0.0575
6.80
100000000
4200000
2900000
0.119
0.0975
90000000
0.25
5.00
12000000
60000000
20000000
1200000
1800000
120100000
650000000
50000000
75000000
775000000
175000000
405699862
7500000
90000000
0.0975
160000000
160000000
40000000
13100000
3200000
2900000
40000000
9000000
93803000
12500000
40000000
0.0875
175000000
0.085
175000000
405469034
405469034
550000000
9000000
0
0.01
10000000
9000000
0.01
0
118150000
293778000
0
72625000
49521000
958000
4055000
-11000
17389000
2413621000
27269000
-40678000
11572000
12274000
386818000
150000000
99120000
427496000
10287000
2739000
30100000
172465000
169700000
190923000
20253000
2458343000
309073000
260000
386818000
803000
2114000
193521000
15000000
1753000
5157000
9000000
20000000
10000000
0
1011000
803000
260000
23100000
70000000
25000000
50000000
0
12500000
10300000
0
150000000
0.0584
2800000
49500000
30100000
160000000
0
160000000
40000000
8900000
9200000
1900000
6325000
0.1163
2921000
20000000
11335000
114131000
54948000
36214000
5273000
82068000
17000
5087000
18616304
0
102300000
72600000
75300000
93500000
0.0575
1000000
100000000
99120000
113900000
880000
61840000
369391972
369391972
550000000
0
0.01
10000000
0.01
0
111060000
127794000
49521000
2082000
3697000
-4000
3860000
102300000
98439000
2261996000
21634000
-30713000
13605000
5706000
258646000
289359000
12193000
342000
70790000
67700000
176557000
5485000
2296402000
287617000
298000
258646000
5516000
76275000
9000000
1311000
0
298000
11289000
114099000
54948000
14756000
5273000
82189000
17000
5046000
102300000
107000000
2400000
100000000
98439000
102200000
1561000
1.50
20
P30D
1.00
147.0859
1000
2019-12-31
0.65
0.35
0.119
4
1400000
2019-12-31
P2Y
9300000
1.00
0.124
0.119
0.127
35900000
124
-94681000
286889000
-0.48
133944425
-3000
0
708000
-137907000
-122784000
-137910000
598000
48000
-3000
1821000
3000
-137907000
-137907000
4000
7862000
2095000
5523000
31304000
8820000
122784000
79500000
5123000
637000
10052000
31963000
3525000
10109000
128465000
0
-1821000
80731000
42053000
-1929000
31304000
242000
-686000
51658000
<div>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 0pt">
<b>2. Accrued expenses and other current liabilities</b></p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 6pt">
Accrued expenses and other current liabilities were comprised of
the following (in thousands):</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt; MARGIN-TOP: 0pt">
 </p>
<table style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; BORDER-COLLAPSE: collapse" cellspacing="0" cellpadding="0" width="76%" align="center" border="0">
<tr>
<td width="72%"></td>
<td valign="bottom" width="8%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="8%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>September 30,<br />
2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>December 31,<br />
2013</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Salary and related expenses</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">10,287</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">12,193</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Research and clinical trial costs</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">1,011</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">1,311</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Accrued interest</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">958</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">2,082</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Construction in progress</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">2,739</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">342</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Other</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">12,274</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">5,706</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Accrued expenses and other current liabilities</p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">27,269</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">21,634</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
</tr>
</table>
</div>
<div>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 18pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
<b>14. Collaboration arrangement</b></p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 6pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
On August 11, 2014, the Company and Sanofi entered into a
license and collaboration agreement, which became effective on
September 23, 2014. Under the terms of the Sanofi License
Agreement, the Company granted to Sanofi exclusive, worldwide
licenses to certain of the Company’s patents, trademarks and
know-how for the development and commercialization of AFREZZA.
Under the terms of the Sanofi License Agreement, Sanofi has the
exclusive right and responsibility to develop AFREZZA worldwide,
subject to certain development activities that will be performed by
the Company. Sanofi will also be obligated to use commercially
reasonable efforts to file for, obtain and maintain marketing
approvals for AFREZZA in certain major markets and countries. In
addition, Sanofi will have exclusive, worldwide rights to
commercialize AFREZZA and will be obligated to use commercially
reasonable efforts to market, promote and commercialize AFREZZA in
all countries in the world where regulatory approval for AFREZZA
has been received. Pursuant to the terms of a supply agreement that
the Company entered into with Sanofi concurrently with the Sanofi
License Agreement, the Company will be responsible for the
manufacture and supply to Sanofi of its requirements of
AFREZZA.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
Under the Sanofi License Agreement, Sanofi paid the Company an
up-front cash payment of $150.0 million in the third quarter of
2014. If certain manufacturing, regulatory and sales milestones are
achieved, the Company will also be eligible to receive up to $775.0
million in milestone payments, of which $75.0 million relates to
certain development and manufacturing milestone events, $50.0
million relates to the filing and completion of regulatory
approvals and $650.0 million relates to the achievement of certain
product sales milestones. In addition, worldwide profits and
losses, which are determined based on the difference between the
net sales of AFREZZA and the costs and expenses incurred by the
Company and Sanofi that are specifically attributable or related to
the development, improvement, regulatory filings, manufacturing,
and commercialization of AFREZZA will be shared 65% by Sanofi and
35% by the Company. In accordance with the terms of the Sanofi
License Agreement, profit and loss sharing will commence the first
full calendar quarter subsequent to the execution date of the
agreement.</p>
<p style="MARGIN-BOTTOM: 0px; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 1px 'Times New Roman'; MARGIN-TOP: 12px; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
 </p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 0pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
On September 23, 2014, the Company entered into the Sanofi
Loan Facility, consisting of a senior secured revolving promissory
note (the “Note”) and a guaranty and security agreement
(the “Security Agreement”) with an affiliate of Sanofi
which provides the Company with a secured loan facility of up to
$175.0 million to fund the Company’s share of net losses
under the Sanofi License Agreement.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
The obligations of the Company under the Sanofi Loan Facility are
guaranteed by the Company’s wholly-owned subsidiary, MannKind
LLC, and are secured by a first priority security interest in
certain insulin inventory located in the United States and any
contractual rights and obligations pursuant to which the Company
purchases or has purchased such insulin, and a second priority
security interest in the Company’s assets that secure the
Company’s obligations under the Facility Agreement, as
amended. In addition, the Company agreed to grant to Sanofi, as
additional security for the obligations under the Sanofi Loan
Facility, a first priority mortgage on the Company’s facility
in Valencia, California, by December 22, 2014.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
Advances under the Sanofi Loan Facility bear interest at a rate of
8.5% per annum and are payable in-kind and compounded
quarterly and added to the outstanding principal balance under the
Sanofi Loan Facility. The Company is required to make mandatory
prepayments on the outstanding loans under the Sanofi Loan Facility
from its share of any Profits (as defined in the Sanofi License
Agreement) under the Sanofi License Agreement within 30 days of
receipt of its share of any such Profits. No advances may be made
under the Sanofi Loan Agreement if Deerfield has commenced
enforcement proceedings in connection with an event of default
under the Facility Agreement.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
The outstanding principal of all loans under the Sanofi Loan
Facility, if not prepaid, will become due and payable on
September 23, 2024 unless accelerated pursuant to the terms of
the Sanofi Loan Facility. Additionally, if the Company sells its
Valencia facility, the Company is required to prepay the loans
under the Sanofi Loan Facility in an amount equal to 100% of the
net cash proceeds of the sale within five business days of
receipt.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
The Sanofi Loan Facility includes customary representations,
warranties and covenants by the Company, including restrictions on
its ability to incur additional indebtedness, grant certain liens
and make certain changes to its organizational documents. Events of
default under the Sanofi Loan Facility include: the Company’s
failure to timely make payments due under the Sanofi Loan Facility;
inaccuracies in the Company’s representations and warranties
to the noteholder; the Company’s failure to comply with any
of its covenants under any of the Sanofi Loan Facility or certain
other related security agreements and documents entered into in
connection with the Sanofi Loan Facility, subject to a cure period
with respect to most covenants; the Company’s insolvency or
the occurrence of certain bankruptcy-related events; termination by
Sanofi of the Sanofi License Agreement as a result of the
Company’s breach of the Sanofi License Agreement; and the
failure of any material provision under any of the Sanofi Loan
Facility or certain other related security agreements and documents
entered into in connection with the Sanofi Loan Facility to remain
in full force and effect. If one or more events of default occurs
and is continuing, Sanofi may terminate its obligation to make
advances under the Sanofi Loan Facility, and, if certain specified
events of default (including the Company’s failure to timely
make payments due under the Sanofi Loan Facility; the
Company’s failure to comply with the negative covenants under
the Sanofi Loan Facility limiting the Company’s ability to
incur additional indebtedness or grant certain liens; the
Company’s insolvency or the occurrence of certain
bankruptcy-related events; termination by Sanofi of the Sanofi
License Agreement as a result of the Company’s breach of the
non-compete provisions of the Sanofi License Agreement; or the
failure of any material provision under any of the Sanofi Loan
Facility or certain other related security agreements and documents
entered into in connection with the Sanofi Loan Facility to remain
in full force and effect) occur and are continuing, the noteholder
may accelerate all of the Company’s repayment obligations
under the Sanofi Loan Facility and otherwise exercise any of its
remedies as a secured creditor. There can be no assurance that the
noteholder would not choose to exercise these rights in the event
such events were to occur.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
The Company analyzed the up-front cash payment of $150.0 million
under the provisions of ASC 605, <i>Revenue Recognition</i>, to
determine whether the up-front cash payment, or a portion thereof,
could be recognized as revenue. ASC 605 provides that revenue is
recognized when there is persuasive evidence that an arrangement
exists, delivery has occurred or services have been rendered, the
price is fixed or determinable and collection is reasonably
assured. In addition, revenue arrangements with multiple elements
are divided into separate units of accounting if certain criteria
are met, including whether the delivered element has stand-alone
value to the customer. When deliverables are separable,
consideration received is allocated to the separate units of
accounting based on the relative selling price of each deliverable
and the appropriate revenue recognition principles are applied to
each unit.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
The assessment of multiple element arrangements requires judgment
in order to determine the appropriate units of accounting and the
points in time that, or periods over which, revenue should be
recognized. Under the terms of the Sanofi License Agreement, the
Company determined that the arrangement contained significant
deliverables including (i) licenses to develop and
commercialize AFREZZA and to use the Company’s trademarks,
(ii) transfer of know-how, (iii) development activities,
and (iv) manufacture and supply services for AFREZZA. Due to
the proprietary nature of the manufacturing services being provided
by the Company, the Company determined that all of the significant
deliverables should be combined into a single unit of accounting.
The Company believes that the manufacturing services are
proprietary due to the fact that over the past twelve years, the
Company has developed proprietary knowledge and patented equipment
and tools that are used in the manufacturing process of AFREZZA.
Due to the complexities of particle formulation and the specialized
knowledge and equipment needed to handle the AFREZZA powder,
neither Sanofi nor any third-party contract manufacturing
organization currently possesses the capability of manufacturing
AFREZZA.</p>
<p style="MARGIN-BOTTOM: 0px; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 1px 'Times New Roman'; MARGIN-TOP: 12px; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
 </p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 0pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
In order for revenue to be recognized, the seller’s price to
the buyer must be fixed and determinable and thus not subject to
refund or adjustment. Given that as of September 30, 2014, the
Company did not have the ability to estimate the amount of costs
that would potentially be incurred under the loss share provision
related to the Sanofi License Agreement, the Company believes this
requirement for revenue recognition is not met.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
As such, the Company did not recognize any revenue pursuant to the
Sanofi License Agreement for the three months ended
September 30, 2014. The Company recorded the $150.0 million
up-front payment as a deferred up-front payment from the Sanofi
License Agreement.</p>
</div>
<div>
<p style="margin-top:18pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
<b>8. Commitments and contingencies</b></p>
<p style="margin-top:6pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
<b><i>Guarantees and Indemnifications —</i></b> In the
ordinary course of its business, the Company makes certain
indemnities, commitments and guarantees under which it may be
required to make payments in relation to certain transactions. The
Company, as permitted under Delaware law and in accordance with its
Bylaws, indemnifies its officers and directors for certain events
or occurrences, subject to certain limits, while the officer or
director is or was serving at the Company’s request in such
capacity. The term of the indemnification period is for the
officer’s or director’s lifetime. The maximum amount of
potential future indemnification is unlimited; however, the Company
has a director and officer insurance policy that may enable it to
recover a portion of any future amounts paid. The Company believes
the fair value of these indemnification agreements is minimal. The
Company has not recorded any liability for these indemnities in the
accompanying condensed consolidated balance sheets. However, the
Company accrues for losses for any known contingent liability,
including those that may arise from indemnification provisions,
when future payment is probable and the amount can be reasonably
estimated.</p>
<p style="margin-top:12pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
<b><i>Litigation —</i></b> The Company is subject to legal
proceedings and claims which arise in the ordinary course of its
business. As of the date hereof, the Company believes that the
final disposition of such matters will not have a material adverse
effect on the financial position, results of operations or cash
flows of the Company. The Company maintains liability insurance
coverage to protect the Company’s assets from losses arising
out of or involving activities associated with ongoing and normal
business operations. In accordance with ASC 450
<i>Contingencies</i>, the Company would record a provision for a
liability when it is both probable that a liability has been
incurred and the amount of the loss can be reasonably
estimated.</p>
<p style="margin-top:12pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
<b><i>Contingencies —</i></b> In connection with the Facility
Agreement, on July 1, 2013 the Company also entered into a
Milestone Rights Purchase Agreement (the “Milestone
Agreement”) with Deerfield Private Design Fund and Horizon
Santé FLML SÁRL (collectively, the “Milestone
Purchasers”), pursuant to which the Company sold the
Milestone Purchasers certain rights (the “Milestone
Rights”) to receive payments of up to $90.0 million upon the
occurrence of specified strategic and sales milestones, including
the first commercial sale of an AFREZZA product in the United
States and the achievement of specified net sales figures (see Note
11 – Facility Agreement).</p>
</div>
<div>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 18pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
<b>11. Facility Agreement</b></p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 6pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
The significant activity related to the Facility Agreement during
the nine months ended September 30, 2014 consisted of the
following (in thousands):</p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 0pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 12pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
 </p>
<table style="TEXT-TRANSFORM: none; TEXT-INDENT: 0px; LETTER-SPACING: normal; BORDER-COLLAPSE: collapse; FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt; WORD-SPACING: 0px; -webkit-text-stroke-width: 0px" border="0" cellspacing="0" cellpadding="0" width="68%" align="center">
<tr>
<td width="84%"></td>
<td valign="bottom" width="9%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: rgb(0,0,0) 1pt solid" valign="bottom" colspan="2" align="center"><b>September 30,<br />
2014</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: 'Times New Roman'; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
<b>Facility financing obligation</b></p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: 'Times New Roman'; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Carrying value at December 31, 2013</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">102,300</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: 'Times New Roman'; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Principal converted to equity</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(93,500</td>
<td valign="bottom" nowrap="nowrap">) </td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: 'Times New Roman'; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Accretion of debt discount and debt issuance expense</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">7,507</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: 'Times New Roman'; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Adjustment to debt discount related to modification of the 2019
notes</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">2,921</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: 'Times New Roman'; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Tranche B principal amount</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">20,000</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: 'Times New Roman'; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Debt discount related to Tranche B purchase</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(1,168</td>
<td valign="bottom" nowrap="nowrap">) </td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: 'Times New Roman'; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Tranche 4 principal amount</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">40,000</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: 'Times New Roman'; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Debt discount related to Tranche 4 purchase</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(5,435</td>
<td valign="bottom" nowrap="nowrap">) </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: rgb(0,0,0) 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: rgb(0,0,0) 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: 'Times New Roman'; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Net carrying value of facility financing obligation</p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">72,625</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: rgb(0,0,0) 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: rgb(0,0,0) 3px double"> </p>
</td>
<td> </td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: 'Times New Roman'; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
<b>Commitment Asset</b></p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: 'Times New Roman'; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Commitment asset balance at December 31,2013</p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">5,157</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: 'Times New Roman'; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Tranche B commitment asset fair value</p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">2,921</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: 'Times New Roman'; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Less commitment asset portion associated with the receipt of
Tranche 4 and Tranche B notes</p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(6,325</td>
<td valign="bottom" nowrap="nowrap">) </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: rgb(0,0,0) 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: rgb(0,0,0) 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: 'Times New Roman'; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Commitment asset value included in other assets</p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">1,753</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: rgb(0,0,0) 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: rgb(0,0,0) 3px double"> </p>
</td>
<td> </td>
</tr>
</table>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 12px; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 1px 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0px; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
 </p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 0pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
Accretion of debt issuance cost and debt discount in connection
with the Facility Agreement during the three and nine months ended
September 30, 2014 were as follows (in thousands):</p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 0pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 12pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
 </p>
<table style="TEXT-TRANSFORM: none; TEXT-INDENT: 0px; LETTER-SPACING: normal; BORDER-COLLAPSE: collapse; FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt; WORD-SPACING: 0px; -webkit-text-stroke-width: 0px" border="0" cellspacing="0" cellpadding="0" width="76%" align="center">
<tr>
<td width="62%"></td>
<td valign="bottom" width="15%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="15%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: rgb(0,0,0) 1pt solid" valign="bottom" colspan="2" align="center"><b>Three months ended<br />
September 30, 2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: rgb(0,0,0) 1pt solid" valign="bottom" colspan="2" align="center"><b>Nine months ended<br />
September 30, 2014</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt" bgcolor="#CCEEFF">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: 'Times New Roman'; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Accretion expense- debt issuance cost</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">9</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">318</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-FAMILY: 'Times New Roman'; FONT-SIZE: 10pt">
<td valign="top">
<p style="TEXT-INDENT: -1em; FONT-FAMILY: 'Times New Roman'; MARGIN-LEFT: 1em; FONT-SIZE: 10pt">
Accretion expense- debt discount</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">306</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">7,189</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
</table>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 12pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
On July 1, 2013, the Company entered into the Facility
Agreement providing for the sale of up to $160.0 million of
2019 notes to Deerfield in four equal tranches of $40.0 million
principal amount. The 2019 notes accrue interest at a rate of
9.75% per annum until maturity in 2019 or their earlier
repayment, repurchase, or conversion. As of September 30,
2014, Deerfield had purchased the four tranches of 2019 notes in
the aggregate principal amount of $160.0 million.</p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 12pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
On February 28, 2014, the Company entered into the First
Amendment, which modified the terms of the Facility Agreement to
provide for the issuance of Tranche B notes to Deerfield. Pursuant
to the terms of the First Amendment and the subsequent occurrence
of certain events specified in the First Amendment, prior to
December 30, 2014, the Company may request that Deerfield
purchase up to $90.0 million aggregate principal amount of
Tranche B notes. The Tranche B notes initially accrued
interest at the rate of 9.75% per year on the outstanding
principal amount, subject to reduction to 8.75% if the Company
entered into a collaboration with a third party to commercialize
AFREZZA. Pursuant to the terms of the First Amendment, the interest
rate was subsequently reduced to 8.75% on September 23, 2014
following completion of the U.S. Federal Trade Commission’s
review of the transactions contemplated by the Sanofi License
Agreement under the Hart-Scott-Rodino Act and the completion of
documentation related to the $175.0 million secured loan facility
being provided to the Company. The interest on the outstanding
principal amount of notes under the Facility Agreement is payable
in cash quarterly in arrears on the last business day of March,
June, September and December of each year. The Company is required
to repay 25% of the original principal amount of any Tranche B
notes on the third, fourth, fifth and sixth anniversaries of the
applicable issue dates of such notes, provided that the entire
outstanding principal amount of all Tranche B notes will become due
and payable no later than December 31, 2019. The Tranche B
notes can be prepaid without penalty or premium commencing two
years after issuance thereof. On May 6, 2014, Deerfield
purchased an aggregate principal amount of $20.0 million in Tranche
B notes in accordance with the provisions of the Facility
Agreement, as amended. On July 18, 2014, Deerfield purchased
an aggregate principal amount of $40.0 million of the fourth and
final tranche of 2019 notes (the “Tranche 4 notes”) in
accordance with the provisions of the Facility Agreement, as
amended, which contains a financial covenant that requires the
Company’s cash and cash equivalents which include available
borrowings under the Loan Arrangement on the last day of each
fiscal quarter to not be less than $25.0 million.</p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 12pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
In addition, pursuant to the First Amendment, the outstanding first
tranche of 2019 notes (the “Tranche 1 notes”) and third
tranche of 2019 notes (the “Tranche 3 notes”) held by
Deerfield were amended and restated to permit Deerfield to convert
up to an additional $60.0 million principal amount under such 2019
notes into the Company’s common stock after the effective
date of the First Amendment. The Company also agreed to register
for resale up to 12,000,000 shares of the Company’s common
stock issuable upon conversion of the outstanding 2019 notes, as
amended and restated, as of the date of the First Amendment. In
March 2014, Deerfield elected to convert the full $40.0 million of
outstanding principal amount of the Tranche 3 notes and $12.5
million principal amount of the Tranche 1 notes. In April 2014,
Deerfield elected to convert the remaining $7.5 million principal
amount of the Tranche 1 notes.</p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 12pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
On August 11, 2014, the Company entered into a second
amendment to the Facility Agreement to permit the incurrence of
additional secured debt under the Sanofi Loan Facility.</p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 18pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
<i>Milestone Rights</i></p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 6pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
In connection with the execution of the Facility Agreement, on
July 1, 2013, the Company issued Milestone Rights to the
Milestone Purchasers. The Milestone Rights provide the Milestone
Purchasers certain rights to receive payments of up to $90.0
million upon the occurrence of specified strategic and sales
milestones, including the first commercial sale of an AFREZZA
product in the United States and the achievement of specified net
sales figures. The payments due under the Milestone Rights are
subject to pro rata reduction in the event of certain funding
failures by Deerfield under the Facility Agreement.</p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 12pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
The Milestone Agreement includes customary representations and
warranties and covenants by the Company, including restrictions on
transfers of intellectual property related to AFREZZA. The
Milestone Rights are subject to acceleration in the event the
Company transfers its intellectual property related to AFREZZA in
violation of the terms of the Milestone Agreement.</p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 12pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
The Milestone Rights were initially recorded as a short-term
liability equal to $3.2 million included in accrued expenses and
other current liabilities in the accompanying condensed
consolidated balance sheet and a long-term liability equal to $13.1
million included in other liabilities. As of September 30,
2014, the first milestone triggering event was achieved following
the Company’s entry into the Sanofi License Agreement, which
resulted in a $1.9 million incremental charge to interest expense
due to the increase in carrying value of the liability to the
required $5.0 million payment, which was paid to Deerfield
subsequent to September 30, 2014 pursuant to the terms of the
Milestone Agreement. As of September 30, 2014, the short-term
portion of the liability had a balance of $9.2 million and the
long-term portion of the liability had a balance of $8.9
million.</p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 18px; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 1px 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0px; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
 </p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 0pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
<i>Commitment Asset</i></p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 6pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
In connection with the issuance of the Tranche 1 notes and the
Milestone Rights, the Company recorded a commitment asset (the
“Commitment Asset”) on July 1, 2013. As a
result of the First Amendment, the Company recorded an additional
Tranche B notes commitment asset (the “Tranche B Commitment
Asset”) with an estimated fair value equal to $2.9 million.
The Commitment Asset remaining as of September 30, 2014
represented the right to receive up to $70.0 million of funding
remaining under the Facility Agreement, as amended, from the sale
of the Tranche B notes. The Commitment Asset is derecognized and
recorded as a debt discount on the 2019 notes and Tranche B notes
when issued and amortized using the effective interest rate method
over the life of the respective notes. Prior to derecognition
occurring, the Company monitors the Commitment Asset on an ongoing
basis to determine whether an impairment indicator is present that
would result in a full or partial write down of the Commitment
Asset as a result of events that may lead to the subsequent
tranches of notes not being issued. Based on the monitoring
procedures performed through September 30, 2014, the Company
did not identify any indicators of impairment.</p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 18pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
<i>Amendment to the outstanding Tranche 1 notes and Tranche 3
notes</i></p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 6pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
The amendment and restatement of the outstanding Tranche 1 notes
and Tranche 3 notes, pursuant to the First Amendment, did not
represent a troubled debt restructuring of the 2019 notes because
the First Amendment did not result in Deerfield granting a
concession to the Company. In addition, the First Amendment did not
result in a substantial modification to the terms of the Tranche 1
notes and Tranche 3 notes.</p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 12pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
The impact of the First Amendment to the Tranche 1 notes and
Tranche 3 notes is being accounted for as a prospective yield
adjustment. Specifically, the value of the Tranche B Commitment
Asset was considered a fee received from the creditor as
consideration for the First Amendment and is being amortized as an
adjustment of interest expense over the remaining term of the
Tranche 1 notes and Tranche 3 notes using the effective interest
method. Further, the value of the Tranche B Commitment Asset, which
decreased the amount of debt discount in the Tranche 1 notes and
Tranche 3 notes, was allocated between the Tranche 1 notes and
Tranche 3 notes in a manner that resulted in the Tranche 1 notes
and Tranche 3 notes having a new effective interest rate of
11.63%.</p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 18pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
<i>Conversion Option</i></p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 6pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
For accounting purposes, the Company evaluated the embedded
conversion option in the 2019 notes as a redemption feature because
the number of shares issuable upon conversion was based on the
volume weighted average prices for specified periods prior to the
conversion date (as opposed to being fixed). Accordingly,
conversions by Deerfield were treated as redemptions of the 2019
notes, and, the Company analyzed whether the conversion option
required bifurcation as an embedded redemption feature. As of
September 30, 2014, Deerfield had converted $100.0 million of
2019 notes into 18,616,304 shares of the Company’s common
stock and no additional principal amount of the 2019 notes is
convertible.</p>
</div>
<div>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 0pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
<b>4. Net loss per common share</b></p>
<p style="TEXT-TRANSFORM: none; MARGIN-TOP: 6pt; TEXT-INDENT: 0px; LETTER-SPACING: normal; FONT: 10pt 'Times New Roman'; WHITE-SPACE: normal; MARGIN-BOTTOM: 0pt; COLOR: rgb(0,0,0); WORD-SPACING: 0px; -webkit-text-stroke-width: 0px">
Basic net loss per share excludes dilution for potentially dilutive
securities and is computed by dividing net loss applicable to
common stockholders by the weighted average number of common shares
outstanding during the period excluding the shares loaned to Bank
of America, N.A. under a share lending arrangement (see Note 7
— Common and preferred stock). As of September 30, 2014,
9,000,000 shares of the Company’s common stock loaned to Bank
of America pursuant to the terms of a share lending agreement as
described in Note 7, were issued and are outstanding, and the
holder of the borrowed shares has all the rights of a holder of the
Company’s common stock. However, because the share borrower
must return all borrowed shares to the Company (or, in certain
circumstances, the cash value thereof), the borrowed shares are not
considered outstanding for the purpose of computing and reporting
basic or diluted earnings (loss) per share. 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 condensed consolidated
statements of operations because the reported net loss in each of
these periods results in their inclusion being antidilutive.
Antidilutive securities, which consist of stock options, restricted
stock units, warrants, and shares that could be issued upon
conversion of the senior convertible notes, that are not included
in the diluted net loss per share calculation consisted of an
aggregate of 47,820,744 shares and 133,944,425 shares as of
September 30, 2014 and 2013, respectively, and exclude the
9,000,000 shares loaned under the share lending arrangement.</p>
</div>
<div>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 6pt">
Total stock-based compensation expense recognized in the
accompanying condensed consolidated statements of operations for
the three and nine months ended September 30, 2014 and 2013
was as follows (in thousands):</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt; MARGIN-TOP: 0pt">
 </p>
<table style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman; BORDER-COLLAPSE: collapse" cellspacing="0" cellpadding="0" width="92%" align="center" border="0">
<tr>
<td width="68%"></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="6" align="center"><b>Three months ended<br />
September 30,</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="6" align="center"><b>Nine months ended<br />
September 30,</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Stock-based compensation</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">(4,827</td>
<td valign="bottom" nowrap="nowrap">) </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">15,943</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">46,755</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">31,304</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom"> </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
</tr>
</table>
</div>
10-Q
MANNKIND CORP
MNKD
Large Accelerated Filer
P3Y
39830000
<div>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 18pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
<b>9. Related-party arrangements</b></p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 6pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
In October 2007, the Company entered into a $350.0 million loan
arrangement with its principal stockholder. The Loan Arrangement
has been amended from time to time. On October 31, 2013, the
promissory note underlying the Loan Arrangement was amended to,
among other things, extend the maturity date of the loan to
January 5, 2020, extend the date through which the Company can
borrow under the Loan Arrangement to December 31, 2019,
increase the aggregate borrowing amount under the Loan Arrangement
from $350.0 million to $370.0 million and provide that repayments
or cancellations of principal under the Loan Arrangement will not
be available for reborrowing.</p>
<p style="MARGIN-BOTTOM: 0px; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 1px 'Times New Roman'; MARGIN-TOP: 12px; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
 </p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 0pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
As of September 30, 2014, the total principal amount
outstanding under the Loan Arrangement was $49.5 million and the
amount available for future borrowings was $30.1 million. Interest,
at a fixed rate of 5.84%, is due and payable quarterly in arrears
on the first day of each calendar quarter for the preceding
quarter, or at such other time as the Company and The Mann Group
mutually agree. All or any portion of accrued and unpaid interest
that becomes due and payable may be paid-in-kind and capitalized as
additional borrowings at any time upon mutual agreement of both
parties and would be classified as non-current. As of
September 30, 2014, the Company had accrued $2.8 million of
interest in other liabilities related to the Loan Arrangement. The
Mann Group can require the Company to prepay up to $200.0 million
in advances that have been outstanding for at least 12 months (less
approximately $105.0 million aggregate principal amount that has
been cancelled in connection with two common stock purchase
agreements). If The Mann Group exercises this right, the Company
will have 90 days after The Mann Group provides written notice (or
the number of days to maturity of the note if less than
90 days) to prepay such advances. However, pursuant to a
letter agreement entered into in August 2010, The Mann Group has
agreed to not require the Company to prepay amounts outstanding
under the amended and restated promissory note if the prepayment
would require the Company to use its working capital resources. In
addition, The Mann Group entered into a subordination agreement
with Deerfield pursuant to which The Mann Group agreed with
Deerfield not to demand or accept any payment under the Loan
Arrangement until the Company’s payment obligations to
Deerfield under the Facility Agreement have been satisfied in full.
Subject to the foregoing, in the event of a default under the Loan
Arrangement, all unpaid principal and interest either becomes
immediately due and payable or may be accelerated at The Mann
Group’s option, and the interest rate will increase to the
one-year LIBOR calculated on the date of the initial advance or in
effect on the date of default, whichever is greater, plus
5% per annum. All borrowings under the Loan Arrangement are
unsecured. The Loan Arrangement contains no financial
covenants.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
During the nine months ended September 30, 2014, there were no
additional borrowings under or amendments to the Loan
Arrangement.</p>
</div>
<div>
<p style="margin-top:12pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
The following is a summary of the carrying values and estimated
fair values of the 2015 notes and the facility financing obligation
(i.e., the 2019 notes and Tranche B notes) (in millions):</p>
<p style="font-size:12pt;margin-top:0pt;margin-bottom:0pt">
 </p>
<table cellspacing="0" cellpadding="0" width="92%" border="0" style="BORDER-COLLAPSE:COLLAPSE; font-family:Times New Roman; font-size:8pt" align="center">
<tr>
<td width="65%"></td>
<td valign="bottom" width="5%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="5%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="5%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="5%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="font-family:Times New Roman; font-size:8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="6" align="center" style="border-bottom:1.00pt solid #000000"><b>September 30,
2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="6" align="center" style="border-bottom:1.00pt solid #000000"><b>December 31,
2013</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="font-family:Times New Roman; font-size:8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="2" align="center" style="border-bottom:1.00pt solid #000000"><b>Carrying<br />
value</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="2" align="center" style="border-bottom:1.00pt solid #000000"><b>Estimated<br />
fair value</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="2" align="center" style="border-bottom:1.00pt solid #000000"><b>Carrying<br />
value</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="2" align="center" style="border-bottom:1.00pt solid #000000"><b>Estimated<br />
fair value</b></td>
<td valign="bottom"> </td>
</tr>
<tr bgcolor="#CCEEFF" style="font-family:Times New Roman; font-size:10pt">
<td valign="top">
<p style="margin-left:1.00em; text-indent:-1.00em; font-size:10pt; font-family:Times New Roman">
2015 notes</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">99.1</td>
<td nowrap="nowrap" valign="bottom">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">113.9</td>
<td nowrap="nowrap" valign="bottom">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">98.4</td>
<td nowrap="nowrap" valign="bottom">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">102.2</td>
<td nowrap="nowrap" valign="bottom">  </td>
</tr>
<tr style="font-family:Times New Roman; font-size:10pt">
<td valign="top">
<p style="margin-left:1.00em; text-indent:-1.00em; font-size:10pt; font-family:Times New Roman">
Facility financing obligation</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">72.6</td>
<td nowrap="nowrap" valign="bottom">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">75.3</td>
<td nowrap="nowrap" valign="bottom">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">102.3</td>
<td nowrap="nowrap" valign="bottom">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">107.0</td>
<td nowrap="nowrap" valign="bottom">  </td>
</tr>
</table>
</div>
0.85
<div>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 6pt">
Accrued expenses and other current liabilities were comprised of
the following (in thousands):</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt; MARGIN-TOP: 0pt">
 </p>
<table style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; BORDER-COLLAPSE: collapse" cellspacing="0" cellpadding="0" width="76%" align="center" border="0">
<tr>
<td width="72%"></td>
<td valign="bottom" width="8%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="8%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>September 30,<br />
2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>December 31,<br />
2013</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Salary and related expenses</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">10,287</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">12,193</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Research and clinical trial costs</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">1,011</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">1,311</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Accrued interest</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">958</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">2,082</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Construction in progress</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">2,739</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">342</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Other</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">12,274</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">5,706</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Accrued expenses and other current liabilities</p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">27,269</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">21,634</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
</tr>
</table>
</div>
381332000
2014-09-30
<div>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 6pt">
Senior convertible notes consisted of the following (in
thousands):</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt; MARGIN-TOP: 0pt">
 </p>
<table style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; BORDER-COLLAPSE: collapse" cellspacing="0" cellpadding="0" width="76%" align="center" border="0">
<tr>
<td width="72%"></td>
<td valign="bottom" width="7%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="7%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>September 30,<br />
2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>December 31,<br />
2013</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
<b>2015 notes</b></p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"> </td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Principal amount</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">100,000</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">100,000</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Unaccreted debt issuance expense</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(880</td>
<td valign="bottom" nowrap="nowrap">) </td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(1,561</td>
<td valign="bottom" nowrap="nowrap">) </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
<td valign="bottom"> </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Net carrying amount</p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">99,120</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"><font style="FONT-SIZE: 8pt"> </font></td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">98,439</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom"> </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
</tr>
</table>
</div>
false
--12-31
2014
<div>
<p style="margin-top:18pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
<b>12. Income taxes</b></p>
<p style="margin-top:6pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
As required by ASC 740 <i>Income Taxes</i> (“ASC 740”),
management of the Company has evaluated the positive and negative
evidence bearing upon the realizability of its deferred tax assets
and concluded, in accordance with the applicable accounting
standards, that net deferred tax assets should be fully
reserved.</p>
<p style="margin-top:12pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
ASC 740-10-25 <i>Income Taxes Recognition</i> clarifies the
accounting and disclosure for uncertainty in tax positions, as
defined. This guidance seeks to reduce the diversity in practice
associated with certain aspects of the recognition and measurement
related to accounting for income taxes. The Company believes that
its income tax filing positions and deductions will be sustained on
audit and does not anticipate any adjustments that will result in a
material change to its financial position. Therefore, no reserves
for uncertain income tax positions have been recorded pursuant to
this guidance. Tax years since 1993 remain subject to examination
by the major tax jurisdictions in which the Company is subject to
tax.</p>
</div>
<div>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 18pt">
<b>10. Senior convertible notes</b></p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 6pt">
Senior convertible notes consisted of the following (in
thousands):</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt; MARGIN-TOP: 0pt">
 </p>
<table style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; BORDER-COLLAPSE: collapse" cellspacing="0" cellpadding="0" width="76%" align="center" border="0">
<tr>
<td width="72%"></td>
<td valign="bottom" width="7%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="7%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>September 30,<br />
2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>December 31,<br />
2013</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
<b>2015 notes</b></p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"> </td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Principal amount</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">100,000</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">100,000</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Unaccreted debt issuance expense</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(880</td>
<td valign="bottom" nowrap="nowrap">) </td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(1,561</td>
<td valign="bottom" nowrap="nowrap">) </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
<td valign="bottom"> </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Net carrying amount</p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">99,120</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"><font style="FONT-SIZE: 8pt"> </font></td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">98,439</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom"> </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
</tr>
</table>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
On August 18, 2010, the Company completed a Rule 144A offering
of $100.0 million aggregate principal amount of 2015 notes. The
2015 notes are governed by the terms of an indenture dated as of
August 24, 2010 (the “2015 Note Indenture”). The
2015 notes bear interest at the rate of 5.75% per year on the
principal amount, payable in cash semi-annually in arrears on
February 15 and August 15 of each year, beginning
February 15, 2011. In connection with the 2015 notes, the
Company had accrued interest of $1.0 million and $2.4 million as of
September 30, 2014 and December 31, 2013, respectively.
The 2015 notes are general, unsecured, senior obligations of the
Company and effectively rank junior in right of payment to all of
the Company’s secured debt, to the extent of the value of the
assets securing such debt and to the debt and all other liabilities
of the Company’s subsidiaries. The maturity date of the 2015
notes is August 15, 2015 and payment is due in full on that
date for unconverted securities. Because the 2015 notes are due
within twelve months, the Company reclassified the 2015 notes from
a long term liability to a current liability at September 30,
2014. Holders of the 2015 notes may convert, at any time prior to
the close of business on the business day immediately preceding the
stated maturity date, any outstanding principal into shares of the
Company’s common stock at an initial conversion rate of
147.0859 shares per $1,000 principal amount, which is equal to a
conversion price of approximately $6.80 per share, subject to
adjustment. Except in certain circumstances, if the Company
undergoes a fundamental change: (1) the Company will pay a
make-whole premium on the 2015 notes converted in connection with a
fundamental change by increasing the conversion rate on such 2015
notes, which amount, if any, will be based on the Company’s
common stock price and the effective date of the fundamental
change, and (2) each holder of 2015 notes will have the option
to require the Company to repurchase all or any portion of such
holder’s 2015 notes at a repurchase price of 100% of the
principal amount of the 2015 notes to be repurchased plus accrued
and unpaid interest, if any. The Company may elect to redeem some
or all of the 2015 notes if the closing stock price has equaled
150% of the conversion price for at least 20 of the 30 consecutive
trading days ending on the trading day before the Company’s
redemption notice. The redemption price will equal 100% of the
principal amount of the 2015 notes to be redeemed, plus accrued and
unpaid interest, if any, to, but excluding, the redemption date,
plus a make-whole payment equal to the sum of the present values of
the remaining scheduled interest payments through and including
August 15, 2015 (other than interest accrued up to, but
excluding, the redemption date). The Company will be obligated to
make the make-whole payment on all the 2015 notes called for
redemption and converted during the period from the date the
Company mailed the notice of redemption to and including the
redemption date. The Company may elect to make the make-whole
payment in cash or shares of its common stock, subject to certain
limitations. Under the terms of the 2015 Note Indenture, the
conversion option can be net-share settled and the maximum number
of shares that could be required to be delivered under the
contract, including the make-whole shares, is fixed and less than
the number of authorized and unissued shares less the maximum
number of shares that could be required to be delivered during the
contract period under other existing commitments. Applying the
Company’s sequencing policy, the Company performed an
analysis at the time of the offering of the 2015 notes and each
reporting date since and has concluded that the number of available
authorized shares at the time of the offering and each subsequent
reporting date was sufficient to deliver the number of shares that
could be required to be delivered during the contract period under
existing commitments.</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
The Company incurred approximately $4.2 million in issuance costs
which are recorded as an offset to the 2015 notes in the
accompanying condensed consolidated balance sheets. These costs are
being accreted to interest expense using the effective interest
method over the term of the 2015 notes.</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
The 2015 notes provide that upon an acceleration of certain
indebtedness, including the 2019 notes and the Tranche B notes
described in Note 11, the holders may elect to accelerate the
Company’s repayment obligations under the 2015 notes if such
acceleration is not cured, waived, rescinded or annulled. There can
be no assurance that the holders would not choose to exercise these
rights in the event such events were to occur.</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
Accretion of debt issuance expense in connection with the 2015
notes during the three and nine months ended September 30,
2014 and 2013 was as follows (in thousands):</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt; MARGIN-TOP: 0pt">
 </p>
<table style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman; BORDER-COLLAPSE: collapse" cellspacing="0" cellpadding="0" width="92%" align="center" border="0">
<tr>
<td width="76%"></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="6" align="center"><b>Three months ended<br />
September 30,</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="6" align="center"><b>Nine months ended<br />
September 30,</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Accretion expense</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">231</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">216</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">681</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">637</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
</tr>
</table>
</div>
<div>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
<b>1. Description of business and basis of presentation</b></p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 6pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
The accompanying unaudited condensed consolidated financial
statements of MannKind Corporation and its subsidiaries
(“MannKind” or the “Company”), have been
prepared in accordance with generally accepted accounting
principles in the United States of America (“GAAP”) for
interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X of the Securities and
Exchange Commission (the “SEC”). Accordingly, they do
not include all of the information and footnotes required by GAAP
for complete financial statements. The information included in this
quarterly report on Form 10-Q should be read in conjunction with
the audited consolidated financial statements and notes thereto
included in the Company’s annual report on Form 10-K for the
fiscal year ended December 31, 2013 filed with the SEC on
March 3, 2014 (the “Annual Report”).</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
In the opinion of management, all adjustments, consisting only of
normal, recurring adjustments, considered necessary for a fair
presentation of the results of these interim periods have been
included. Interim financial results may not be indicative of the
results that may be expected for the full year.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
The preparation of financial statements in conformity with GAAP
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 or
assumptions. The more significant estimates reflected in these
accompanying financial statements involve assessing long-lived
assets for impairment, accrued expenses, including clinical study
expenses, valuation of forward purchase contracts, valuation of the
facility financing obligation, commitment asset, milestone rights,
valuation of stock-based compensation and the determination of the
provision for income taxes and corresponding deferred tax assets
and liabilities and any valuation allowance recorded against net
deferred tax assets. The estimation process often may yield a range
of potentially reasonable estimates of the ultimate future outcomes
and management must select an amount that falls within that range
of reasonable estimates. This process may result in actual results
differing materially from those estimated amounts used in the
preparation of the financial statements.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
<b><i>Business — </i></b>The Company is a
biopharmaceutical company focused on the discovery and development
of therapeutic products for diseases such as diabetes. The
Company’s lead product, AFREZZA (insulin human) inhalation
powder, is a rapid-acting inhaled insulin that was approved by the
U.S. Food and Drug Administration (“FDA”) on
June 27, 2014 to improve glycemic control in adult patients
with diabetes.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
<b><i>Basis of Presentation — </i></b>The 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.
It is costly to develop therapeutic products and conduct clinical
studies for these products. From its inception through
September 30, 2014, the Company had accumulated net losses of
$2.5 billion, which include cumulative negative cash flow from
operations of $1.7 billion and a goodwill impairment charge of
$151.4 million.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
On August 11, 2014, the Company entered into a license and
collaboration agreement (the “Sanofi License
Agreement”) with Sanofi-Aventis Deutschland GmbH (which
subsequently assigned its rights and obligations under the
agreement to Sanofi-Aventis U.S. LLC (“Sanofi”)),
pursuant to which Sanofi will be responsible for global commercial,
regulatory and development activities for AFREZZA. Under the
Sanofi License Agreement, the Company received a $150.0 million
up-front fee and may earn up to an aggregate of $775.0 million upon
the achievement of certain development, manufacturing, regulatory
and sales milestones. Worldwide profits and losses with respect to
AFREZZA will be shared 65% by Sanofi and 35% by the Company.
Pursuant to a supply agreement, the Company will manufacture
AFREZZA at its manufacturing facility in Danbury, Connecticut to
supply Sanofi’s demand for the product. The Sanofi License
Agreement became effective on September 23, 2014 following
completion of the U.S. Federal Trade Commission’s review of
the transactions contemplated by the Sanofi License Agreement under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations promulgated thereunder (the
“Hart-Scott-Rodino Act”) and the completion of
documentation related to the $175.0 million secured loan facility
being provided to the Company by an affiliate of Sanofi (the
“Sanofi Loan Facility”) to fund the Company’s
share of net losses under the Sanofi License Agreement.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
At September 30, 2014, the Company’s capital resources
consisted of cash and cash equivalents of $172.5 million. The
Company expects to continue to incur significant expenditures to
support commercial launch of AFREZZA and the development of other
product candidates as contemplated under the Sanofi License
Agreement. In addition, the Company’s 5.75% Senior
Convertible Notes due 2015 (the “2015 notes”) in the
aggregate principal amount of $100.0 million have a maturity date
of August 15, 2015, and payment on the outstanding amount is
due in full on that date (see Note 10 – Senior convertible
notes).</p>
<p style="MARGIN-BOTTOM: 0px; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 1px 'Times New Roman'; MARGIN-TOP: 12px; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
 </p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 0pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
The Company may need to raise additional capital, whether through
the sale of equity or debt securities, additional strategic
business collaborations, the establishment of other funding
facilities, licensing arrangements, asset sales or other means.
Additional funding sources that are, or in certain circumstances
may be available to the Company, include approximately
$30.1 million principal amount of available borrowings under
its loan arrangement ( the “Loan Arrangement”) with The
Mann Group LLC (“The Mann Group”) (see note 9 –
Related-party arrangements), potential proceeds from the exercise
of warrants issued in its February 2012 public offering of
approximately $20 million, the Company’s at-the-market
issuance sales agreements which allow the Company to sell up to $50
million in common stock, and pursuant to the facility agreement
(the “Facility Agreement”) with Deerfield Private
Design Fund II, L.P. (“Deerfield Private Design Fund”)
and Deerfield Private Design International II, L.P. (collectively,
“Deerfield”) and the First Amendment to Facility
Agreement and Registration Rights Agreement (the “First
Amendment”) additional sales of an additional tranche of
notes (the “Tranche B notes”) of up to $70 million
which must be purchased prior to December 30, 2014 (see Note 11
– Facility Agreement).</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
Although we believe that our existing cash and cash equivalents and
available debt financing will be sufficient to finance our
operational cash needs through at least the next twelve months,
should our results not meet our current operating plan, it could
negatively impact our liquidity and we may need to raise additional
capital or seek additional financing sources as discussed above.
There can be no assurance that we would be able to raise such
additional financing or additional capital on acceptable terms, or
at all, and if we are not able to raise adequate additional
financing or capital to continue to fund our ongoing operations, we
will need to defer, reduce or eliminate significant planned
expenditures or significantly curtail our operations, and there may
be substantial doubt about our ability to continue as a going
concern.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
<b><i>Prepaid expenses and other current assets — </i></b>Prepaid expenses and
other current assets primarily consist of prepaid expenses for
goods and services to be received. As of September 30, 2014,
prepaid and other current assets had a balance of $20.3 million,
mainly comprised of a $15.0 million prepayment for 2015 quantities
of insulin, prepaid insurance, and prepaid clinical trial
expenses.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
On July 31, 2014, the Company entered into a Supply Agreement
(the “Supply Agreement”) with Amphastar France
Pharmaceuticals S.A.S., a French corporation
(“Amphastar”), pursuant to which Amphastar will
manufacture for and supply to the Company certain quantities of
recombinant human insulin for use in AFREZZA. Under the terms of
the Supply Agreement, Amphastar will be responsible for
manufacturing the insulin in accordance with the Company’s
specifications and agreed-upon quality standards. The Company has
agreed to purchase annual minimum quantities of insulin under the
Supply Agreement of an aggregate of approximately
€120.1 million in calendar years 2015 through 2019. The
Company may request to purchase additional quantities of insulin
over such annual minimum quantities. As part of the Supply
Agreement, the Company paid a $15.0 million deposit to Amphastar as
prepayment for 2015 quantities of insulin.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
Unless earlier terminated, the term of the Supply Agreement expires
on December 31, 2019 and can be renewed for additional,
successive two year terms upon 12 months’ written notice,
given prior to the end of the initial term or any additional two
year term. The Company and Amphastar each have normal and customary
termination rights, including termination for material breach that
is not cured within a specific time frame or in the event of
liquidation, bankruptcy or insolvency of the other party. In
addition, the Company may terminate the Supply Agreement upon two
years’ prior written notice to Amphastar without cause or
upon 30 days’ prior written notice to Amphastar if a
controlling regulatory authority withdraws approval for AFREZZA,
provided, however, in the event of a termination pursuant to either
of the latter two scenarios, the provisions of the Supply Agreement
require the Company to pay the full amount of all unpaid purchase
commitments due over the initial term within 60 calendar days of
the effective date of such termination.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
<b><i>Sale of intellectual property — </i></b>On July 18, 2014,
the Company entered into an assignment agreement with a third party
whereby the third party acquired all proprietary rights, technology
and know-how that related to a small molecule inhibitor compound
and all pre-clinical data and results related thereto. Under the
terms of the assignment agreement, the Company received total
consideration of $9.3 million, which was offset by $1.4 million of
expense associated with the sale of the intellectual property
related to oncology.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
<b><i>Fair Value of Financial Instruments — </i></b>The carrying amounts
reported in the accompanying financial statements for cash and cash
equivalents, accounts payable and accrued liabilities approximate
their fair value due to their relatively short maturities. The fair
value of the cash equivalents, note payable to related party,
senior convertible notes, and the elements of the Facility
Agreement are discussed in Note 13, “Fair value of financial
instruments.”</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
<b><i>Recently Issued Accounting Standards
—</i></b> In
July 2013, the FASB issued ASU 2013-11,<i> Income Taxes (Topic
740): Presentation of an Unrecognized Tax Benefit when a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit
Carryforward Exists (a consensus of the FASB Emerging Issues Task
Force)</i>. The amendments in this ASU provide guidance on the
financial statements presentation of an unrecognized tax benefit
when a net operating loss carryforward, a similar tax loss, or a
tax credit carryforward exists. An unrecognized tax benefit should
be presented in the financial statements as a reduction to a
deferred tax asset for a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward with certain exceptions, in
which case such an unrecognized tax benefit should be presented in
the financial statements as a liability. The amendments in this ASU
do not require new recurring disclosures. The amendments in this
ASU are effective for fiscal years, and interim periods within
those years, beginning after December 15, 2013. The adoption
of the new requirement did not have a significant impact on the
Company’s consolidated financial statements.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
In May 2014, a new standard was issued related to revenue
recognition, which requires an entity to recognize the amount of
revenue to which it expects to be entitled for the transfer of
promised goods or services to customers. The new standard will
replace most of the existing revenue recognition standards in U.S.
GAAP when it becomes effective on January 1, 2017. Early
adoption is not permitted. The new standard allows for either
“full retrospective” adoption, whereby the new standard
is applied to each prior reporting period presented or
“modified retrospective” adoption, whereby the new
standard is only applied to the most current period presented with
the cumulative effect of the change recognized at the date of the
initial application. The Company is assessing the potential impact
of the new standard on its consolidated statements of financial
position and results of operations and comprehensive income (loss)
and has not yet selected a transition method.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
In June 2014, the FASB issued ASU No. 2014-10, Development
Stage Entities (Topic 915): Elimination of Certain Financial
Reporting Requirements, Including an Amendment to Variable Interest
Entities Guidance in Topic 810, Consolidation. The amendments
in this ASU remove all incremental financial reporting requirements
from GAAP for development stage entities, including the removal of
Topic 915, Development Stage Entities, from the FASB
Accounting Standards Codification. In addition, the ASU:
(a) adds an example disclosure in Topic 275, Risks and
Uncertainties, to illustrate one way that an entity that has
not begun planned principal operations could provide information
about the risks and uncertainties related to the company’s
current activities; and (b) removes an exception provided to
development stage entities in Topic 810, Consolidation, for
determining whether an entity is a variable interest entity. The
presentation and disclosure requirements in Topic 915 will no
longer be required for the first annual period beginning after
December 15, 2014. The revised consolidation standards are
effective one year later, in annual periods beginning after
December 15, 2015. Early adoption is permitted. The Company is
evaluating the impact the adoption of ASU 2014-10 will have on its
consolidated financial statements.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
On August 27, 2014, the FASB issued ASU 2014-15, which
provides guidance on determining when and how reporting entities
must disclose going-concern uncertainties in their financial
statements. The new standard requires management to perform interim
and annual assessments of an entity’s ability to continue as
a going concern within one year of the date of issuance of the
entity’s financial statements (or within one year after the
date on which the financial statements are available to be issued,
when applicable). Further, an entity must provide certain
disclosures if there is “substantial doubt about the
entity’s ability to continue as a going concern.” The
ASU is effective for annual periods ending after December 15,
2016, and interim periods thereafter; early adoption is permitted.
The Company is evaluating the impact the adoption of ASU 2014-15
will have on its consolidated financial statements.</p>
</div>
0000899460
<div>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 18pt">
<b>3. Accounting for stock-based compensation</b></p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 6pt">
Total stock-based compensation expense recognized in the
accompanying condensed consolidated statements of operations for
the three and nine months ended September 30, 2014 and 2013
was as follows (in thousands):</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt; MARGIN-TOP: 0pt">
 </p>
<table style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman; BORDER-COLLAPSE: collapse" cellspacing="0" cellpadding="0" width="92%" align="center" border="0">
<tr>
<td width="68%"></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="6" align="center"><b>Three months ended<br />
September 30,</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="6" align="center"><b>Nine months ended<br />
September 30,</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Stock-based compensation</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">(4,827</td>
<td valign="bottom" nowrap="nowrap">) </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">15,943</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">46,755</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">31,304</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom"> </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
</tr>
</table>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
During the three months ended March 31, 2014, the Company
issued stock awards to employees primarily with a four-year vesting
schedule. The grant date fair value of the 46,400 restricted stock
units and 17,700 stock options issued were $296,000 and $81,000,
respectively, with a grant date fair value per share of $6.39 and
$4.58, respectively.</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
During the three months ended June 30, 2014, the Company
issued stock awards to employees primarily with a four-year vesting
schedule as well as non-employee directors primarily with a
three-year vesting schedule. The grant date fair value of the
158,600 restricted stock units and 252,600 stock options issued
were $1.23 million and $1.32 million, respectively. The grant date
fair value per share was $7.76 for restricted stock units, $5.31
for employee stock options and $5.22 for non-employee director
stock options.</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
On June 30, 2014, the Company modified certain performance
grants to allow 124 employees to withhold in excess of the minimum
statutory requirements for performance-based restricted stock units
at the employee’s discretion through December 31, 2014.
The modification resulted in the reclassification of these
performance grants from equity awards to liability awards, which
require re-measurement at the end of each reporting period through
settlement. Consequently, as of June 30, 2014, the
reclassification and re-measurement of these performance-based
restricted stock units resulted in an increase in stock-based
compensation expense of $35.9 million.</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
During the three months ended September 30, 2014, the
performance shares related to the modification settled. The
performance grants were re-measured on their respective settlement
dates, which resulted in a credit to stock compensation expense of
$12.9 million. As of September 30, 2014, there were no
remaining liability awards.</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
During the three months ended September 30, 2014, the Company
issued stock awards to employees primarily with a four-year vesting
schedule. The grant date fair value of the 720,000 restricted stock
units and 1,053,900 stock options issued were $5.1 million and $4.9
million, respectively, with a grant date fair value per share of
$7.09 and $4.66, respectively.</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
As of September 30, 2014, there was $10.3 million of
unrecognized compensation cost related to options and $12.5 million
of unrecognized compensation cost related to restricted stock
units, which are expected to be recognized over the remaining
weighted average vesting period of 3.0 years. The Company evaluates
stock awards with performance conditions as to the probability that
the performance conditions will be met and estimates the date at
which the performance conditions will be met in order to properly
recognize stock-based compensation expense over the requisite
service period. As of September 30, 2014, there were no awards
with milestones not considered probable of achievement.</p>
</div>
-0.42
<div>
<p style="margin-top:18pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
<b>13. Fair value of financial instruments</b></p>
<p style="margin-top:6pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
The Company applies various valuation approaches in determining the
fair value of its financial assets and liabilities within a
hierarchy that maximizes the use of observable inputs and minimizes
the use of unobservable inputs by requiring that observable inputs
be used when available. Observable inputs are inputs that market
participants would use in pricing the asset or liability based on
market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company’s
assumptions about the inputs that market participants would use in
pricing the asset or liability and are developed based on the best
information available in the circumstances. The fair value
hierarchy is broken down into three levels based on the source of
inputs as follows:</p>
<p style="font-size:1px;margin-top:6px;margin-bottom:0px">
 </p>
<p style="margin-top:0pt; margin-bottom:0pt; margin-left:4%; font-size:10pt; font-family:Times New Roman">
Level 1— Quoted prices for identical instruments in active
markets.</p>
<p style="margin-top:6pt; margin-bottom:0pt; margin-left:4%; font-size:10pt; font-family:Times New Roman">
Level 2— Quoted prices for similar instruments in active
markets; quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations whose
inputs are observable or whose significant value drivers are
observable.</p>
<p style="margin-top:6pt; margin-bottom:0pt; margin-left:4%; font-size:10pt; font-family:Times New Roman">
Level 3— Significant inputs to the valuation model are
unobservable.</p>
<p style="margin-top:12pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
The availability of observable inputs can vary among the various
types of financial assets and liabilities. To the extent that the
valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value
requires more judgment. In certain cases, the inputs used to
measure fair value may fall into different levels of the fair value
hierarchy. In such cases, for financial statement disclosure
purposes, the level in the fair value hierarchy within which the
fair value measurement is categorized is based on the lowest level
input that is significant to the overall fair value
measurement.</p>
<p style="margin-top:18pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
<i>Cash and cash equivalents</i></p>
<p style="margin-top:6pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
Cash equivalents consist of highly liquid investments with original
or remaining maturities of 90 days or less at the time of purchase,
that are readily convertible into cash. As of September 30,
2014 and December 31, 2013, the Company held $172.5 million
and $70.8 million, respectively, of cash and cash equivalents,
consisting primarily of money market funds of $169.7 million and
$67.7 million, respectively, and the remaining in non-interest
bearing checking accounts. The carrying value approximates the fair
value. The fair value of these money market funds was determined by
using quoted prices for identical investments in an active market
(Level 1 in the fair value hierarchy).</p>
<p style="margin-top:12pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
The following is a summary of the carrying values and estimated
fair values of the 2015 notes and the facility financing obligation
(i.e., the 2019 notes and Tranche B notes) (in millions):</p>
<p style="font-size:12pt;margin-top:0pt;margin-bottom:0pt">
 </p>
<table cellspacing="0" cellpadding="0" width="92%" border="0" style="BORDER-COLLAPSE:COLLAPSE; font-family:Times New Roman; font-size:8pt" align="center">
<tr>
<td width="65%"></td>
<td valign="bottom" width="5%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="5%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="5%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="5%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="font-family:Times New Roman; font-size:8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="6" align="center" style="border-bottom:1.00pt solid #000000"><b>September 30,
2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="6" align="center" style="border-bottom:1.00pt solid #000000"><b>December 31,
2013</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="font-family:Times New Roman; font-size:8pt">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="2" align="center" style="border-bottom:1.00pt solid #000000"><b>Carrying<br />
value</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="2" align="center" style="border-bottom:1.00pt solid #000000"><b>Estimated<br />
fair value</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="2" align="center" style="border-bottom:1.00pt solid #000000"><b>Carrying<br />
value</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td valign="bottom" colspan="2" align="center" style="border-bottom:1.00pt solid #000000"><b>Estimated<br />
fair value</b></td>
<td valign="bottom"> </td>
</tr>
<tr bgcolor="#CCEEFF" style="font-family:Times New Roman; font-size:10pt">
<td valign="top">
<p style="margin-left:1.00em; text-indent:-1.00em; font-size:10pt; font-family:Times New Roman">
2015 notes</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">99.1</td>
<td nowrap="nowrap" valign="bottom">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">113.9</td>
<td nowrap="nowrap" valign="bottom">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">98.4</td>
<td nowrap="nowrap" valign="bottom">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">102.2</td>
<td nowrap="nowrap" valign="bottom">  </td>
</tr>
<tr style="font-family:Times New Roman; font-size:10pt">
<td valign="top">
<p style="margin-left:1.00em; text-indent:-1.00em; font-size:10pt; font-family:Times New Roman">
Facility financing obligation</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">72.6</td>
<td nowrap="nowrap" valign="bottom">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">75.3</td>
<td nowrap="nowrap" valign="bottom">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">102.3</td>
<td nowrap="nowrap" valign="bottom">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">107.0</td>
<td nowrap="nowrap" valign="bottom">  </td>
</tr>
</table>
<p style="margin-top:18pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
<i>Senior Convertible Notes</i></p>
<p style="margin-top:6pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
The estimated fair value of the 2015 notes was calculated based on
model-derived valuations whose inputs were observable, such as the
Company’s stock price, and non-observable, such as the
Company’s longer-term historical volatility, which was
estimated to be 85% (Level 3 in the fair value hierarchy). As there
is no current observable market for the 2015 notes, the Company
determined the estimated fair value using a convertible bond
valuation model within a lattice framework. The convertible bond
valuation model combined expected cash outflows with market-based
assumptions regarding risk-adjusted yields, stock price volatility
and recent price quotes and trading information regarding Company
issued debt instruments and shares of common stock into which the
notes are convertible.</p>
<p style="margin-top:18pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
<i>Facility Agreement</i></p>
<p style="margin-top:6pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
As discussed in Note 11 — Facility Agreement, in connection
with the Facility Agreement, the Company issued 2019 notes and
Milestone Rights and recorded the Commitment Asset on July 1,
2013. In addition, on February 28, 2014, the Company entered
into the First Amendment, and recorded the Tranche B Commitment
Asset, which represented the increase in borrowing capacity that
the Company received as consideration for the modifications made to
the Facility Agreement and the Tranche 1 notes and Tranche 3 notes.
As there is no current observable market for the 2019 notes or
Tranche B notes, the Company determined the estimated fair value
using a bond valuation model based on a discounted cash flow
methodology. The bond valuation model combined expected cash flows
associated with principal repayment and interest based on the
contractual terms of the debt agreement discounted to present value
using a selected market discount rate of 12.7% at December 31,
2013 for the 2019 notes and a selected market discount rate of
11.9% at the inception of the Tranche B notes (Level 3 in the fair
value hierarchy). On September 30, 2014, the market discount
rate was recalculated at 12.4% for the Tranche 1 notes and the
Tranche 4 notes and 11.9% for the Tranche B notes. The Tranche 2
and Tranche 3 notes were fully converted by the end of the first
quarter of 2014.</p>
<p style="font-size:1px;margin-top:12px;margin-bottom:0px">
 </p>
<p style="margin-top:0pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
The estimated fair value of the Milestone Rights was calculated
using the income approach in which the cash flows associated with
the specified contractual payments were adjusted for both the
expected timing and the probability of achieving the milestones
discounted to present value using a selected market discount rate
(Level 3 in the fair value hierarchy). The expected timing and
probability of achieving the milestones, starting in 2014, was
developed with consideration given to both internal data, such as
progress made to date and assessment of criteria required for
achievement, and external data, such as market research studies.
The discount rate (17.5%) was selected based on an estimation
of required rate of returns for similar investment opportunities
using available market data. As of September 30, 2014, the
fair value of the Milestone Rights is estimated at $23.1
million.</p>
<p style="margin-top:12pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
The fair value of the Commitment Asset was estimated using the
income approach by estimating the fair value of the future tranches
using a market debt rate (12.0%) commensurate with the risk of
the future tranches and the fair value of the cash expected to be
received by the Company and assessing the probability of the
commitments being funded in the future based on the operational
hurdles required for funding being met (Level 3 in the fair value
hierarchy). At September 30, 2014, as Deerfield had purchased
all four tranches of 2019 notes in the aggregate principal amount
of $160.0 million, the carrying value of the Commitment Asset was
zero.</p>
<p style="margin-top:12pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
The fair value of the Tranche B Commitment Asset was estimated
using a discounted cash flow analysis under the income approach.
Specifically, the fair value was determined by estimating the fair
value of the future tranche using a market yield (11.9%)
commensurate with the risk of the future tranche and the fair value
of the cash expected to be received by the Company and assessing
the probability of the commitment being funded in the future based
on the operational hurdles required for funding being met as well
as consideration of alternative funding options (Level 3 in the
fair value hierarchy). As of the date it was recorded, the Tranche
B Commitment Asset was valued at $2.9 million.</p>
<p style="margin-top:12pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
On May 6, 2014, Deerfield purchased $20.0 million aggregate
principal amount of Tranche B notes in accordance with the
provisions of the Facility Agreement, as amended. Accordingly, the
$1.2 million portion of the Commitment Asset associated with the
$20.0 million purchased was derecognized and recorded as debt
discount on the Tranche B notes. Consequently, the remaining
carrying value of the Tranche B Commitment Asset was $1.8 million.
As of September 30, 2014, because there have been no material
changes to the established estimates, the carrying value of the
Tranche B Commitment Asset approximates its respective estimated
fair value.</p>
<p style="margin-top:12pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
There were no material re-measurements to fair value during the
nine months ended September 30, 2014 and 2013 of financial
assets and liabilities that are not measured at fair value on a
recurring basis. There were no transfers of assets or
liabilities between the fair value measurement levels during the
nine months ended September 30, 2014 and 2013.</p>
</div>
<div>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 18pt">
<b>6. Property and equipment</b></p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 6pt">
Property and equipment — net consisted of the following
(dollar amounts in thousands):</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt; MARGIN-TOP: 0pt">
 </p>
<table style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; BORDER-COLLAPSE: collapse" cellspacing="0" cellpadding="0" width="84%" align="center" border="0">
<tr>
<td width="65%"></td>
<td valign="bottom" width="6%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="6%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="6%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>Estimated<br />
Useful<br />
Life<br />
(Years)</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>September 30,<br />
2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>December 31,<br />
2013</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Land</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom" nowrap="nowrap"> </td>
<td valign="bottom" nowrap="nowrap" align="right">
—  </td>
<td valign="bottom" nowrap="nowrap"> </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">5,273</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">5,273</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Buildings</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">39-40</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">54,948</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">54,948</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Building improvements</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">5-40</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">114,131</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">114,099</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Machinery and equipment</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">3-15</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">82,068</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">82,189</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Furniture, fixtures and office equipment</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">5-10</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">5,087</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">5,046</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Computer equipment and software</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">3</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">11,335</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">11,289</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Leasehold improvements</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">4</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">17</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">17</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Construction in progress</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">36,214</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">14,756</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
<td valign="bottom"> </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top"></td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">309,073</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"><font style="FONT-SIZE: 8pt"> </font></td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">287,617</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Less accumulated depreciation and amortization</p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(118,150</td>
<td valign="bottom" nowrap="nowrap">) </td>
<td valign="bottom"><font style="FONT-SIZE: 8pt"> </font></td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(111,060</td>
<td valign="bottom" nowrap="nowrap">) </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
<td valign="bottom"> </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Property and equipment — net</p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">190,923</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"><font style="FONT-SIZE: 8pt"> </font></td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">176,557</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom"> </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
</tr>
</table>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
Leasehold improvements are amortized over four years which is the
shorter of the term of the lease or the service lives of the
improvements.</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
Depreciation and amortization expense related to property and
equipment for the three and nine months ended September 30,
2014 and 2013 was as follows (in thousands):</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt; MARGIN-TOP: 0pt">
 </p>
<table style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman; BORDER-COLLAPSE: collapse" cellspacing="0" cellpadding="0" width="92%" align="center" border="0">
<tr>
<td width="72%"></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="6" align="center"><b>Three months ended<br />
September 30,</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="6" align="center"><b>Nine months ended<br />
September 30,</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Depreciation and amortization expense</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">2,414</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">2,874</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">7,386</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">8,820</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
</tr>
</table>
</div>
<div>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 6pt">
The significant activity related to the Facility Agreement during
the nine months ended September 30, 2014 consisted of the
following (in thousands):</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt; MARGIN-TOP: 0pt">
 </p>
<table style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; BORDER-COLLAPSE: collapse" cellspacing="0" cellpadding="0" width="68%" align="center" border="0">
<tr>
<td width="84%"></td>
<td valign="bottom" width="9%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>September 30,<br />
2014</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
<b>Facility financing obligation</b></p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Carrying value at December 31, 2013</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">102,300</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Principal converted to equity</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(93,500</td>
<td valign="bottom" nowrap="nowrap">) </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Accretion of debt discount and debt issuance expense</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">7,507</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Adjustment to debt discount related to modification of the 2019
notes</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">2,921</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Tranche B principal amount</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">20,000</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Debt discount related to Tranche B purchase</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(1,168</td>
<td valign="bottom" nowrap="nowrap">) </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Tranche 4 principal amount</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">40,000</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Debt discount related to Tranche 4 purchase</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(5,435</td>
<td valign="bottom" nowrap="nowrap">) </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Net carrying value of facility financing obligation</p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">72,625</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
<b>Commitment Asset</b></p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Commitment asset balance at December 31,2013</p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">5,157</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Tranche B commitment asset fair value</p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">2,921</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Less commitment asset portion associated with the receipt of
Tranche 4 and Tranche B notes</p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(6,325</td>
<td valign="bottom" nowrap="nowrap">) </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Commitment asset value included in other assets</p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">1,753</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
</tr>
</table>
</div>
<div>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 0pt">
Accretion of debt issuance cost and debt discount in connection
with the Facility Agreement during the three and nine months ended
September 30, 2014 were as follows (in thousands):</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt; MARGIN-TOP: 0pt">
 </p>
<table style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; BORDER-COLLAPSE: collapse" cellspacing="0" cellpadding="0" width="76%" align="center" border="0">
<tr>
<td width="62%"></td>
<td valign="bottom" width="15%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="15%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>Three months ended<br />
September 30, 2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>Nine months ended<br />
September 30, 2014</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Accretion expense- debt issuance cost</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">9</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">318</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Accretion expense- debt discount</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">306</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">7,189</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
</table>
</div>
Q3
47820744
<div><strong><em><font size="2">Fair Value of Financial Instruments
— </font></em></strong>The
carrying amounts reported in the accompanying financial statements
for cash and cash equivalents, accounts payable and accrued
liabilities approximate their fair value due to their relatively
short maturities. The fair value of the cash equivalents, note
payable to related party, senior convertible notes, and the
elements of the Facility Agreement are discussed in Note 13,
“Fair value of financial instruments.”</div>
<div>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 6pt">
Property and equipment — net consisted of the following
(dollar amounts in thousands):</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt; MARGIN-TOP: 0pt">
 </p>
<table style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; BORDER-COLLAPSE: collapse" cellspacing="0" cellpadding="0" width="84%" align="center" border="0">
<tr>
<td width="65%"></td>
<td valign="bottom" width="6%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="6%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="6%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>Estimated<br />
Useful<br />
Life<br />
(Years)</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>September 30,<br />
2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>December 31,<br />
2013</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Land</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom" nowrap="nowrap"> </td>
<td valign="bottom" nowrap="nowrap" align="right">
—  </td>
<td valign="bottom" nowrap="nowrap"> </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">5,273</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">5,273</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Buildings</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">39-40</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">54,948</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">54,948</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Building improvements</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">5-40</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">114,131</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">114,099</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Machinery and equipment</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">3-15</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">82,068</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">82,189</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Furniture, fixtures and office equipment</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">5-10</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">5,087</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">5,046</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Computer equipment and software</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">3</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">11,335</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">11,289</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Leasehold improvements</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">4</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">17</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">17</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Construction in progress</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">36,214</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"> </td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">14,756</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
<td valign="bottom"> </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top"></td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">309,073</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"><font style="FONT-SIZE: 8pt"> </font></td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">287,617</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Less accumulated depreciation and amortization</p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(118,150</td>
<td valign="bottom" nowrap="nowrap">) </td>
<td valign="bottom"><font style="FONT-SIZE: 8pt"> </font></td>
<td valign="bottom"> </td>
<td valign="bottom" align="right">(111,060</td>
<td valign="bottom" nowrap="nowrap">) </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
<td valign="bottom"> </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 1px solid"> </p>
</td>
<td> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Property and equipment — net</p>
</td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"><font style="FONT-SIZE: 8pt">  </font></td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">190,923</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom"><font style="FONT-SIZE: 8pt"> </font></td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">176,557</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom"> </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
</tr>
</table>
</div>
-7000
0
14768000
130000
-161941000
-149524000
-161948000
93500000
1638000
-7000
19134000
7000
-161941000
-161941000
4000
9740000
26844000
3809000
46755000
7386000
150000000
149524000
40000000
2164000
681000
11895000
101675000
-3003000
15574000
71729000
0
-9884000
82684000
66840000
13692000
46755000
2186000
20000000
<div>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 0pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
<b>7. Common and preferred stock</b></p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 6pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
The Company is authorized to issue 550,000,000 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, issuable
in one or more series designated by the Company’s board of
directors. No other class of capital stock is authorized. As of
September 30, 2014 and December 31, 2013, 405,469,034 and
369,391,972 shares of common stock, respectively, were issued and
outstanding and no shares of preferred stock were outstanding.
Included in the common stock outstanding as of September 30,
2014 and December 31, 2013 are 9,000,000 shares of common
stock loaned to Bank of America under a share lending agreement in
connection with the offering of $100.0 million aggregate principal
amount of 2015 notes (see Note 10 — Senior convertible
notes). Bank of America is obligated to return the borrowed shares
(or, in certain circumstances, the cash value thereof) to the
Company on or about the 45th business day following the date as of
which the entire principal amount of the 2015 notes ceases to be
outstanding, subject to extension or acceleration in certain
circumstances or early termination at Bank of America’s
option. The Company did not receive any proceeds from the sale of
the borrowed shares by Bank of America, but the Company did receive
a nominal lending fee of $0.01 per share from Bank of America for
the use of borrowed shares.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
On July 1, 2013, the Company entered into the Facility
Agreement with Deerfield providing for the sale of up to $160.0
million of 2019 notes to Deerfield in four equal tranches of $40.0
million principal amount. On February 28, 2014, the Company
amended the Facility Agreement to, among other things, allow
Deerfield, subject to certain limitations, to convert up to an
additional $60.0 million principal amount under the
then-outstanding 2019 notes into the Company’s common stock
after the effective date of the First Amendment. The Company also
agreed to register for resale up to 12,000,000 shares of common
stock issuable upon conversion of the outstanding 2019 notes, with
a minimum conversion price of $5.00 per share unless the Company
otherwise consents. The conversion price was determined by the
average of the volume weighted average prices per share during the
three trading days immediately preceding the election to convert.
As of September 30, 2014, Deerfield had converted $100.0
million of 2019 notes into 18,616,304 shares of the Company’s
common stock which resulted in total expense of $6.4 million for
the nine months ended September 30, 2014 and $0.6 million for the
twelve months ended December 31, 2013 for the difference between
the principal amount of the notes converted and their carrying
amount (see Note 11 – Facility Agreement). No additional
principal amount of 2019 notes is convertible.</p>
</div>
<div>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
<em><strong>Basis of Presentation — </strong></em>The 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.
It is costly to develop therapeutic products and conduct clinical
studies for these products. From its inception through
September 30, 2014, the Company had accumulated net losses of
$2.5 billion, which include cumulative negative cash flow from
operations of $1.7 billion and a goodwill impairment charge of
$151.4 million.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
On August 11, 2014, the Company entered into a license and
collaboration agreement (the “Sanofi License
Agreement”) with Sanofi-Aventis Deutschland GmbH (which
subsequently assigned its rights and obligations under the
agreement to Sanofi-Aventis U.S. LLC (“Sanofi”)),
pursuant to which Sanofi will be responsible for global commercial,
regulatory and development activities for AFREZZA. Under the
Sanofi License Agreement, the Company received a $150.0 million
up-front fee and may earn up to an aggregate of $775.0 million upon
the achievement of certain development, manufacturing, regulatory
and sales milestones. Worldwide profits and losses with respect to
AFREZZA will be shared 65% by Sanofi and 35% by the Company.
Pursuant to a supply agreement, the Company will manufacture
AFREZZA at its manufacturing facility in Danbury, Connecticut to
supply Sanofi’s demand for the product. The Sanofi License
Agreement became effective on September 23, 2014 following
completion of the U.S. Federal Trade Commission’s review of
the transactions contemplated by the Sanofi License Agreement under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations promulgated thereunder (the
“Hart-Scott-Rodino Act”) and the completion of
documentation related to the $175.0 million secured loan facility
being provided to the Company by an affiliate of Sanofi (the
“Sanofi Loan Facility”) to fund the Company’s
share of net losses under the Sanofi License Agreement.</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
At September 30, 2014, the Company’s capital resources
consisted of cash and cash equivalents of $172.5 million. The
Company expects to continue to incur significant expenditures to
support commercial launch of AFREZZA and the development of other
product candidates as contemplated under the Sanofi License
Agreement. In addition, the Company’s 5.75% Senior
Convertible Notes due 2015 (the “2015 notes”) in the
aggregate principal amount of $100.0 million have a maturity date
of August 15, 2015, and payment on the outstanding amount is
due in full on that date (see Note 10 – Senior convertible
notes).</p>
<p style="MARGIN-BOTTOM: 0px; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 1px 'Times New Roman'; MARGIN-TOP: 12px; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
 </p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 0pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
The Company may need to raise additional capital, whether through
the sale of equity or debt securities, additional strategic
business collaborations, the establishment of other funding
facilities, licensing arrangements, asset sales or other means.
Additional funding sources that are, or in certain circumstances
may be available to the Company, include approximately
$30.1 million principal amount of available borrowings under
its loan arrangement ( the “Loan Arrangement”) with The
Mann Group LLC (“The Mann Group”) (see note 9 –
Related-party arrangements), potential proceeds from the exercise
of warrants issued in its February 2012 public offering of
approximately $20 million, the Company’s at-the-market
issuance sales agreements which allow the Company to sell up to $50
million in common stock, and pursuant to the facility agreement
(the “Facility Agreement”) with Deerfield Private
Design Fund II, L.P. (“Deerfield Private Design Fund”)
and Deerfield Private Design International II, L.P. (collectively,
“Deerfield”) and the First Amendment to Facility
Agreement and Registration Rights Agreement (the “First
Amendment”) additional sales of an additional tranche of
notes (the “Tranche B notes”) of up to $70 million
which must be purchased prior to December 30, 2014 (see Note 11
– Facility Agreement).</p>
<p style="MARGIN-BOTTOM: 0pt; WHITE-SPACE: normal; TEXT-TRANSFORM: none; WORD-SPACING: 0px; COLOR: rgb(0,0,0); FONT: 10pt 'Times New Roman'; MARGIN-TOP: 12pt; LETTER-SPACING: normal; TEXT-INDENT: 0px; -webkit-text-stroke-width: 0px">
Although we believe that our existing cash and cash equivalents and
available debt financing will be sufficient to finance our
operational cash needs through at least the next twelve months,
should our results not meet our current operating plan, it could
negatively impact our liquidity and we may need to raise additional
capital or seek additional financing sources as discussed above.
There can be no assurance that we would be able to raise such
additional financing or additional capital on acceptable terms, or
at all, and if we are not able to raise adequate additional
financing or capital to continue to fund our ongoing operations, we
will need to defer, reduce or eliminate significant planned
expenditures or significantly curtail our operations, and there may
be substantial doubt about our ability to continue as a going
concern.</p>
</div>
1753000
<div>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
<b><i>Business —</i></b> The Company is a biopharmaceutical
company focused on the discovery and development of therapeutic
products for diseases such as diabetes. The Company’s lead
product, AFREZZA (insulin human) inhalation powder, is a
rapid-acting inhaled insulin that was approved by the U.S. Food and
Drug Administration (“FDA”) on June 27, 2014 to
improve glycemic control in adult patients with diabetes.</p>
</div>
<div>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
Accretion of debt issuance expense in connection with the 2015
notes during the three and nine months ended September 30,
2014 and 2013 was as follows (in thousands):</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt; MARGIN-TOP: 0pt">
 </p>
<table style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman; BORDER-COLLAPSE: collapse" cellspacing="0" cellpadding="0" width="92%" align="center" border="0">
<tr>
<td width="76%"></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="6" align="center"><b>Three months ended<br />
September 30,</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="6" align="center"><b>Nine months ended<br />
September 30,</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Accretion expense</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">231</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">216</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">681</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">637</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
</tr>
</table>
</div>
<div>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
<b><i>Recently Issued Accounting Standards —</i></b> In July
2013, the FASB issued ASU 2013-11,<i> Income Taxes (Topic
740): Presentation of an Unrecognized Tax Benefit when a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit
Carryforward Exists (a consensus of the FASB Emerging Issues Task
Force)</i>. The amendments in this ASU provide guidance on the
financial statements presentation of an unrecognized tax benefit
when a net operating loss carryforward, a similar tax loss, or a
tax credit carryforward exists. An unrecognized tax benefit should
be presented in the financial statements as a reduction to a
deferred tax asset for a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward with certain exceptions, in
which case such an unrecognized tax benefit should be presented in
the financial statements as a liability. The amendments in this ASU
do not require new recurring disclosures. The amendments in this
ASU are effective for fiscal years, and interim periods within
those years, beginning after December 15, 2013. The adoption
of the new requirement did not have a significant impact on the
Company’s consolidated financial statements.</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
In May 2014, a new standard was issued related to revenue
recognition, which requires an entity to recognize the amount of
revenue to which it expects to be entitled for the transfer of
promised goods or services to customers. The new standard will
replace most of the existing revenue recognition standards in U.S.
GAAP when it becomes effective on January 1, 2017. Early
adoption is not permitted. The new standard allows for either
“full retrospective” adoption, whereby the new standard
is applied to each prior reporting period presented or
“modified retrospective” adoption, whereby the new
standard is only applied to the most current period presented with
the cumulative effect of the change recognized at the date of the
initial application. The Company is assessing the potential impact
of the new standard on its consolidated statements of financial
position and results of operations and comprehensive income (loss)
and has not yet selected a transition method.</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
In June 2014, the FASB issued ASU No. 2014-10, Development
Stage Entities (Topic 915): Elimination of Certain Financial
Reporting Requirements, Including an Amendment to Variable Interest
Entities Guidance in Topic 810, Consolidation. The amendments
in this ASU remove all incremental financial reporting requirements
from GAAP for development stage entities, including the removal of
Topic 915, Development Stage Entities, from the FASB
Accounting Standards Codification. In addition, the ASU:
(a) adds an example disclosure in Topic 275, Risks and
Uncertainties, to illustrate one way that an entity that has
not begun planned principal operations could provide information
about the risks and uncertainties related to the company’s
current activities; and (b) removes an exception provided to
development stage entities in Topic 810, Consolidation, for
determining whether an entity is a variable interest entity. The
presentation and disclosure requirements in Topic 915 will no
longer be required for the first annual period beginning after
December 15, 2014. The revised consolidation standards are
effective one year later, in annual periods beginning after
December 15, 2015. Early adoption is permitted. The Company is
evaluating the impact the adoption of ASU 2014-10 will have on its
consolidated financial statements.</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
On August 27, 2014, the FASB issued ASU 2014-15, which
provides guidance on determining when and how reporting entities
must disclose going-concern uncertainties in their financial
statements. The new standard requires management to perform interim
and annual assessments of an entity’s ability to continue as
a going concern within one year of the date of issuance of the
entity’s financial statements (or within one year after the
date on which the financial statements are available to be issued,
when applicable). Further, an entity must provide certain
disclosures if there is “substantial doubt about the
entity’s ability to continue as a going concern.” The
ASU is effective for annual periods ending after December 15,
2016, and interim periods thereafter; early adoption is permitted.
The Company is evaluating the impact the adoption of ASU 2014-15
will have on its consolidated financial statements.</p>
</div>
P4Y
<div>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
Depreciation and amortization expense related to property and
equipment for the three and nine months ended September 30,
2014 and 2013 was as follows (in thousands):</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 12pt; MARGIN-TOP: 0pt">
 </p>
<table style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman; BORDER-COLLAPSE: collapse" cellspacing="0" cellpadding="0" width="92%" align="center" border="0">
<tr>
<td width="72%"></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
<td valign="bottom" width="3%"></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="6" align="center"><b>Three months ended<br />
September 30,</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="6" align="center"><b>Nine months ended<br />
September 30,</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 8pt; FONT-FAMILY: Times New Roman">
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2014</b></td>
<td valign="bottom"> </td>
<td valign="bottom">  </td>
<td style="BORDER-BOTTOM: #000000 1pt solid" valign="bottom" colspan="2" align="center"><b>2013</b></td>
<td valign="bottom"> </td>
</tr>
<tr style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman" bgcolor="#CCEEFF">
<td valign="top">
<p style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-LEFT: 1em; TEXT-INDENT: -1em">
Depreciation and amortization expense</p>
</td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">2,414</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">2,874</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">7,386</td>
<td valign="bottom" nowrap="nowrap">  </td>
<td valign="bottom">  </td>
<td valign="bottom">$</td>
<td valign="bottom" align="right">8,820</td>
<td valign="bottom" nowrap="nowrap">  </td>
</tr>
<tr style="FONT-SIZE: 1px">
<td valign="bottom"></td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
<td valign="bottom">  </td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td valign="bottom">
<p style="BORDER-TOP: #000000 3px double"> </p>
</td>
<td> </td>
</tr>
</table>
</div>
<div>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
<b><i>Prepaid expenses and other current assets —</i></b>
Prepaid expenses and other current assets primarily consist of
prepaid expenses for goods and services to be received. As of
September 30, 2014, prepaid and other current assets had a
balance of $20.3 million, mainly comprised of a $15.0 million
prepayment for 2015 quantities of insulin, prepaid insurance, and
prepaid clinical trial expenses.</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
On July 31, 2014, the Company entered into a Supply Agreement
(the “Supply Agreement”) with Amphastar France
Pharmaceuticals S.A.S., a French corporation
(“Amphastar”), pursuant to which Amphastar will
manufacture for and supply to the Company certain quantities of
recombinant human insulin for use in AFREZZA. Under the terms of
the Supply Agreement, Amphastar will be responsible for
manufacturing the insulin in accordance with the Company’s
specifications and agreed-upon quality standards. The Company has
agreed to purchase annual minimum quantities of insulin under the
Supply Agreement of an aggregate of approximately
€120.1 million in calendar years 2015 through 2019. The
Company may request to purchase additional quantities of insulin
over such annual minimum quantities. As part of the Supply
Agreement, the Company paid a $15.0 million deposit to Amphastar as
prepayment for 2015 quantities of insulin.</p>
<p style="MARGIN-BOTTOM: 0pt; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman; MARGIN-TOP: 12pt">
Unless earlier terminated, the term of the Supply Agreement expires
on December 31, 2019 and can be renewed for additional,
successive two year terms upon 12 months’ written notice,
given prior to the end of the initial term or any additional two
year term. The Company and Amphastar each have normal and customary
termination rights, including termination for material breach that
is not cured within a specific time frame or in the event of
liquidation, bankruptcy or insolvency of the other party. In
addition, the Company may terminate the Supply Agreement upon two
years’ prior written notice to Amphastar without cause or
upon 30 days’ prior written notice to Amphastar if a
controlling regulatory authority withdraws approval for AFREZZA,
provided, however, in the event of a termination pursuant to either
of the latter two scenarios, the provisions of the Supply Agreement
require the Company to pay the full amount of all unpaid purchase
commitments due over the initial term within 60 calendar days of
the effective date of such termination.</p>
</div>
0.01
0.65
<div>
<p style="margin-top:18pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
<b>5. State research and development credit exchange
receivable</b></p>
<p style="margin-top:6pt; margin-bottom:0pt; font-size:10pt; font-family:Times New Roman">
The State of Connecticut provides certain companies with the
opportunity to exchange certain research and development income tax
credit carryforwards for cash in exchange for forgoing the
carryforward of the research and development income tax credits.
The program provides for an exchange of research and development
income tax credits for cash equal to 65% of the value of
corporation tax credit available for exchange. Current estimated
amounts receivable under the program were $803,000 at
September 30, 2014, and there was no current portion at
December 31, 2013. Long-term estimated amounts receivable
under the program were $260,000 and $298,000 at September 30,
2014 and December 31, 2013, respectively.</p>
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<b><i>Sale of intellectual property —</i></b> On
July 18, 2014, the Company entered into an assignment
agreement with a third party whereby the third party acquired all
proprietary rights, technology and know-how that related to a small
molecule inhibitor compound and all pre-clinical data and results
related thereto. Under the terms of the assignment agreement, the
Company received total consideration of $9.3 million, which was
offset by $1.4 million of expense associated with the sale of the
intellectual property related to oncology.</p>
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