan, unless he or she otherwise indicates in agreements or notices delivered hereunder: (i) each agreement or notice delivered by that Participant shall be deemed to apply to all of his or her Purchase Rights under the Plan, and (ii) a Purchase Right with a lower exercise price (or an earlier-granted Purchase Right, if different Purchase Rights have identical exercise prices) shall be exercised to the fullest possible extent before a Purchase Right with a higher exercise price (or a later-granted Purchase Right if different Purchase Rights have identical exercise prices) shall be exercised. 6. ELIGIBILITY. (a) Purchase Rights may be granted only to Employees of the Company or, as the Board may designate as provided in Section 3(b), to Employees of a Related Corporation. Except as provided in Section 6(b), an Employee shall not be eligible to be granted Purchase Rights under the Plan unless, on the Offering Date, such Employee has been in the employ of the Company or the Related Corporation, as the case may be, for such continuous period preceding such Offering Date as the Board may require, but in no event shall the required period of continuous employment be greater than two (2) years. In addition, the Board may provide that no Employee shall be eligible to be granted Purchase Rights under the Plan unless, on the Offering Date, such Employee's customary employment with the Company or the Related Corporation is more than twenty (20) hours per week and/or more than five (5) months per calendar year. 5 (b) The Board may provide that each person who, during the course of an Offering, first becomes an Eligible Employee shall, on a date or dates specified in the Offering which coincides with the day on which such person becomes an Eligible Employee or which occurs thereafter, receive a Purchase Right under that Offering, which Purchase Right shall thereafter be deemed to be a part of that Offering. Such Purchase Right shall have the same characteristics as any Purchase Rights originally granted under that Offering, as described herein, except that: (i) the date on which such Purchase Right is granted shall be the "Offering Date" of such Purchase Right for all purposes, including determination of the exercise price of such Purchase Right; (ii) the period of the Offering with respect to such Purchase Right shall begin on its Offering Date and end coincident with the end of such Offering; and (iii) the Board may provide that if such person first becomes an Eligible Employee within a specified period of time before the end of the Offering, he or she shall not receive any Purchase Right under that Offering. (c) No Employee shall be eligible for the grant of any Purchase Rights under the Plan if, immediately after any such Purchase Rights are granted, such Employee owns stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Related Corporation. For purposes of this Section 6(c), the rules of Section 424(d) of the Code shall apply in determining the stock ownership of any Employee, and stock which such Employee may purchase under all outstanding Purchase Rights and options shall be treated as stock owned by such Employee. (d) As specified by Section 423(b)(8) of the Code, an Eligible Employee may be granted Purchase Rights under the Plan only if such Purchase Rights, together with any other rights granted under all Employee Stock Purchase Plans of the Company and any Related Corporations, do not permit such Eligible Employee's rights to purchase stock of the Company or any Related Corporation to accrue at a rate which exceeds twenty five thousand dollars ($25,000) of Fair Market Value of such stock (determined at the time such rights are granted, and which, with respect to the Plan, shall be determined as of their respective Offering Dates) for each calendar year in which such rights are outstanding at any time. (e) Officers of the Company and any designated Related Corporation, if they are otherwise Eligible Employees, shall be eligible to participate in Offerings under the Plan. Notwithstanding the foregoing, the Board may provide in an Offering that Employees who are highly compensated Employees within the meaning of Section 423(b)(4)(D) of the Code shall not be eligible to participate. 7. PURCHASE RIGHTS; PURCHASE PRICE. (a) On each Offering Date, each Eligible Employee, pursuant to an Offering made under the Plan, shall be granted a Purchase Right to purchase up to that number of shares of 6 Common Stock purchasable either with a percentage or with a maximum dollar amount, as designated by the Board, but in either case not exceeding twenty percent (20%), of such Employee's Earnings (as defined by the Board in each Offering) during the period that begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering. (b) The Board shall establish one (1) or more Purchase Dates during an Offering as of which Purchase Rights granted pursuant to that Offering shall be exercised and purchases of shares of Common Stock shall be carried out in accordance with such Offering. (c) In connection with each Offering made under the Plan, the Board may specify a maximum number of shares of Common Stock that may be purchased by any Participant on any Purchase Date during such Offering. In connection with each Offering made under the Plan, the Board may specify a maximum aggregate number of shares of Common Stock that may be purchased by all Participants pursuant to such Offering. In addition, in connection with each Offering that contains more than one Purchase Date, the Board may specify a maximum aggregate number of shares of Common Stock that may be purchased by all Participants on any Purchase Date under the Offering. If the aggregate purchase of shares of Common Stock issuable upon exercise of Purchase Rights granted under the Offering would exceed any such maximum aggregate number, then, in the absence of any Board action otherwise, a pro rata allocation of the shares of Common Stock available shall be made in as nearly a uniform manner as shall be practicable and equitable. (d) The purchase price of shares of Common Stock acquired pursuant to Purchase Rights shall be not less than the lesser of: (i) an amount equal to eighty-five percent (85%) of the Fair Market Value of the shares of Common Stock on the Offering Date; or (ii) an amount equal to eighty-five percent (85%) of the Fair Market Value of the shares of Common Stock on the applicable Purchase Date. 8. PARTICIPATION; WITHDRAWAL; TERMINATION. (a) A Participant may elect to authorize payroll deductions pursuant to an Offering under the Plan by completing and delivering to the Company, within the time specified in the Offering, an enrollment form (in such form as the Company may provide). Each such enrollment form shall authorize an amount of Contributions expressed as a percentage of the submitting Participant's Earnings (as defined in each Offering) during the Offering (not to exceed the maximum percentage specified by the Board). Each Participant's Contributions shall remain the property of the Participant at all times prior to the purchase of Common Stock, but such Contributions may be commingled with the assets of the Company and used for general corporate purposes except where applicable law requires that Contributions be deposited with an independent third party. To the extent provided in the Offering, a Participant may begin making Contributions after the beginning of the Offering. To the extent provided in the Offering, a 7 Participant may thereafter reduce (including to zero) or increase his or her Contributions. To the extent specifically provided in the Offering, in addition to making Contributions by payroll deductions, a Participant may make Contributions through the payment by cash or check prior to each Purchase Date of the Offering. (b) During an Offering, a Participant may cease making Contributions and withdraw from the Offering by delivering to the Company a notice of withdrawal in such form as the Company may provide. Such withdrawal may be elected at any time prior to the end of the Offering, except as provided otherwise in the Offering. Upon such withdrawal from the Offering by a Participant, the Company shall distribute to such Participant all of his or her accumulated Contributions (reduced to the extent, if any, such Contributions have been used to acquire shares of Common Stock for the Participant) under the Offering, and such Participant's Purchase Right in that Offering shall thereupon terminate. A Participant's withdrawal from an Offering shall have no effect upon such Participant's eligibility to participate in any other Offerings under the Plan, but such Participant shall be required to deliver a new enrollment form in order to participate in subsequent Offerings. (c) Purchase Rights granted pursuant to any Offering under the Plan shall terminate immediately upon a Participant ceasing to be an Employee for any reason or for no reason (subject to any post-employment participation period required by law) or other lack of eligibility. The Company shall distribute to such terminated or otherwise ineligible Employee all of his or her accumulated Contributions (reduced to the extent, if any, such Contributions have been used to acquire shares of Common Stock for the terminated or otherwise ineligible Employee) under the Offering. (d) Purchase Rights shall not be transferable by a Participant otherwise than by will, the laws of descent and distribution, or a beneficiary designation as provided in Section 13. During a Participant's lifetime, Purchase Rights shall be exercisable only by such Participant. (e) Unless otherwise specified in an Offering, the Company shall have no obligation to pay interest on Contributions. 9. EXERCISE. (a) On each Purchase Date during an Offering, each Participant's accumulated Contributions shall be applied to the purchase of shares of Common Stock up to the maximum number of shares of Common Stock permitted pursuant to the terms of the Plan and the applicable Offering, at the purchase price specified in the Offering. No fractional shares shall be issued upon the exercise of Purchase Rights unless specifically provided for in the Offering. (b) If any amount of accumulated Contributions remains in a Participant's account after the purchase of shares of Common Stock and such remaining amount is less than the amount required to purchase one share of Common Stock on the final Purchase Date of an Offering, then such remaining amount shall be held in such Participant's account for the purchase of shares of Common Stock under the next Offering under the Plan, unless such 8 Participant withdraws from such next Offering, as provided in Section 8(b), or is not eligible to participate in such Offering, as provided in Section 6, in which case such amount shall be distributed to such Participant after the final Purchase Date, without interest. If the amount of Contributions remaining in a Participant's account after the purchase of shares of Common Stock is at least equal to the amount required to purchase one (1) whole share of Common Stock on the final Purchase Date of the Offering, then such remaining amount shall be distributed in full to such Participant at the end of the Offering. (c) No Purchase Rights may be exercised to any extent unless the shares of Common Stock to be issued upon such exercise under the Plan are covered by an effective registration statement pursuant to the Securities Act and the Plan is in material compliance with all laws applicable to the Plan. If on a Purchase Date during any Offering hereunder the shares of Common Stock are not so registered or the Plan is not in such compliance, no Purchase Rights or any Offering shall be exercised on such Purchase Date, and the Purchase Date shall be delayed until the shares of Common Stock are subject to such an effective registration statement and the Plan is in such compliance, except that the Purchase Date shall not be delayed more than twelve (12) months and the Purchase Date shall in no event be more than twenty-seven (27) months from the Offering Date. If, on the Purchase Date under any Offering hereunder, as delayed to the maximum extent permissible, the shares of Common Stock are not registered and the Plan is not in such compliance, no Purchase Rights or any Offering shall be exercised and all Contributions accumulated during the Offering (reduced to the extent, if any, such Contributions have been used to acquire shares of Common Stock) shall be distributed to the Participants. 10. COVENANTS OF THE COMPANY. The Company shall seek to obtain from each federal, state, foreign or other regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of Common Stock upon exercise of the Purchase Rights. If, after commercially reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority that counsel for the Company deems necessary for the lawful issuance and sale of shares of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell shares of Common Stock upon exercise of such Purchase Rights unless and until such authority is obtained. 11. USE OF PROCEEDS FROM SHARES OF COMMON STOCK. Proceeds from the sale of shares of Common Stock pursuant to Purchase Rights shall constitute general funds of the Company. 12. RIGHTS AS A STOCKHOLDER. A Participant shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, shares of Common Stock subject to Purchase Rights unless and until the Participant's shares of Common Stock acquired upon exercise of Purchase Rights are recorded in the books of the Company (or its transfer agent). 9 13. DESIGNATION OF BENEFICIARY. (a) A Participant may file a written designation of a beneficiary who is to receive any shares of Common Stock and/or cash, if any, from the Participant's account under the Plan in the event of such Participant's death subsequent to the end of an Offering but prior to delivery to the Participant of such shares of Common Stock or cash. In addition, a Participant may file a written designation of a beneficiary who is to receive any cash from the Participant's account under the Plan in the event of such Participant's death during an Offering. Any such designation shall be on a form provided by or otherwise acceptable to the Company. (b) The Participant may change such designation of beneficiary at any time by written notice to the Company. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant's death, the Company shall deliver such shares of Common Stock and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its sole discretion, may deliver such shares of Common Stock and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 14. ADJUSTMENTS UPON CHANGES IN SECURITIES; CORPORATE TRANSACTIONS. (a) If any change is made in the shares of Common Stock, subject to the Plan, or subject to any Purchase Right, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan shall be appropriately adjusted in the type(s), class(es) and maximum number of shares of Common Stock subject to the Plan pursuant to Section 4(a), and the outstanding Purchase Rights shall be appropriately adjusted in the type(s), class(es), number of shares and purchase limits of such outstanding Purchase Rights. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (Notwithstanding the foregoing, the conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company.") (b) In the event of a Corporate Transaction, then: (i) any surviving or acquiring corporation may continue or assume Purchase Rights outstanding under the Plan or may substitute similar rights (including a right to acquire the same consideration paid to stockholders in the Corporate Transaction) for those outstanding under the Plan, or (ii) if any surviving or acquiring corporation does not continue or assume such Purchase Rights or does not substitute similar rights for Purchase Rights outstanding under the Plan, then, the Participants' accumulated Contributions shall be used to purchase shares of Common Stock within ten (10) business days prior to the Corporate Transaction under the ongoing Offering, and the Participants' Purchase Rights under the ongoing Offering shall terminate immediately after such purchase. 10 15. AMENDMENT OF THE PLAN. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 14 relating to adjustments upon changes in securities and except as to amendments solely to benefit the administration of the Plan, to take account of a change in legislation or to obtain or maintain favorable tax, exchange control or regulatory treatment for Participants or the Company or any Related Corporation, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary for the Plan to satisfy the requirements of Section 423 of the Code or other applicable laws or regulations. (b) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Employee Stock Purchase Plans or to bring the Plan and/or Purchase Rights into compliance therewith. (c) The rights and obligations under any Purchase Rights granted before amendment of the Plan shall not be impaired by any amendment of the Plan except: (i) with the consent of the person to whom such Purchase Rights were granted, or (ii) as necessary to comply with any laws or governmental regulations (including, without limitation, the provisions of the Code and the regulations promulgated thereunder relating to Employee Stock Purchase Plans). 16. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board in its discretion may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate at the time that all of the shares of Common Stock reserved for issuance under the Plan, as increased and/or adjusted from time to time, have been issued under the terms of the Plan. No Purchase Rights may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Any benefits, privileges, entitlements and obligations under any Purchase Rights while the Plan is in effect shall not be impaired by suspension or termination of the Plan except (i) as expressly provided in the Plan or with the consent of the person to whom such Purchase Rights were granted, (ii) as necessary to comply with any laws, regulations, or listing requirements, or (iii) as necessary to ensure that the Plan and/or Purchase Rights comply with the requirements of Section 423 of the Code. 17. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Purchase Rights shall be exercised unless and until the Plan has been approved by the stockholders of the Company within twelve (12) months before or after the date the Plan is adopted by the Board. 11 18. MISCELLANEOUS PROVISIONS. (a) The Plan and Offering do not constitute an employment contract. Nothing in the Plan or in the Offering shall in any way alter the at will nature of a Participant's employment or be deemed to create in any way whatsoever any obligation on the part of any Participant to continue in the employ of the Company or a Related Corporation, or on the part of the Company or a Related Corporation to continue the employment of a Participant. (b) The provisions of the Plan shall be governed by the laws of the State of California without resort to that state's conflicts of laws rules. 12 MANNKIND CORPORATION 2004 EMPLOYEE STOCK PURCHASE PLAN OFFERING DOCUMENT ADOPTED BY THE BOARD OF DIRECTORS, MARCH 23, 2004 In this document, capitalized terms not otherwise defined shall have the same definitions of such terms as in the MannKind Corporation, 2003 Employee Stock Purchase Plan. 1. GRANT; OFFERING DATE. (a) The Board hereby authorizes a series of Offerings pursuant to the terms of this Offering document. (b) The first Offering hereunder (the "Initial Offering") shall begin on the date the Company's Common Stock is first offered to the public under a registration statement declared effective under the Securities Act (the "IPO Date") and shall end on [THE DATE APPROXIMATELY 6 MONTHS FOLLOWING IPO DATE], unless terminated earlier as provided below. After the Initial Offering, an additional new Offering shall begin on the day after the Purchase Date of the immediately preceding Offering. The first day of an Offering is that Offering's "Offering Date." Except as provided below, each Offering shall be approximately six (6) months in duration, with one (1) Purchase Period which, except for the Purchase Period of the Initial Offering (which may be longer or shorter than six (6) months) shall be approximately six (6) months in length. Except as provided below, a Purchase Date is the last day of a Purchase Period or of an Offering, as the case may be. The Initial Offering shall consist of one (1) Purchase Period with the Purchase Period of the Initial Offering ending on [THE DATE APPROXIMATELY 6 MONTHS FOLLOWING IPO DATE]. (c) Notwithstanding the foregoing: (i) if any Offering Date falls on a day that is not a Trading Day, then such Offering Date shall instead fall on the next subsequent Trading Day, and (ii) if any Purchase Date falls on a day that is not a Trading Day, then such Purchase Date shall instead fall on the immediately preceding Trading Day. (d) Prior to the commencement of any Offering, the Board may change any or all terms of such Offering and any subsequent Offerings. The granting of Purchase Rights pursuant to each Offering hereunder shall occur on each respective Offering Date unless prior to such date (i) the Board determines that such Offering shall not occur, or (ii) no shares of Common Stock remain available for issuance under the Plan in connection with the Offering. (e) If the Company's accountants advise the Company that the accounting treatment of purchases under the Plan will change or has changed in a manner that the Company determines is detrimental to its best interests, then the Company may, in its discretion, take any or all of the following actions: (i) terminate each ongoing Offering as of the next Purchase Date 13 (after the purchase of stock on such Purchase Date) under such Offering; (ii) set a new Purchase Date for each ongoing Offering and terminate each such Offering after the purchase of stock on such Purchase Date; (iii) amend the Plan and each ongoing Offering to reduce or eliminate an accounting treatment that is detrimental to the Company's best interests and (iv) terminate each ongoing Offering and refund any money previously contributed by the participants. 2. ELIGIBLE EMPLOYEES. (a) Each Eligible Employee who, on the date that is ten (10) days prior to the Offering Date of an Offering hereunder, is (i) an employee of the Company; (ii) an employee of a Subsidiary incorporated in the United States; or (iii) an employee of a Subsidiary that is not incorporated in the United States, provided that the Board or Committee has designated the employees of such Subsidiary as eligible to participate in the Offering, shall be granted a Purchase Right on the Offering Date of such Offering. (b) Notwithstanding the foregoing, the following Employees shall not be Eligible Employees or be granted Purchase Rights under an Offering: (i) part-time or seasonal Employees whose customary employment is twenty (20) hours per week or less or five (5) months per calendar year or less; (ii) five percent (5%) stockholders (including ownership through unexercised and/or unvested stock options) as described in Section 6(c) of the Plan; or (iii) Employees in jurisdictions outside of the United States if, as of the Offering Date of the Offering, the grant of such Purchase Rights would not be in compliance with the applicable laws of any jurisdiction in which the Employee resides or is employed. (c) Notwithstanding the foregoing, each person who first becomes an Eligible Employee during an ongoing Offering shall not be able to participate in such Offering. 3. PURCHASE RIGHTS. (a) Subject to the limitations set forth herein and in the Plan, a Participant's Purchase Right shall permit the purchase of the number of shares of Common Stock purchasable with up to twenty percent (20%) of such Participant's Earnings paid during the period of such Offering beginning immediately after such Participant first commences participation; provided, however, that no Participant may have more than twenty percent (20%) of such Participant's Earnings applied to purchase shares of Common Stock under all ongoing Offerings under the Plan and all other plans of the Company and Related Corporations that are intended to qualify as Employee Stock Purchase Plans. (b) For Offerings hereunder, "Earnings" means the base compensation paid to a Participant, including all salary and wages (including amounts elected to be deferred by the Participant, that would otherwise have been paid, under any cash or deferred arrangement or 14 other deferred compensation program established by the Company or a Related Corporation); but excluding overtime pay, commissions, bonuses, and all other remuneration paid directly to such Participant, profit sharing, the cost of employee benefits paid for by the Company or a Related Corporation, education or tuition reimbursements, imputed income arising under any Company or Related Corporation group insurance or benefit program, traveling expenses, business and moving expense reimbursements, income received in connection with stock options, contributions made by the Company or a Related Corporation under any employee benefit plan, and similar items of compensation. (c) Notwithstanding the foregoing, the maximum number of shares of Common Stock that a Participant may purchase on any Purchase Date in an Offering shall be such number of shares as has a Fair Market Value (determined as of the Offering Date for such Offering) equal to (x) $25,000 multiplied by the number of calendar years in which the Purchase Right under such Offering has been outstanding at any time, minus (y) the Fair Market Value of any other shares of Common Stock (determined as of the relevant Offering Date with respect to such shares) that, for purposes of the limitation of Section 423(b)(8) of the Code, are attributed to any of such calendar years in which the Purchase Right is outstanding. The amount in clause (y) of the previous sentence shall be determined in accordance with regulations applicable under Section 423(b)(8) of the Code based on (i) the number of shares previously purchased with respect to such calendar years pursuant to such Offering or any other Offering under the Plan, or pursuant to any other Company or Related Corporation plans intended to qualify as Employee Stock Purchase Plans, and (ii) the number of shares subject to other Purchase Rights outstanding on the Offering Date for such Offering pursuant to the Plan or any other such Company or Related Corporation Employee Stock Purchase Plan. (d) The maximum aggregate number of shares of Common Stock available to be purchased by all Participants under an Offering shall be the number of shares of Common Stock remaining available under the Plan on the Offering Date. If the aggregate purchase of shares of Common Stock upon exercise of Purchase Rights granted under the Offering would exceed the maximum aggregate number of shares available, the Board shall make a pro rata allocation of the shares available in a uniform and equitable manner. (e) Notwithstanding the foregoing, the maximum number of shares of Common Stock that an Eligible Employee may purchase on any Purchase Date during any Offering shall not exceed 10,000 shares. 4. PURCHASE PRICE. The purchase price of shares of Common Stock under an Offering shall be the lesser of: (i) eighty-five percent (85%) of the Fair Market Value of such shares of Common Stock on the applicable Offering Date, or (ii) eighty-five percent (85%) of the Fair Market Value of such shares of Common Stock on the applicable Purchase Date, in each case rounded up to the nearest whole cent per share. For the Initial Offering, the Fair Market Value of the shares of Common Stock at the time when the Offering commences shall be the price per share at which 15 shares are first sold to the public in the Company's initial public offering as specified in the final prospectus for that initial public offering. 5. PARTICIPATION. (a) An Eligible Employee may elect to participate in an Offering on the Offering Date. An Eligible Employee shall elect his or her payroll deduction percentage on such enrollment form as the Company provides. The completed enrollment form must be delivered to the Company prior to the date participation is to be effective, unless a later time for filing the enrollment form is set by the Company for all Eligible Employees with respect to a given Offering. Payroll deduction percentages must be expressed in whole percentages of Earnings, with a minimum percentage of one percent (1%) and a maximum percentage of twenty percent (20%). Except as provided in paragraph (e) below with respect to the Initial Offering, Contributions may be made only by way of payroll deductions. (b) A Participant may change (increase or decrease) his or her participation level once during a Purchase Period. In addition, a Participant may decrease to zero percent (0%) his or her participation level only once during a Purchase Period. Any such increase or decrease in participation level shall be made by delivering a notice to the Company or a designated Subsidiary in such form as the Company provides prior to the ten (10) day period (or such shorter period of time as determined by the Company and communicated to Participants) immediately preceding the next Purchase Date of the Purchase Period for which it is to be effective. (c) A Participant may withdraw from an Offering and receive a refund of his or her Contributions (reduced to the extent, if any, such Contributions have been used to acquire shares of Common Stock for the Participant on any prior Purchase Date) without interest, at any time prior to the end of the Offering, excluding only each ten (10) day period immediately preceding a Purchase Date (or such shorter period of time determined by the Company and communicated to Participants), by delivering a withdrawal notice to the Company or a designated Subsidiary in such form as the Company provides. A Participant who has withdrawn from an Offering shall not again participate in such Offering, but may participate in subsequent Offerings under the Plan in accordance with the terms of the Plan and the terms of such subsequent Offerings. (d) Notwithstanding the foregoing or any other provision of this Offering document or of the Plan to the contrary, neither the enrollment of any Eligible Employee in the Plan nor any forms relating to participation in the Plan shall be given effect until such time as a registration statement covering the registration of the shares under the Plan that are subject to the Offering has been filed by the Company and has become effective. (e) Notwithstanding the foregoing or any other provision of this Offering document or of the Plan to the contrary, with respect to the Initial Offering only, each Eligible Employee who is employed on the IPO Date automatically shall be enrolled in the Initial Offering, with a Purchase Right to purchase up to the number of shares of Common Stock that are purchasable with twenty percent (20%) of the Eligible Employee's Earnings, subject to the limitations set 16 forth in Section 3(c)-(e) above. Following the filing of an effective registration statement pursuant to a Form S-8, such Eligible Employee shall be provided a certain period of time, as determined by the Company in its sole discretion, within which to elect to authorize payroll deductions for the purchase of shares during the Initial Offering (which may be for a percentage that is less than twenty percent (20%) of the Eligible Employee's Earnings). If such Eligible Employee elects not to authorize such payroll deductions, the Eligible Employee instead may purchase shares of Common Stock under the Plan by delivering a single cash payment for the purchase of such shares to the Company or a designated Subsidiary prior to the ten (10) day period (or such shorter period of time as determined by the Company and communicated to Participants) immediately preceding the Purchase Date under the Initial Offering. If an Eligible Employee neither elects to authorize payroll deductions nor chooses to make a cash payment in accordance with the foregoing sentence, then the Eligible Employee shall not purchase any shares of Common Stock during the Initial Offering. After the end of the Initial Offering, in order to participate in any subsequent Offerings, an Eligible Employee must enroll and authorize payroll deductions prior to the commencement of the Offering, in accordance with paragraph (a) above; provided, however, that once an Eligible Employee enrolls in an Offering and authorizes payroll deductions (including in connection with the Initial Offering), the Eligible Employee automatically shall be enrolled for all subsequent Offerings until he or she elects to withdraw from an Offering pursuant to paragraph (c) above or terminates his or her participation in the Plan. 6. PURCHASES. Subject to the limitations contained herein, on each Purchase Date, each Participant's Contributions (without any increase for interest) shall be applied to the purchase of whole shares, up to the maximum number of shares permitted under the Plan and the Offering. 7. NOTICES AND AGREEMENTS. Any notices or agreements provided for in an Offering or the Plan shall be given in writing, in a form provided by the Company, and unless specifically provided for in the Plan or this Offering, shall be deemed effectively given upon receipt or, in the case of notices and agreements delivered by the Company, five (5) days after deposit in the United States mail, postage prepaid. 8. EXERCISE CONTINGENT ON STOCKHOLDER APPROVAL. The Purchase Rights granted under an Offering are subject to the approval of the Plan by the stockholders of the Company as required for the Plan to obtain treatment as an Employee Stock Purchase Plan. 9. OFFERING SUBJECT TO PLAN. Each Offering is subject to all the provisions of the Plan, and the provisions of the Plan are hereby made a part of the Offering. The Offering is further subject to all interpretations, 17 amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of an Offering and those of the Plan (including interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan), the provisions of the Plan shall control. 18
Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the use in this Amendment No. 3 to Registration Statement No. 333-115020 of MannKind Corporation on Form S-1 of our report dated April 29, 2004 (July 22, 2004 as to the fifth paragraph of Note 1), appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the headings "Summary Financial Data," "Selected Financial Data" and "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Los Angeles, California July 23, 2004