• the convenience and ease of administration of our product candidates relative to existing treatment ~~methods, such as our ability to gain regulatory approval for our liquid 100 IU/cc formulation of VIAject~~^® ~~and the degree to which injection site discomfort may be associated with this formulation;~~methods;

• the label and promotional claims allowed by the FDA, such as, in the case of ~~VIAject~~^®,an RHI- or insulin analog-based formulation, claims relating to glycemic control, hypoglycemia, weight gain, injection site discomfort, expiry dating and required handling conditions;

• the pricing and reimbursement of our product candidates relative to existing treatments; and

• marketing and distribution support for our product candidates.

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Our ultra-rapid-acting insulin formulations have not yet been shown to be clinically superior to existing rapid-acting insulin analogs. It may be difficult for us to demonstrate superiority in the future because we anticipate that the primary endpoint of any pivotal clinical trial that we might conduct with an ultra-rapid-acting insulin product candidate would be non-inferiority to the comparator drug product. In addition, we are aware of other companies with expertise in protein stabilization that are developing stable liquid glucagon formulations. If these formulations are easier to use than any product that we may develop, such as by allowing for room temperature storage, our products, even if approved by the FDA, may not achieve commercial success.
The successful development of our product candidates may depend upon our ability to collaborate with or license technology from third parties.
Our ultra-rapid-acting insulin analog-based formulations and our liquid glucagon formulations are at early stages of development. In order for us to meet our projected milestones for these programs, we must obtain reliable sources of active pharmaceutical ingredients and other related materials and supplies. Our leading candidate for a liquid glucagon formulation uses proprietary stabilization technology supplied by a third party pursuant to a license agreement. If we do not maintain a commercial license to this technology, our efforts to commercialize a glucagon rescue product may be materially harmed. We may also continue to study additional third-party proprietary stabilization technologies for use in these programs. Even if these studies are successful, we cannot assure you that we will be able to license any third-party technologies on terms that would be acceptable to us.
If we fail to enter into strategic collaborations for the commercialization of our product candidates or if our collaborations are unsuccessful, we may be delayed in our commercialization efforts; we may be required to establish our own sales, marketing, manufacturing and distribution capabilities which will be expensive, require additional capital we do not currently have, and could delay the commercialization of our product candidates and have a material and adverse ~~affect~~effect on our ~~business.~~business; we cannot commercialize our insulin analog-based formulations until all applicable third-party patents have expired.
A broad base of physicians, including primary care physicians, internists and endocrinologists, treat patients with diabetes. A large sales force may be required to educate and support these physicians. In addition, we cannot commercialize on our own any insulin analog-based formulation in the United States until 2014 at the earliest, when the patents covering the currently marketed insulin analogs first begin to expire. Therefore, our current strategy for developing, manufacturing and commercializing our product candidates includes securing collaborations with leading pharmaceutical and biotechnology companies, ~~for~~including those that hold patents covering the ~~commercialization of our product candidates.~~currently marketed insulin analogs. To date, we have not entered into any out-licensing collaborations with pharmaceutical or biotechnology companies. We face significant competition in seeking appropriate collaborators. In addition, collaboration agreements are complex and time-consuming to negotiate, document and implement. For all these reasons, it may be difficult for us to find third parties that are willing to enter into collaborations on economic terms that are favorable to us, or at all. IfEven if we do enter into any such collaboration, the collaboration may not be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. It is likely that our collaborators will have significant discretion in determining the efforts and resources that they will apply to these collaborations.
If we fail to enter into collaborations, or if our collaborations are unsuccessful, we may be required to establish our own direct sales, marketing, manufacturing and distribution capabilities. Establishing these capabilities can be time-consuming and expensive and we have little experience in doing so. Because of our size, we would be at a disadvantage to our potential competitors to the extent they collaborate with large pharmaceutical companies that have substantially more resources than we do. As a result, we would not initially be able to field a sales force as large as our competitors or provide the same degree of market research or marketing support. In addition, our competitors would have a greater ability to devote research and development resources toward expansion of the indications for their products. We cannot assure ~~prospective~~our investors that we will succeed in entering into acceptable collaborations, that any such collaboration will be successful or, if not, that we will successfully develop our own sales, marketing and distribution capabilities.
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If we are unable to obtain adequate reimbursement from governments or third-party payors for any products that we may develop or if we are unable to obtain acceptable prices for those products, they may not be purchased or used and our revenues and prospects for profitability will suffer.
Our future revenues and profits will depend heavily upon the availability of adequate reimbursement for the use of our approved product candidates from governmental and other third-party payors, both in the United States and in other markets. Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:
• a covered benefit under its health plan;

• safe, effective and medically necessary;

• appropriate for the specific patient;

• cost-effective; and

• neither experimental nor investigational.

Obtaining reimbursement approval for a product from each government or other third-party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost-effectiveness data for the use of our products to each payor. We may not be able to provide data sufficient to gain acceptance with respect to reimbursement. Even when a payor determines that a product is eligible for reimbursement, the payor may impose coverage limitations that preclude payment for some uses that are approved by the FDA or comparable authorities. In addition, eligibility for coverage does not imply that any product will be reimbursed in all cases or at a rate that allows us to make a profit or even cover our costs.
Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may not be made permanent.
~~We are subject to pricing pressures and uncertainties regarding Medicare reimbursement and reform.~~
     Reforms in Medicare added a prescription drug reimbursement benefit beginning in 2006 for all Medicare beneficiaries. Although we cannot predict the full effects on our business of the implementation of this legislation, it is possible that the new benefit, which will be managed by private health insurers, pharmacy benefit managers, and other managed care organizations, will result in decreased reimbursement for prescription drugs, which may further exacerbate industry-wide pressure to reduce the prices charged for prescription drugs. This could harm our ability to generate revenues.
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Governments outside the United States tend to impose strict price controls, which may adversely affect our revenues, if any.
In some countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be adversely affected.
     Legislation has been introduced in Congress that, if enacted, would permit more widespread re-importation of drugs from foreign countries into the United States, which may include re-importation from foreign countries where the drugs are sold at lower prices than in the United States. Such legislation, or similar regulatory changes, could decrease the price we receive for any approved products which, in turn, could adversely affect our operating results and our overall financial condition.
Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.
We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
• decreased demand for any product candidates or products that we may develop;

• injury to our reputation;

• withdrawal of clinical trial participants;

• costs to defend the related litigation;

• substantial monetary awards to trial participants or patients;

• loss of revenue; and

• the inability to commercialize any products that we may develop.

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We currently carry global liability insurance that we believe is sufficient to cover us from potential damages arising from past or future clinical trials of ~~VIAject~~^®~~. We also carry local insurance policies per clinical trial of~~ our ultra-rapid-acting insulin formulations and other product ~~candidates.~~candidates that we may advance into the clinic. The amount of insurance that we currently hold may not be adequate to cover all liabilities that we may incur. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for any products. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost. If losses from product liability claims exceed our liability insurance coverage, we may ourselves incur substantial liabilities. If we are required to pay a product liability claim, we may not have sufficient financial resources to complete development or commercialization of any of our product candidates and, if so, our business and results of operations would be harmed.
We face substantial competition in the development of our product candidates which may result in others developing or commercializing products before or more successfully than we do.
We are engaged in segments of the pharmaceutical industry that are characterized by intense competition and rapidly evolving technology. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public and private research organizations are pursuing the development of novel drugs that target endocrine disorders. We face, and expect to continue to face, intense and increasing competition as new products enter the market and advanced technologies become available. There are several approved injectable rapid-acting mealtime insulin analogs currently on the market including Humalog^®, marketed by Eli Lilly and Company, NovoLog^®, marketed by Novo Nordisk, ~~A/S,~~ and ~~Apidra~~^®Apidra®, marketed by Sanofi-Aventis. These rapid-acting insulin analogs provide improvement over regular forms of ~~short-acting~~mealtime insulin, including faster subcutaneous absorption, an earlier and greater insulin peak and more rapid post-peak decrease. Both Humalog® and NovoLog® have limited remaining patent protection in the United States and Europe. The possible introduction of lower priced brands or substitutable generic versions of these products could negatively impact the revenue potential of our ultra-rapid-acting product candidates should any be approved.
In addition, other development stage ~~rapid-acting~~ insulin formulations may be approved and compete with ~~VIAject~~^®.ours. Halozyme Therapeutics, Inc. has conducted a Phase 1 and multiple Phase 2 clinical ~~trial~~trials of ~~Humulin~~^® RRHI, lispro (the insulin analog in Humalog®) and ~~Humalog~~^®aspart (the insulin analog in NovoLog®) in combination with a recombinant human hyaluronidase enzyme and has reported that in each case the combination yielded pharmacokinetics and glucodynamics that better mimicked physiologic mealtime insulin release and activity than ~~Humulin~~^® RRHI, Humalog® or ~~Humalog~~^®NovoLog® alone. ~~Generex Biotechnology Corporation~~Novo Nordisk has ~~developed~~reported that they have initiated clinical development of an ~~oral spray~~insulin analog intended to provide faster onset of action than the currently available rapid-acting insulin analogs and that ~~is currently in~~a candidate formulation will enter Phase 3 ~~development.~~ clinical trials either in late 2012 or early 2013.
Several companies are also developing alternative insulin systems for diabetes, including MannKind Corporation, which ~~has~~ submitted ~~its~~an NDA in early ~~2009.~~2009 for an inhalable insulin product candidate. Mannkind’s product candidate was not approved by the FDA and MannKind is currently conducting two additional Phase 3 clinical trials. MannKind has announced that it plans to resubmit a revised NDA in the third quarter of 2013. Approval of an inhaled insulin could reduce the overall market for injectable mealtime insulin.
A liquid glucagon formulation for use as a rescue treatment for diabetes patients experiencing severe hypoglycemia would also face significant competition if it were to be commercialized. Eli Lilly and Novo Nordisk currently market injectable glucagon rescue kit products. We are aware of several glucagon rescue product candidates in early stage development, such an auto-injector device that integrates glucagon powder and a diluent into a dual chamber cartridge within that device and an auto-injector utilizing a concentrated, non-aqueous glucagon formulation. In addition, other companies with expertise in protein stabilization have announced that they have developed a ~~number~~stable liquid glucagon formulation using FDA-approved injectable ingredients. We believe that at least one of ~~established pharmaceutical companies, including GlaxoSmithKline plc, and Bristol-Myers Squibb Company,~~these formulations of glucagon is being studied in one or more clinical trials. All of these programs utilize the same active ingredient as the liquid glucagon formulations that we are developing ~~proprietary technologies~~and offer, or ~~have entered into arrangements with, or acquired, companies with technologies~~may offer, presentations allowing for ~~the treatment of diabetes.~~room temperature storage. In addition, Eli Lilly is developing a glucagon analog, which may also offer advantages over our liquid glucagon formulations.
Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative
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arrangements for research, development, manufacturing and commercialization. Our competitors may develop products that are more effective, safer, more convenient or less costly than any that
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we are developing or that would render our product candidates obsolete or non-competitive. Our competitors may also obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours.
Many of our potential competitors have:
• significantly greater financial, technical and human resources than we have and may be better equipped to discover, develop, manufacture and commercialize product candidates;

• more extensive experience in preclinical testing and clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products;

• product candidates that have been approved or are in late-stage clinical development; or

• collaborative arrangements in our target markets with leading companies and research institutions.

Our product candidates may be rendered obsolete by technological change.
The rapid rate of scientific discoveries and technological changes could result in one or more of our product candidates becoming obsolete or noncompetitive. For several decades, scientists have attempted to improve the bioavailability of injected formulations and to devise alternative non-invasive delivery systems for the delivery of drugs such as insulin. Our product candidates will compete against many products with similar indications. ~~In addition to the currently marketed rapid-acting insulin analogs, our competitors are developing insulin formulations delivered by oral pills, pulmonary devices and oral spray devices.~~ Our future success will depend not only on our ability to develop our product candidates, but also on our ability to maintain market acceptance against emerging industry developments. We cannot assure ~~present~~current or prospective stockholders that we will be able to do so.
Our business activities involve the storage and use of hazardous materials, which require compliance with environmental and occupational safety laws regulating the use of such materials. If we violate these laws, we could be subject to significant fines, liabilities or other adverse consequences.
Our research and development work and manufacturing processes involve the controlled storage and use of hazardous materials, including chemical and biological materials. Our operations also produce hazardous waste products. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials. Although we believe that our safety procedures for handling and disposing of such materials and waste products comply in all material respects with the standards prescribed by federal, state and local laws and regulations, the risk of accidental contamination or injury from hazardous materials cannot be completely eliminated. In the event of an accident or failure to comply with environmental laws, we could be held liable for any damages that may result, and any such liability could fall outside the coverage or exceed the limits of our insurance. In addition, we could be required to incur significant costs to comply with environmental laws and regulations in the future or pay substantial fines or penalties if we violate any of these laws or regulations. Finally, current or future environmental laws and regulations may impair our research, development or production efforts.
Risks Related to Our Dependence on Third Parties
Use of third parties to manufacture our product candidates may increase the risks that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, or that our suppliers will not be able to manufacture our products in their final dosage form. In any such case, clinical development and commercialization of our product candidates could be delayed, prevented or impaired.
We do not currently own or operate manufacturing facilities for commercial production of our product candidates. We have limited experience in drug manufacturing and we lack the resources and the capabilities to manufacture any of our product candidates on a clinical or commercial scale. Our current strategy is to outsource to third parties all of the manufacturing ofrequired for our product ~~candidates and products to third parties.~~candidates. We also expect to rely upon third parties to produce materials required for the commercial production of our product candidates if we succeed in obtaining necessary regulatory approvals. We ~~currently rely~~have recently relied on ~~one manufacturer~~the University of Iowa to manufacture our ~~VIAject~~^®product ~~candidate. We intend to negotiate a~~candidates, but we do not have any commercial manufacturing ~~agreement~~agreements in place with ~~this manufacturer but cannot guarantee that we will reach agreement in a timely manner or on terms that are favorable to us.~~third parties.
     ~~There can be no assurance that this manufacturer will support our VIAject~~^® or other manufacturing programs in the future. The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques, processes and quality controls.25

Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates or products ourselves, including:
• reliance on the third party for regulatory compliance and quality assurance;

• the possible breach of the manufacturing agreement by the third party because of factors beyond our control; and

• the possible refusal by or inability of the third party to support our manufacturing programs ~~based on its own business priorities, at~~in a time frame that ~~is costly or inconvenient for us.~~we would otherwise prefer.
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Our manufacturers may not be able to comply with current good manufacturing practice, or cGMP, regulations or other regulatory requirements or similar regulatory requirements outside the United States. Our manufacturers are subject to unannounced inspections by the FDA, state regulators and similar regulators outside the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates.
Our product candidates and any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that are both capable of manufacturing for us and willing to do so. If the third parties that we engage to manufacture product for our clinical trials should cease to continue to do so for any reason, we likely would experience delays in advancing these trials while we identify and qualify replacement suppliers and we may be unable to obtain replacement supplies on terms that are favorable to us. In addition, if we are not able to obtain adequate supplies of our product candidates or the drug substances used to manufacture them, it will be more difficult for us to develop our product candidates and compete effectively.
Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to develop product candidates and commercialize any products that receive regulatory approval on a timely and competitive basis.
We rely on third parties to conduct our clinical trials and those third parties may not perform satisfactorily, including failing to meet established ~~deadlines~~timelines for the completion of such trials.
We do not independently conduct clinical trials of our product candidates. We rely on third parties, such as contract research organizations, clinical data management organizations, medical institutions and clinical investigators, to enroll qualified patients and conduct our clinical trials. Our reliance on these third parties for clinical development activities reduces our control over these activities. We are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, for conducting, recording, and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, regulatory approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.
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If our suppliers ~~principally our sole insulin supplier,~~of active pharmaceutical ingredients and other production materials fail to deliver materials and provide services needed for the production of ~~VIAject~~^® ~~and VIAtab~~™our ultra-rapid acting insulin formulations or our liquid glucagon formulation in a timely and sufficient manner, or if they fail to comply with applicable regulations, clinical development or regulatory approval of our product candidates, or commercialization of our products could be delayed, producing additional losses and depriving us of potential product revenue.
We need access to sufficient, reliable and affordable supplies of ~~recombinant human~~ insulin, glucagon and other materials, such as vials, cartridges, pre-filled syringes and, potentially, drug injection devices, for which we rely on various suppliers. We also must rely on those suppliers to comply with relevant regulatory and other legal requirements, including the production of insulin and glucagon in accordance with cGMP. We can make no assurances that our suppliers ~~particularly our insulin supplier,~~ will comply with cGMP.
We have ~~recently~~ entered into ~~a new~~an agreement with our existing ~~single insulin~~RHI supplier from which we obtain all of the ~~insulin~~RHI that we use for testing and manufacturing ~~VIAject~~^® ~~and VIAtab™. Our~~our RHI-based formulations. In July 2011, we amended our agreement with this insulin supplier so that the agreement will terminate in ~~December 2011. We are discussing the possibility of extending this supply agreement beyond 2011, but we cannot guarantee that this effort will be successful.~~June 2018.
We believe that our current supplies of ~~insulin,~~RHI, together with the quantities of ~~insulin~~RHI called for under our existing supply agreement, will be sufficient to allow us to complete ~~our current clinical trial extension~~the full development program ~~and anticipated future clinical trials of VIAject~~^®~~. In addition, we believe that~~required by the ~~quantities available under the agreement will be sufficient~~FDA in order to ~~support our needs for approximately three years following the commercial launch of VIAject~~^®~~. We are seeking~~receive approval to ~~qualify other insulin suppliers to serve as additional or alternative suppliers~~market an RHI-based formulation if we are unable or choose not to enter into a new commercial supply agreement with our existing supplier. We cannot assure you that we will be able to qualify a new insulin supplier prior to December 2011. Even if we do qualify a new suppliersuccessful in a timely manner, the cost of switching or adding additional suppliers may be significant, and we cannot assure you that we will be able to enter into a commercial supply agreement with a new supplier on favorable terms.developing one. If we are unable to procure sufficient quantities of insulin from our current or any future supplier, if supply of ~~recombinant human insulin~~RHI and other materials otherwise becomes limited, or if our suppliers do not meet relevant regulatory requirements, and if we were unable to obtain these materials in sufficient amounts, in a timely manner and at reasonable prices, we could be delayed in the manufacturing and ~~future~~possible commercialization of ~~VIAject~~^® ~~and VIAtab™,~~an ultra-rapid-acting insulin, which ~~would~~may have a material adverse effect on our business. We would incur substantial costs and manufacturing delays if our suppliers are unable to provide us with products or services approved by the FDA or other regulatory agencies.
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We have entered into a commercial supply agreement with a third party for the supply of glucagon that we intend to use in the manufacture of our glucagon rescue product candidate. However, we have not purchased significant quantities of glucagon from this third-party supplier and we do not anticipate doing so prior to the manufacture of validation batches of a proposed commercial product. Additionally, we have agreed to purchase an excipient used to stabilize one of our glucagon rescue candidate formulations from a third-party that has licensed its proprietary stabilization technologies to us. If this third-party is unable to supply us with sufficient quantities of the stabilizing excipient, our development program for a liquid glucagon formulation may be materially harmed.
We have not entered into any long-term agreements for the supply of one or more insulin analogs, vials, cartridges, pre-filled syringes or injection devices, some or all of which we would need to procure in significant quantities if we were to commercialize any of our product candidates.
Risks Related to Our Intellectual Property
If we are unable to protect our intellectual property rights, our competitors may develop and market similar or identical products that may reduce demand for our products, and we may be prevented from establishing collaborative relationships on favorable terms.
The following factors are important to our success:
• receiving patent protection for our product candidates;

• maintaining our trade secrets;

• not infringing on the proprietary rights of others; and

• preventing others from infringing our proprietary rights.

We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. We try to protect our proprietary position by filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business.
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Because the patent position of pharmaceutical companies involves complex legal and factual questions, the issuance, scope and enforceability of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. Thus, any patents that we own or license from others may not provide any protection against competitors.
     ~~We have been granted one U.S. patent and one European patent~~In June 2012 we entered into an agreement with Aegis to acquire an exclusive, sublicensable, worldwide license to the protein stabilization technology that we are using in ~~all~~the development of our liquid glucagon formulations. Under the terms of the ~~designation countries, several pending United States~~agreement, Aegis will prepare, file, prosecute and maintain patents and patent applications ~~relating~~that are specific to our ~~VIAject~~^® ~~and VIAtab™ technology and several pending U.S. foreign patent applications relating~~liquid glucagon formulations in jurisdictions that we may designate from time to ~~our technology for enhancing delivery of drugs. These~~time.
Our pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. If patents do not issue with claims encompassing our products, our competitors may develop and market similar or identical products that compete with ours. Even if patents are issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Failure to obtain effective patent protection for our technology and products may reduce demand for our products and prevent us from establishing collaborative relationships on favorable terms.
The individual active and inactive ingredients in our ~~VIAject~~^®ultra-rapid-acting insulin formulations and ~~VIAtab™ product candidates~~our liquid glucagon formulations have been known and used for many years and, therefore, are no longer subject to patent ~~protection.~~protection, except in proprietary combinations. Accordingly, our ~~granted U.S.~~patent and ~~foreign patents and~~ pending ~~patent~~ applications are directed to the particular formulations of these ingredients in our products, and to their use. Although we believe our formulations and their ~~use~~uses are ~~patentable~~or will be patented and provide a competitive advantage, ~~even if issued,~~ our patents may not prevent others from marketing formulations using the same active and inactive ingredients in similar but different formulations.
We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. We try to protect this information by entering into confidentiality agreements with parties that have access to it, such as potential corporate partners, collaborators, employees and consultants. Any of these parties may breach the agreements and disclose our confidential information or our competitors may learn of the information in some other way. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business and financial condition could be materially adversely affected.
The laws of many foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States. Accordingly, the fact that we have obtained certain patent rights in the United States does not guarantee that we will be able to obtain the same or similar rights elsewhere. Even if we are granted patents in foreign countries, we cannot guarantee that we will be able to enforce our rights effectively.
We may become involved in lawsuits and administrative proceedings to protect, defend or enforce our patents that would be expensive and time-consuming.
In order to protect or enforce our patent rights, we may initiate patent litigation against third parties in the United States or in foreign countries. In addition, we may be subject to certain opposition proceedings conducted in patent and trademark offices challenging the validity of our patents and may become involved in future opposition proceedings challenging the patents of others. The defense of intellectual property rights, including patent rights, through lawsuits, interference or opposition proceedings, and other legal and administrative proceedings can be costly and can divert our technical and management personnel from their normal responsibilities. Such costs increase our operating losses and reduce our resources available for development activities. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. For example, during the course of this kind of litigation and despite protective orders entered by the court, confidential information may be inadvertently disclosed in the form of
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documents or testimony in connection with discovery requests, depositions or trial testimony. This disclosure could materially adversely affect our business and financial results.
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Claims by other parties that we infringe or have misappropriated their proprietary technology may result in liability for damages, royalties, or other payments, or stop our development and commercialization efforts.
Competitors and other third parties may initiate patent litigation against us in the United States or in foreign countries based on existing patents or patents that may be granted in the future. Many of our competitors may have obtained patents covering products and processes generally related to our products and processes, and they may assert these patents against us. Moreover, there can be no assurance that these competitors have not sought or will not seek additional patents that may cover aspects of our technology. As a result, there is a greater likelihood of a patent dispute than would be expected if our competitors were pursuing unrelated technologies.
While we conduct patent searches to determine whether the technologies used in our products infringe patents held by third parties, numerous patent applications are currently pending and may be filed in the future for technologies generally related to our technologies, including many patent applications that remain confidential after filing. Due to these factors and the inherent uncertainty in conducting patent searches, there can be no guarantee that we will not violate third-party patent rights that we have not yet identified.
There may be U.S. and foreign patents issued to third parties that relate to aspects of our product candidates. There may also be patent applications filed by these or other parties in the United States and various foreign jurisdictions that relate to some aspects of our product candidates, which, if issued, could subject us to infringement actions. The owners or licensees of these and other patents may file one or more infringement actions against us. In addition, a competitor may claim misappropriation of a trade secret by an employee hired from that competitor. Any such infringement or misappropriation action could cause us to incur substantial costs defending the lawsuit and could distract our management from our business, even if the allegations of infringement or misappropriation are unwarranted. A need to defend multiple actions or claims could have a disproportionately greater impact. In addition, either in response to or in anticipation of any such infringement or misappropriation claim, we may enter into commercial agreements with the owners or licensees of these rights. The terms of these commercial agreements may include substantial payments, including substantial royalty payments on revenues received by us in connection with the commercialization of our products.
Payments under such agreements could increase our operating losses and reduce our resources available for development activities. Furthermore, a party making this type of claim could secure a judgment that requires us to pay substantial damages, which would increase our operating losses and reduce our resources available for development activities. A judgment could also include an injunction or other court order that could prevent us from making, using, selling, offering for sale or importing our products or prevent our customers from using our products. If a court determined or if we independently concluded that any of our products or manufacturing processes violated third-party proprietary rights, our clinical trials could be delayed and there can be no assurance that we would be able to reengineer the product or processes to avoid those rights, or to obtain a license under those rights on commercially reasonable terms, if at all.
Risks Related to Regulatory Approval of Our Product Candidates
~~If we fail to submit our NDA for VIAject~~^® ~~as we intend, or if we are unable to obtain required regulatory approvals, we will not be able to commercialize VIAject~~^® ~~as planned, or at all, and our ability to generate revenue will be materially impaired.~~
     ~~We have invested a significant portion of our efforts and financial resources in the development of VIAject~~^®~~, and our ability to generate near-term revenue depends on VIAject’s~~^® ~~success. All of our product candidates, including VIAject~~^®, and the activities associated with their development and commercialization, including their testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. Failure to obtain regulatory approval for a product candidate will prevent us from commercializing the product candidate. Securing FDA approval requires the submission of an NDA containing extensive preclinical and clinical data and supporting information for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing FDA approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the FDA.
     ~~We have not yet submitted an NDA or received regulatory approval to market VIAject~~^® ~~or any of our other product candidates in the United States or any other jurisdiction. We intend to submit our NDA for VIAject~~^® ~~in December 2009. If we are delayed in filing our NDA, our ability to generate revenue from the commercialization of VIAject~~^® will be similarly delayed. Additionally, we cannot guarantee that the FDA will accept our NDA as filed, review our NDA in a timely fashion or approve our NDA. Many companies that have believed that their products performed satisfactorily in clinical trials have nonetheless failed to obtain FDA approval for their products. Upon the FDA’s review of our NDA, it may request that we conduct additional analyses of the data and, if it believes that the data are not satisfactory, could request additional information from us, including data that may necessitate additional clinical trials. While we announced positive results from our pivotal Phase 3 clinical trial of VIAject^®, data from patients with Type 1 diabetes in India were found to be anomalous when compared to data from the United States and Germany for the same trial. As a result, the FDA could conclude we did not establish non-inferiority of VIAject^® ~~when compared to Humulin~~^® R in terms of blood glucose control. Failure of the FDA to accept our NDA as filed, review our NDA in a timely fashion, or approve our NDA will materially impair our ability to generate product revenue and our business.
If the FDA does not believe that our product candidates satisfy the requirements for the Section 5~~05(b)~~505(b)(2) approval procedure, or if the requirements for our product candidates under Section 505(b)(2) are not as we expect, the approval pathway will take longer and cost more than anticipated and in either case may not be successful.
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We believe ~~that VIAject~~^®our ultra-rapid acting insulin formulations and ~~VIAtab™~~our liquid glucagon formulation for use as a rescue product qualify for approval under Section 505(b)(2) of the FFDCA. Because we are developing new formulations of previously approved chemical entities, such as insulin ~~this may enable us to avoid having~~and glucagon, our drug approval strategy is to submit ~~certain types of data and studies that are required in full NDAs and instead submit an NDA under~~ Section 505(b)(2). NDAs to the FDA. We plan to pursue similar routes for submitting applications for our product candidates in foreign jurisdictions if available. The FDA may not agree that our ~~products~~product candidates are approvable ~~under~~pursuant to Section 505(b)(2)~~. Insulin~~ NDAs. There is ~~a unique and complex drug that is associated with more intra-and inter-patient variability than many small molecule drugs. The availability of the~~no specific guidance
29

available for Section 505(b)(2) ~~pathway~~NDAs for insulin or glucagon. In addition, while there is ~~even more controversial than~~precedent for ~~small molecule drugs, and the FDA may~~a glucagon product being approved under a Section 505(b)(2) NDA, we are not ~~accept this pathway for our~~aware of any insulin product ~~candidates. The FDA~~that has ~~not published any guidance that specifically addresses an NDA for an insulin product candidate~~been approved under a Section 505(b)(2)~~. No other insulin product has yet been approved pursuant to an NDA under Section 505(b)(2).~~ NDA. If the FDA determines that ~~NDAs under~~ Section 505(b)(2) NDAs are not appropriate and that full NDAs are required for our product candidates, the time and financial resources required to obtain FDA approval for our product candidates could substantially and materially ~~increase. This would require us~~increase, and our product candidates might be less likely to ~~obtain substantially more funding than previously anticipated which could significantly dilute the ownership interests of our stockholders. Even with this investment, the prospect for FDA approval may~~ be ~~significantly lower.~~approved. If the FDA requires full NDAs for our product candidates, or requires more extensive testing and development for some other reason, our ability to compete with alternative products that arrive on the market more quickly than our product candidates would be adversely impacted.
Notwithstanding the approval of many products by the FDA ~~under~~pursuant to Section 505(b)(2), over the last few years certain ~~brand-name~~ pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged in court, the FDA may be required to change its interpretation of Section 505(b)(2) which could delay or even prevent the FDA from approving any ~~NDA under~~ Section 505(b)(2) NDA that we submit. The pharmaceutical industry is highly competitive, and it is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product. ~~However,~~Moreover, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition.
     ~~Moreover, even~~Even if ~~VIAject~~^® ~~and VIAtab™ are~~one of our product candidates is approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses for which the product may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product.
Any product for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products, when and if any of them are approved.
Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and ~~comparable~~other state and federal regulatory authorities. These requirements include, in the case of FDA, submissions of safety and other post-marketing information and reports, registration requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. In addition, if any of our product candidates are approved, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription drug products. In particular, a drug may not be promoted in a misleading manner or for uses that are not approved by the FDA as reflected in the product’s approved labeling. The FDA and other ~~agencies~~state and federal entities actively enforce the laws and regulations prohibiting misleading promotion and the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.
Discovery after approval of previously unknown problems with our products, manufacturers or manufacturing processes, or failure to comply with state or federal regulatory requirements, may result in actions such as:
• restrictions on such products’ manufacturers or manufacturing processes;

• restrictions on the marketing or distribution of a product;

•
requirements that we conduct new studies, make labeling changes, and implement Risk Evaluation and Mitigation Strategies;

• warning letters;

30

• withdrawal of the products from the market;

• refusal to approve pending applications or supplements to approved applications that we submit;

• recall of products;

• fines, restitution or disgorgement of profits or revenue;

• suspension or withdrawal of regulatory approvals;

• refusal to permit the import or export of our products;

• product embargo and/or seizure;
25

• injunctions; or

• imposition of civil or criminal penalties.

~~Legislation~~Changes in law, regulations, and policies may preclude approval of our product under a 505(b)(2) or make it more difficult and costly for us to obtain regulatory approval of our product candidates and to produce, market and distribute our existing products.
     ~~On September 27, 2007,~~In March 2010, the President ~~Bush~~ signed into law legislation creating an abbreviated pathway for approval under the ~~Food and Drug Administration Amendments~~Public Health Service, or PHS Act, of ~~2007, or~~biological products that are similar to other biological products that are approved under the ~~FDAAA.~~PHS Act. This ~~new~~ legislation ~~grants significant new powers~~also expanded the definition of biological product to ~~the FDA, many of which are aimed at improving drug safety and assuring the safety of drug products after approval. Under the FDAAA, companies that violate the~~include proteins such as insulin. The new law ~~are subject~~contains transitional provisions governing protein products such as insulin that, under certain circumstances, might permit companies to ~~substantial civil monetary penalties. While we expect~~seek approval for their insulin products as biologics under the ~~FDAAA~~PHS Act and might require that Biodel’s product be approved under the PHS Act rather than in a 505(b)(2) NDA. We would be unlikely to have a significant impact on the pharmaceutical industry, the extent of the impact is not yet known. The new requirements and changes imposed by the FDAAA may make it more difficult, and more costly, to obtain and maintainpursue approval of ~~new pharmaceutical products and~~our RHI- or insulin analog-based product candidates if we were required to ~~produce, market and distribute existing products.~~seek approval under the PHS Act rather than in a 505(b)(2) NDA.
In addition, the ~~FDA’s~~federal and state laws, regulations, policies or guidance may change ~~and new or additional statutes or government regulations may be enacted~~in a manner that could prevent or delay regulatory approval of our product candidates or further restrict or regulate post-approval activities. It is impossible to predict whether additional legislative changes will be enacted, or FDA regulations, guidance or interpretations implemented or modified, or what the impact of such changes, if any, may be.
Failure to obtain regulatory approval in international jurisdictions would prevent us from marketing our products abroad.
We intend to have our products marketed outside the United States. In order to market our products in the European Union and many other jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy and governing, among other things, clinical trials and commercial sales and distribution of our products. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA approval. The regulatory approval ~~process~~processes outside the United States may include all of the risks associated with obtaining FDA approval, as well as additional risks. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market.
Reports of side effects or safety concerns in related technology fields or in other companies’ clinical trials could delay or prevent us from obtaining regulatory approval or negatively impact public perception of our product candidates.
At present, there are a number of clinical trials being conducted by us and by other pharmaceutical companies involving insulin or insulin delivery systems. The major safety concern with patients taking insulin is the occurrence of hypoglycemic events. If we discover that our product is associated with a significantly
31

increased frequency of hypoglycemic or other adverse events, or if other pharmaceutical companies announce that they observed frequent or significant adverse events in their trials involving insulin or insulin delivery systems, we could encounter delays in the commencement or completion of our clinical trials or difficulties in obtaining the approval of our product candidates. In addition, the public perception of our products might be adversely affected, which could harm our business and results of operations, even if the concern relates to another company’s product.
Risks Related to Employee Matters and Managing Growth
Our future success depends on our ability to retain our chief executive officer and other key executives and to attract, retain and motivate qualified personnel.
We are highly dependent on ~~Dr. Solomon S. Steiner,~~Errol De Souza, our ~~Chairman,~~ President and Chief Executive Officer, Gerard Michel, our Chief Financial Officer and Dr. Alan Krasner, our Chief Medical Officer. ~~Dr. Steiner is an inventor of our VIAdel™ technology.~~ The loss of the services of any of these persons might impede the achievement of our research, development and commercialization objectives. ~~With the exception of Dr. Steiner, we currently do not have employment agreements with any other executive officers.~~ Replacing key employees may be difficult and time-consuming because of the limited number of individuals in our industry with the skills and experiences required to develop, gain regulatory approval of and commercialize our product candidates successfully. ~~Other than a $1 million key person insurance policy on Dr. Steiner, we~~We generally do not ~~have~~maintain key person life insurance to cover the loss of any of our ~~other~~ employees.
Recruiting and retaining qualified scientific personnel, clinical personnel and sales and marketing personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms, if at all, given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from other companies, universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.
We may expand our development, regulatory and sales and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
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If our development and commercialization plans for ~~VIAject~~^®any of our product candidates are successful, we may experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of manufacturing, clinical trials management, and regulatory affairs. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems and continue to recruit and train additional qualified personnel. Due to our limited financial resources we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
Risks Related to Our Common Stock
~~Our executive officers, directors and principal stockholders have significant ability to control all matters submitted to stockholders for approval.~~
     Our executive officers, directors and principal stockholders, in the aggregate, beneficially own shares representing approximately 39% of our outstanding capital stock. As a result, these stockholders, if they act together, will be able to exercise a significant controlling influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations and sales of all or substantially all of our assets, and will have significant control over our management and policies. The interests of this group of stockholders may not always coincide with our corporate interests or the interests of other stockholders. This significant concentration of stock ownership could also result in the entrenchment of our management and adversely affect the price of our common stock.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our corporate charter and bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.
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Among others, these provisions:
• establish a classified board of directors such that not all members of the board are elected at one time;

• allow the authorized number of our directors to be changed only by resolution of our board of directors;

• limit the manner in which stockholders can remove directors from the board;

• establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors;

• require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;

• limit who may call stockholder meetings;

• authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a stockholder rights plan or “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and

• require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of our charter or bylaws.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
If our stock price is volatile, purchasers of our common stock could incur substantial losses.
Our stock price has been and may continue to be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price for our common stock may be influenced by many factors, including:
• results of clinical trials of our product candidates or those of our competitors;

• regulatory or legal developments in the United States and other countries;

• variations in our financial results or those of companies that are perceived to be similar to us;
27

• developments or disputes concerning patents or other proprietary rights;

• the recruitment or departure of key personnel;

• changes in the structure of healthcare payment systems;

• market conditions in the pharmaceutical and biotechnology sectors and issuance of new or changed securities analysts’ reports or recommendations;

• general economic, industry and market conditions; and

• the other factors described in this “Risk Factors” section.

Our outstanding warrants may be exercised, and our outstanding shares of preferred stock may be converted, in the future, which would increase the number of shares in the public market and result in dilution to our stockholders.
As a result of our May 2011 registered direct offering and June 2012 private placement, we have outstanding warrants to purchase 2,256,929 shares of our common stock at $9.92 per share and 2,749,469 shares of our common stock at $2.66 per share. The $9.92 per share warrants expire in May 2016 and the $2.66 per share warrants expire in June 2017. We also have outstanding shares of Series A convertible preferred stock that are convertible into 453,486 shares of common stock and shares of Series B preferred
33

stock that are convertible into 3,605,607 shares of common stock. The exercise of these warrants for, or the conversion of shares of Series A preferred stock or Series B preferred stock into, shares of common stock would be substantially dilutive to the outstanding shares of common stock. Any dilution or potential dilution may cause our stockholders to sell their shares, which would contribute to a downward movement in the stock price of our common stock.
We have never paid any cash dividends on our capital stock and we do not anticipate paying any cash dividends in the foreseeable future.
We have paid no cash dividends on our capital stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, we do not expect to pay any cash dividends in the foreseeable future, and payment of cash dividends, if any, will depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends. Capital appreciation, if any, of our common stock will be investors’ sole source of gain for the foreseeable future.
A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.
     Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of November 30, 2009, we had approximately 24 million shares of common stock outstanding. Of these, approximately 9 million shares are able to be sold in accordance with the SEC’s Rule 144 and the remainder are generally freely tradable without restriction under securities laws.
We incur substantial costs as a result of operating as a public company, and our management is required to devote substantial time to comply with public company regulations.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 as well as other federal and state laws. These requirements may place a strain on our people, systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting, significant resources and management oversight will be required. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Risks Related to our June 2012 Private Placement
The number of shares of our common stock outstanding has increased substantially as a result of our June 2012 private placement, and some of the purchasers in the private placement beneficially own significant blocks of our common stock; the securities that we issued in the private placement will be generally available for resale in the public market upon registration under the Securities Act of 1933, as amended, or the Securities Act.
In June 2012, we completed our 2012 private placement of an aggregate of 4,250,020 shares of our common stock, 3,605,607 shares of our Series B preferred stock and warrants to purchase an aggregate of 2,749,469 shares of our common stock. The issuance of these shares and warrants resulted in substantial dilution to stockholders who held our common stock prior to the 2012 private placement. Some of the purchasers in the private placement will have significant influence over the outcome of any stockholder vote, including the election of directors and the approval of mergers or other business combination transactions.
Pursuant to the securities purchase agreement that we entered into with the purchasers in the 2012 private placement, we filed with the Securities and Exchange, or the SEC, a registration statement to register the resale of the shares of common stock and Series B preferred stock issued and sold in the private placement, the shares of common stock issuable upon conversion of the Series B preferred stock issued and sold in the private placement, and the shares of common stock issuable upon exercise of the warrants issued and sold in the private placement. Upon the effectiveness of the registration statement, these securities became generally available for resale in the public market. The market price of our common stock could fall as a result of an increase in the number of shares available for sale in the public market.
If we do not maintain effectiveness of the registration statement, we will be required to pay certain liquidated damages, which could be material in amount.
Pursuant to the terms of the securities purchase agreement that we entered into with the purchasers in the 2012 private placement, we have agreed to pay liquidated damages to such purchasers if the registration
34

statement we filed with the SEC, which was declared effective on August 13, 2012, is suspended or ceases to remain continuously effective as to all the securities for which it is required to be effective. We refer to such an event as a registration default. Subject to the specified exceptions, for each 30-day period or portion thereof during which a registration default remains uncured, we are obligated to pay liquidated damages to each purchaser in cash in an amount equal to 1% of the aggregate purchase price paid by each such purchaser in the private placement, up to a maximum of 8% of such aggregate purchase price. These amounts could be material, and any liquidated damages we are required to pay could have a material adverse effect on our financial condition.
ITEM 1B.UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.PROPERTIES
We lease approximately 29,300 square feet of office space and laboratory facilities in Danbury, ~~Connecticut from Mulvaney Properties LLC.~~Connecticut. Our corporate headquarters are located at 100 Saw Mill Road, Danbury, Connecticut, in approximately 19,500 square feet of rentable office space. The lease for this office space expires July 31, 2014, subject to our right to renew the lease under the same terms and conditions for an additional seven year term. Our laboratory ~~facility is~~facilities are located at 6 and 8 Christopher Columbus Avenue, Danbury, Connecticut, in approximately 7,200 and 2,600 square feet of rentable laboratory and office ~~space.~~space, respectively. The leases for our facilities at 6 and 8 Christopher Columbus expire in January ~~2010.~~2013. We expect to renew these leases before they expire. Our laboratory ~~facility is~~facilities are fully equipped to perform our current drug delivery and related research and development ~~activities, as well as to manufacture on a limited basis our own product line in accordance with cGMP.~~activities.
     ~~Mulvaney Properties LLC is controlled by a non-affiliated stockholder of ours.~~
ITEM 3.LEGAL PROCEEDINGS
We currently are not involved in any material legal proceedings. However, from time to time, we may have certain contingent liabilities that arise in the ordinary course of our business activities. Our management believes that the resolution of such matters will not have a material adverse effect on our financial position, results of operations or cash flows.
In February 2012, we brought action against one of our vendors, before the American Arbitration Association in New York relating to disputed fees charged to us for inventory storage. As part of an arbitration stipulation, we established a $1.5 million escrow account and recorded an accrual of $0.7 million towards this claim. During the quarter ended June 30, 2012, we paid $0.5 million from the escrow account to the vendor. On July 30, 2012, we received a judgment from the arbitrator stating that we were required to only pay the vendor a balance of $55 thousand, after deducting legal fees. During the quarter ended September 30, 2012, the remaining escrow balance of $1.0 million was transferred to cash and the remaining accrual of $0.2 million was reversed and recorded in research and development expense.
ITEM 4.~~SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS~~MINE SAFETY DISCLOSURES
     ~~None.~~
28
Not applicable.
35

PART IIII-OTHER INFORMATION
ITEM 5.5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information
     ~~Since~~From May 2007 through May 10, 2012, our common stock traded on the NASDAQ Global Market, and, since May 11, ~~2007,~~2012, our common stock has traded on the NASDAQ ~~Global~~Capital Market, in each case under the symbol “BIOD.”
The following table sets forth the high and low sale prices per share for our common stock ~~for~~on the applicable exchange in each of the quarters within our two most recent fiscal years. All prices shown in the ~~period beginning October 1, 2008 through September 30, 2009, as reported~~table reflect the one-for-four reverse split of our outstanding common stock that we effected on ~~the NASDAQ Global Market:~~June 11, 2012.
Fiscal Quarter Ended
    High
    Low
December 31, 2010
              $ 21.28          $ 6.00
March 31, 2011
              $ 11.88          $ 7.28
June 30, 2011
              $ 10.36          $ 5.96
September 30, 2011
              $ 8.52          $ 2.04
December 31, 2011
              $ 3.48          $ 2.04
March 31, 2012
              $ 2.96          $ 2.24
June 30, 2012
              $ 4.00          $ 2.00
September 30, 2012
              $ 3.82          $ 2.41

Quarter Ended High Low
December 31, 2008 $ 4.99 $ 1.62
March 31, 2009 $ 6.00 $ 3.29
June 30, 2009 $ 6.02 $ 3.64
September 30, 2009 $ 5.48 $ 4.46
The closing price of our common stock, as reported byon the NASDAQ ~~Global~~Capital Market, was ~~$3.99~~$2.58 on December ~~8, 2009.~~14, 2012.
Holders
As of November 30, ~~2009,~~2012, the number of holders of record of our common stock was ~~49.~~51.
Dividends
We have never paid or declared any cash dividends on our common stock. We currently intend to retain earnings, if any, to finance the growth and development of our business. Payment of future dividends, if any, will be at the discretion of our board of directors.
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Equity Compensation Plan Information
Information relating to compensation plans under which our equity securities are authorized for issuance iswill be set forth under “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in our definitive proxy statement for our ~~2010~~2013 Annual Meeting of Stockholders.
Issuer Purchases of Equity Securities
     ~~We did not make any purchases~~The following table sets forth the information relating to repurchases of our ~~shares of common stock in~~equity securities during the ~~fourth quarter of fiscal 2009, nor did any affiliated purchaser or anyone acting on behalf of us or an affiliated purchaser.~~
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three months ended September 30, 2012:
Period
    (a)
Total number of
shares (or units)
purchased
    (b)
Average price paid
per share (or unit)
    (c)
Total number of
shares (or units)
purchased as part of
publicly announced
plans or programs
    (d)
Maximum number
(or approximate
dollar value) of
shares (or units) that
may yet be purchased
under the plans or
programs
July 1, 2012 to July 31, 2012
                 —           $ —              —           $ —
August 1, 2012 to August 31, 2012
                 —              —              —              —
September 1, 2012 to September 30, 2012
                 82,470             2.87             —              —
Total
                 82,470          $ 2.87             —           $ —

(a)     These shares were not purchased as part of publicly announced plans or programs. They represent the surrender of shares to us to satisfy employee withholding tax obligations related to the vesting of stock-based compensation awards.

37

ITEM 6.SELECTED FINANCIAL DATA
You should read the following selected financial data together with our financial statements and the related notes which are included elsewhere in this Annual Report and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Annual Report. We have derived the statement of operations data set forth below for the three-year period ended September 30, ~~2009~~2012 and the balance sheet data as of September 30, ~~2008~~2011 and ~~2009~~2012 set forth below from our audited financial statements which are included in this Annual Report. We have derived the statement of operations data set forth below for the years ended September 30, ~~2005, 2006~~2008 and ~~2007~~2009 and the balance sheet data as of September 30, ~~2005, 2006~~2008, 2009 and ~~2007~~2010 set forth below from our audited financial statements, which are not included in this Annual Report. ~~Our audited financial statements include, in the opinion of our management, all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of those statements.~~ Historical results for any prior ~~or interim~~ period are not necessarily indicative of results to be expected in any future ~~period or for a full fiscal year.~~

Year Ended September 30,
2005 2006 2007 2008 2009
(In thousands, except share and per share amounts)
Statement of operations data:

Revenue $ — $ — $ — $ — $ —

Operating expenses:
Research and development 2,666 5,987 15,939 32,554 32,325
General and administrative 724 1,548 8,386 14,800 10,994

Total operating expenses �� 3,390 7,535 24,325 47,354 43,319
Other (income) and expense:
Interest and other income (9 ) (182 ) (1,902 ) (3,010 ) (386 )
Interest expense — 78 — — —
Loss on settlement of debt — 627 — — —

Operating loss before tax provision (benefit) (3,381 ) (8,058 ) (22,423 ) (44,344 ) (42,933 )
Tax provision (benefit) 2 10 125 (983 ) 337

Net loss (3,383 ) (8,068 ) (22,548 ) (43,361 ) (43,270 )
Charge for accretion of beneficial conversion rights — (603 ) — — —
Deemed dividend — warrants — — (4,457 ) — —

Net loss applicable to common stockholders $ (3,383 ) $ (8,671 ) $ (27,005 ) $ (43,361 ) $ (43,270 )

Net loss per share — basic and diluted $ (0.56 ) $ (1.05 ) $ (1.76 ) $ (1.94 ) $ (1.82 )

Weighted average shares outstanding — basic and diluted 6,080,746 8,252,113 15,354,898 22,390,434 23,746,598

As of September 30,
2005 2006 2007 2008 2009
(In thousands)
Balance sheet data:

Cash, cash equivalents and marketable investment securities $ 368 $ 17,539 $ 80,022 $ 90,283 $ 54,640
Working capital (deficit) (98 ) 15,307 75,244 84,377 46,787
Total assets 1,195 18,659 82,506 97,511 59,625
Deficit accumulated during the development stage (4,157 ) (12,828 ) (39,833 ) (83,194 ) (126,464 )
Total stockholders’ equity 654 16,348 77,223 88,487 50,538
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period. All share and per share amounts set forth below reflect the one-for-four reverse split of our outstanding common stock that we effected on June 11, 2012.
    Year Ended September 30,

    2008
    2009
    2010
    2011
    2012
    (In thousands, except share and per share amounts)
Statement of operations data:

Revenue
              $ —           $ —           $ —           $ —           $ —
Operating expenses:

Research and development
                 32,554             32,325             26,177             13,901             12,571
Government grants
                 —              —              —              —              (88 )
General and administrative
                 14,800             10,994             10,980             9,321             6,816
Total operating expenses
                 47,354             43,319             37,157             23,222             19,299
Other (income) and expense:

Interest and other income
                 (3,010 )            (386 )            (17 )            (60 )            (80 )
Adjustment to fair value of common stock warrant liability
                 —              —              1,254             (12,611 )            1,510
Loss before tax provision (benefit)
                 (44,344 )            (42,933 )            (38,394 )            (10,551 )            (20,729 )
Tax provision (benefit)
                 (983 )            337              (104 )            41              18
Net loss
                 (43,361 )            (43,270 )            (38,290 )            (10,592 )            (20,747 )
Net loss applicable to common stockholders
              $ (43,361 )         $ (43,270 )         $ (38,290 )         $ (10,592 )         $ (20,747 )
Net loss per share — basic and diluted*
              $ (7.76 )         $ (7.28 )         $ (6.34 )         $ (1.36 )         $ (1.91 )
Weighted average shares outstanding — basic and diluted*
                 5,597,609             5,936,650             6,040,467             7,788,741             10,882,688

    As of September 30,

    2008
    2009
    2010
    2011
    2012
    (In thousands)
Balance sheet data:

Cash, cash equivalents, and marketable securities
              $ 90,283          $ 54,640          $ 28,923          $ 38,701          $ 39,050
Working capital
                 84,377             46,787             25,178             35,907             36,756
Total assets
                 97,511             59,625             32,616             41,505             41,134
Deficit accumulated during the development stage
                 (83,194 )            (126,464 )            (164,754 )            (175,346 )            (196,093 )
Total stockholders’ equity
                 88,487             50,538             24,060             37,078             31,016

~~ITEM 7.~~*   Restated for a one for four (1:4) reverse stock split effective on June 11, 2012.

38

ITEM 7.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes ~~and other financial information~~ included elsewhere in this Annual Report on Form ~~10-K~~.10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in thisForm 10-K,, including information with respect to our plans and ~~strategies~~strategy for our business and related financing, includes forward-looking statements ~~which~~that involve risks and uncertainties. ~~Please review the “Forward-Looking Statements” and~~You should read the “Risk Factors” ~~sections~~section of thisForm 10-K (see Part I-Item 1A above) for a discussion of important factors that could cause actual results to differ materially ~~differ~~ from ~~those anticipated~~the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a specialty biopharmaceutical company focused on the development and commercialization of innovative treatments for ~~endocrine disorders such as~~ diabetes ~~which~~that may be safer, more effective and more convenient for patients. We develop our product candidates by applying our proprietary formulation technologies to existing drugs in order to improve their therapeutic profiles. Our ~~initial development efforts are focused on peptide hormones. Our~~ most advanced ~~product candidate, VIAject~~^®~~, has been studied in two pivotal Phase 3 clinical trials for the treatment~~program involves developing proprietary formulations of ~~patients with Type 1 and Type 2 diabetes. Earlier stage product candidates include VIAtab™, a sublingual tablet formulation of insulin.~~
          ~~VIAject~~^® ~~is our proprietary~~ injectable ~~formulation of~~ recombinant human insulin, or RHI, designed to be ~~absorbed into the blood faster~~more rapid-acting than the “rapid-acting” mealtime insulin analogs currently ~~marketed rapid-acting insulin analogs. We have recently completed two pivotal Phase 3 clinical trials of VIAject~~^®~~, one in patients with Type 1 diabetes and the other in patients with Type 2 diabetes. In both clinical trials we compared VIAject~~^®used to ~~Humulin~~^® ~~R, a form of recombinant human insulin. We believe VIAject~~^® can improve the management of blood glucose levels in patients with diabetes by more closely mimicking the natural first-phase insulin release that healthy individuals experience at mealtime. Patients in both clinical trials were treated for a period of six months.
          ~~In March 2009, we announced our plan to submit an NDA to the FDA by the end of 2009 to market VIAject~~^® for the treatment of diabetes. We expect that the NDA will be submitted under section 505(b)(2) of the FFDCA and be based upon results from multiple pharmacokinetic and pharmacodynamic studies as well as our two completed Phase 3 studies of VIAject^® intreat patients with Type 1 and Type 2 diabetes. We, ~~intend~~therefore, refer to ~~seek approval~~these formulations as our “ultra-rapid-acting” insulin formulations. In addition to our RHI-based formulations, we are using our formulation technologies to develop new ultra-rapid-acting formulations of insulin analogs. These insulin analog-based formulations generally use the same or similar excipients as our RHI-based formulations and are designed to be more rapid-acting than the “rapid-acting” mealtime insulin analogs, but they may present characteristics that are different from those offered by our RHI-based formulations. We are also developing liquid glucagon formulations for use as a ~~100 IU/cc liquid~~rescue treatment for diabetes patients experiencing severe hypoglycemia.
An earlier RHI-based formulation known as Linjeta^TM (and previously referred to as VIAject®) was the subject of ~~VIAject~~^®a New Drug Application, or NDA, that ~~is bioequivalent~~we submitted to the ~~two-part 25 IU/cc lyophilized powder formulation of VIAject~~FDA in December 2009. In October 2010, the FDA issued a complete response letter stating that the NDA for Linjeta^®TM could not be approved in its submitted form and that ~~was used in our pivotal~~we should conduct two new Phase 3 clinical ~~trials.~~
          ~~In October 2009~~trials using our preferred commercial formulation of Linjeta^TM prior to re-submitting the NDA. Based upon the complete response letter and subsequent feedback that the FDA provided to us at a meeting in January 2011, we ~~executed a letter~~decided to study newer RHI-based formulations in earlier stage clinical trials. The objective of ~~intent~~these clinical trials was to ~~purchase a disposable insulin pen designed by Wockhardt Ltd. for use~~identify an RHI-based formulation with ~~VIAject~~^®~~. We intend to submit this pen~~pharmacokinetic and pharmacodynamic profiles similar to the ~~FDA for review at a later date after completing certain modifications that we believe will improve its commercial performance.~~
          ~~In 2010 we plan to conduct additional~~Linjeta^TM formulation, but with improved injection site toleration characteristics. These earlier stage clinical trials ~~designed to generate additional data to enhance VIAject’s potential commercial success.~~
          ~~We have developed all~~evaluated the pharmacokinetic, pharmacodynamic and injection site toleration profiles of our product candidates ~~utilizing~~relative to Humalog®, a rapid-acting insulin analog.
In September 2011, we announced that two newer formulations, BIOD-105 and BIOD-107, did not demonstrate our ~~proprietary VIAdel™ technology,~~target profile in Phase 1 clinical trials. We subsequently conducted a Phase 1 clinical trial of two additional formulations, BIOD-123 and BIOD-125, and announced top line results from that trial in April 2012. Both BIOD-123 and BIOD-125 achieved our target pharmacokinetic, pharmacodynamic and toleration profiles. Based on our assessment of these two formulations, we selected BIOD-123 as our lead RHI-based product candidate, and in the third calendar quarter of 2012, we began enrolling patients in a Phase 2 clinical trial of BIOD-123. This Phase 2 clinical trial is designed to assess the clinical impact of BIOD-123 relative to Humalog®. The trial is being conducted at investigative centers in the United States and is expected to enroll approximately 130 randomized patients with Type 1 diabetes. We expect to announce top-line results from this Phase 2 clinical trial in the third calendar quarter of 2013.
In May 2012, we selected two insulin analog-based formulations, BIOD-238 and BIOD-250, to evaluate in a Phase 1 clinical trial. BIOD-238 and BIOD-250 generally use the same or similar excipients as BIOD-123 and are intended to be optimized for rapid absorption and injection site toleration. We began enrolling patients in the Phase 1 clinical trial in the third calendar quarter of 2012. This trial, which ~~allows us~~is being conducted in Australia, is designed to ~~study~~compare the ~~interaction between peptide hormones~~pharmacokinetic and ~~small molecules.~~injection site toleration profiles of these formulations relative to a rapid-acting mealtime insulin analog. We ~~use~~expect to announce top-line results from
39

this clinical trial in the first calendar quarter of 2013. In parallel with the Phase 1 clinical trial of BIOD-238 and BIOD-250, we are continuing our ~~technology to reformulate existing peptide drugs with small molecule ingredients that are generally regarded as safe by the FDA~~formulation development work to improve ~~their therapeutic profiles.~~the stability characteristics of our ultra-rapid-acting insulin analog-based formulations.
In addition to our ultra-rapid-acting insulin formulation program, we are developing a liquid glucagon formulation for use as a rescue treatment for diabetes patients experiencing severe hypoglycemia, or very low concentrations of blood glucose. To date, we have not selected a lead formulation to advance into clinical trials. We are continuing to conduct preclinical testing to develop formulations that achieve a combination of pharmacokinetic, pharmacodynamic and stability characteristics that we believe would be required for a glucagon rescue treatment product to be commercially successful.
We are a development stage company. We were incorporated in December 2003 and commenced active operations in January 2004. To date, we have generated no revenues and have incurred significant losses. We expect to continue to incur operating losses as we continue our efforts to develop and commercialize our product candidates. We have financed our operations and internal growth through various financing transactions, including our initial public offering in May 2007 and ~~follow-on offering in February 2008 and prior to that,~~several subsequent transactions, including, most recently, our June 2012 private ~~placements of convertible preferred stock and other securities.~~placement. We have devoted substantially all of our efforts to research and development activities, including clinical trials. Our net loss was ~~$43.3~~$20.7 million for the year ended September 30, ~~2009.~~2012. As of September 30, ~~2009,~~2012, we had a deficit accumulated during the development stage of ~~$126.5~~$196.1 million. The deficit accumulated during the development stage is attributable primarily to our research and development activities and non-cash charges for (1) accretion of beneficial conversion rights and (2) deemed dividend-warrants and stock-based compensation. Research and development and general and administrative expenses, as a percentage of net loss applicable to common stockholders, represent approximately ~~75%~~73% and ~~25%~~33%, respectively, of the expenses that we have incurred since our inception.
As of September 30, 2012, we had approximately $39.1 million in cash and cash equivalents compared to $38.7 million in cash and cash equivalents as of September 30, 2011. We believe that our existing cash, cash equivalents and restricted cash will be sufficient to fund our anticipated operating expenses and capital expenditures at least until the second calendar quarter of 2014. We believe that future cash expenditures will be partially offset by raising additional capital from research grants, capital markets, proceeds derived from collaborations, including, but not limited to, upfront fees, research and development funding, milestone payments and royalties. We can give no assurances that such funding will, in fact, be realized in the time frames we expect, or at all. We may be required to ~~continue to generate significant losses as we continue to develop~~secure alternative financing arrangements or defer or limit some or all of our ~~product candidates.~~research, development or clinical projects.
Financial Operations Overview
Revenues
To date, we have generated no revenues. We do not expect to begin generating any revenues unless any of our product candidates receive marketing approval, or if we receive payments in connection with strategic collaborations that we may enter into for the commercialization of our product candidates.
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Research and Development Expenses
Research and development expenses consist of the ~~cost~~costs associated with our basic research activities, as well as the costs associated with our drug development efforts, conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings. Our research and development expenses consist of:
• external research and development expenses incurred under agreements with third-party contract research organizations and investigative sites, third-party manufacturing organizations and consultants;

• employee-related expenses, which include salaries and benefits for the personnel involved in our preclinical and clinical drug development and manufacturing activities; and

• facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment and laboratory and other supplies.

          ~~While we have suspended significant expenditures~~We intend to focus our research and development efforts on conducting preclinical studies and Phase 1 and Phase 2 clinical trials to determine our ~~earlier stage product candidates~~preferred development, clinical and ~~any enlargement of~~regulatory program for our ~~laboratory facilities pending further~~
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ultra-rapid-acting insulin formulations and our liquid glucagon formulations. We anticipate that our research and development ~~of our regulatory plans for VIAject~~^®~~, we expect to continue to incur significant operating losses~~expenses for the ~~next several years~~fiscal year ending September 30, 2013 will increase as ~~we:~~compared to the fiscal year ended September 30, 2012, as we continue to:
• ~~continue~~study BIOD-123 in a Phase 2 clinical trial;

•   study our ultra-rapid-acting insulin analog-based formulations in early stage clinical ~~trial extension program~~trials and conduct additional formulation development work to improve the stability, pharmacokinetic, and pharmacodynamic properties of our ultra-rapid-acting insulin analog-based formulations; and

•   conduct the development work necessary to select a lead formulation for ~~the pivotal Phase 3~~our liquid glucagon rescue product candidate and commence clinical trials of ~~VIAject~~^®~~, which is designed to run through February 2010;~~that formulation.

Over the longer term, we anticipate that these expenses will increase further as we:
• conduct ~~additional~~later stage clinical trials of ~~VIAject~~^® ~~to support~~ our ~~commercialization efforts~~ultra-rapid-acting insulin formulations and ~~potentially,~~a liquid glucagon formulation, including one or more pivotal clinical trials required for FDA ~~approval;~~approval of NDAs for these product candidates; and

• purchase ~~recombinant human insulin~~active pharmaceutical ingredients and other materials to ~~build commercial supply inventory for VIAject~~^®.support our research and development activities.

          ~~If we obtain regulatory approval for VIAject~~^®~~, research and development expenses may increase significantly as we prepare for the commercial launch of VIAject~~^® ~~and reinvigorate development work on our early stage product candidates.~~
We have used our employee and infrastructure resources across multiple research projects ~~including~~and our drug development ~~programs.~~programs for our ultra-rapid-acting insulin formulations, including BIOD-123, BIOD-238 and BIOD-250, and our liquid glucagon formulations. To date, we have not tracked expenses related to our product development activities on a ~~program-by-program~~project or program basis. Accordingly, we cannot reasonably estimate the amount of research and development expenses that we incurred with respect to each of our clinical and preclinical product candidates. However, substantially all of our research and development expenses incurred to date are attributable to our ~~VIAject~~^®ultra-rapid-acting insulin program.
In July and September 2012, we received two National Institutes of Health (NIH) awards for the development of concentrated ultra-rapid-acting insulin formulation and glucagon formulation for use in an artificial pancreas. The July 2012 award is intended to fund research to develop a proprietary ultra-rapid-insulin product candidate at high concentrations suited to provide sufficient quantities of insulin in an external artificial pancreas pump device that has limited volume capacity. The July award is for two years and totals $582 thousand. The September 2012 award is intended to fund research to develop a proprietary glucagon product candidate optimized to algorithmically deliver glucagon as part of a bihormonal closed loop system to mitigate hypoglycemic events. The September 2012 award is for two years and totals $583 thousand.
The following table illustrates, for each period presented, our research and development costs by nature of the cost.
    Year Ended September 30,

    2010
    2011
    2012
    December 3,
2003
(Inception) to
September 30,
2012
    (In thousands)
Research and development expenses:

Preclinical expenses
              $ 2,746          $ 3,665          $ 3,974          $ 22,639
Manufacturing expenses
                 8,894             5,332             2,644             38,931
Clinical/regulatory expenses
                 14,537             4,904             5,953             81,130
Total
              $ 26,177          $ 13,901          $ 12,571          $ 142,700

December 3,
2003
(Inception) to
Year Ended September 30, September 30,
2007 2008 2009 2009
(In thousands)
Research and development expenses:
Pre-clinical expenses $ 1,983 $ 4,230 $ 2,709 $ 12,253
Manufacturing expenses 2,141 6,728 11,674 22,061
Clinical/regulatory expenses 11,815 21,596 17,942 55,737

Total $ 15,939 $ 32,554 $ 32,325 $ 90,051

The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, specific timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of, or the period, if any, in which material net cash inflows may commence from our product candidates. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:
•   our ability to complete our Phase 2 clinical trial of BIOD-123 in a timely manner and the outcome of that trial;

41

• the success of our formulation development work to improve the stability, pharmacokinetic and pharmacodynamic characteristics of our ultra-rapid-acting insulin analog-based formulations;

•   our ability to conduct the development work necessary to select a lead formulation for our liquid glucagon product candidate for the rescue treatment of severe hypoglycemia and commence clinical trials of that formulation;

•   the results of our real-time stability programs for our insulin and glucagon product candidates, including the reproducibility of earlier, smaller scale, stability studies and our ability to accurately project real-time stability on the basis of accelerated testing;

•   our ability to accurately anticipate technical challenges that we may face in the development of a glucagon rescue product candidate;

•   our ability to secure approval by the FDA for our product candidates under Section 505(b)(2) of the ~~Federal Food, Drug and Cosmetic Act, or the~~ FFDCA;

• our ability to ~~file our NDA for VIAject~~^® ~~in December 2009 as planned~~conduct pivotal clinical trials and ~~once filed, the length of time that will elapse before our NDA is fully reviewed~~other tests or analyses required by the ~~FDA;~~FDA to secure approval to commercialize an ultra-rapid-acting insulin formulation or a liquid glucagon formulation;

• ~~the costs associated with preparing and submitting our MAA for VIAject~~^® ~~to the EMEA;~~
• our ability to ~~market, commercialize and achieve market acceptance~~enter into collaboration arrangements for the commercialization of our product candidates ~~particularly VIAject~~^®;and the success or failure of any such collaborations into which we enter, or our ability to commercialize our product candidates ourselves;

• our ability to enforce our patents for our product candidates and our ability to secure ~~approval by the FDA~~additional patents for ~~VIAject~~^® ~~without conducting additional pivotal clinical trials;~~our product candidates;
32

• ~~the FDA’s findings regarding data anomalies observed in India in our Phase 3 clinical trial of VIAject~~^® ~~for patients with Type 1 diabetes and the impact of those findings on the timing of a regulatory approval;~~
• ~~the size, endpoints and duration of additional clinical trials of VIAject~~^® ~~to support our commercialization efforts and, potentially, FDA approval;~~
• ~~the cost to fully develop the 100 IU/cc liquid formulation of VIAject~~^®;
• our ability to ~~establish that~~protect our intellectual property and operate our business without infringing upon the ~~100 IU/cc liquid formulation~~intellectual property rights of ~~VIAject~~^® ~~is well-tolerated in chronic use;~~others;

• the ~~cost to develop an insulin pen program for use with VIAject~~^®;
• ~~the costs~~degree of ~~pre-commercialization activities, including increased insulin purchases;~~
• ~~the costs associated with qualifying and obtaining regulatory approval of suppliers of insulin and manufacturers~~clinical utility of our product ~~candidates;~~candidates, particularly with regard to our ultra-rapid-acting insulin formulations, which have not yet been shown to be clinically superior to existing rapid-acting insulin analogs;

• ~~the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims;~~
• the emergence of competing technologies and products and other adverse market ~~developments;~~developments, such as advancements in glucagon stabilization technologies that could enable a room-temperature rescue product in a portable, easy to use presentation;

•   the ability of our major suppliers to produce our products in our final dosage form;

•   our commercialization, marketing and manufacturing capabilities and strategies; and

• our ability to ~~establish~~accurately estimate anticipated operating losses, future revenues, capital requirements and ~~maintain collaborations and the terms and success of the collaborations, including the timing and amount of payments that we might receive from potential strategic collaborators.~~our needs for additional financing.

A change in the outcome of any of these variables with respect to the development of ~~VIAject~~^®ultra-rapid-acting insulin formulations or our ~~other product candidates~~liquid glucagon formulation, could mean a significant change in the costs and timing associated with product development. ~~For example, if the FDA or other regulatory authority were to require us to conduct an additional pivotal Phase 3 clinical trial of VIAject~~^®~~, we could be required to expend significant additional financial resources and time on the completion of that clinical development program.~~
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related expenses for personnel, including stock-based compensation expenses, in our executive, legal, accounting, finance and information technology functions. Other general and administrative expenses include facility-related costs not otherwise allocated to research and development expense, travel expenses, costs associated with industry conventions and professional fees, such as legal and accounting fees and consulting costs.
We anticipate that our general and administrative expenses in the fiscal year ending September 30, 2013 will ~~not change significantly~~remain substantially the same as in the fiscal year ended September 30, 2012 as we continue to focus our ~~product development~~ efforts on ~~obtaining regulatory approval for VIAject~~^®.product formulation activities and earlier stage clinical trials. Over the longer term, however, these expenses could increase if we are successful in advancing our product candidates into later stage clinical trials, including Phase 3 pivotal trials.
42

Warrant Liability
In June 2012, we issued warrants to purchase 2,749,469 shares of our common stock at an exercise price of $2.66 per share in connection with our June 2012 private placement. These warrants will expire on June 26, 2017, five years from the original issuance date of June 27, 2012. In May 2011, we issued warrants to purchase 2,256,929 shares of our common stock at an exercise price of $9.92 per share in connection with our May 2011 registered direct offering. These warrants will expire on May 17, 2016, five years from the original issuance date of May 18, 2011. Under the terms of both the 2012 warrants and the 2011 warrants, if we enter into a merger or change of control transaction, the holders of the warrants will be entitled to receive consideration as if they had exercised the warrants immediately prior to such transaction, or they may require us to purchase the unexercised warrants at the Black-Scholes value (as defined in the applicable warrant) of the warrant on the date of such transaction. The holders have up to 30 days following any such transaction to exercise this right. As a result of this provision, we ~~approach~~recognize the ~~commercial launch~~2012 and 2011 warrants as liabilities at their fair value on each reporting date.
We use the Black-Scholes valuation model to estimate the fair value of ~~VIAject~~^®:
~~Marketable Securities~~
          ~~In accordance with Accounting Standard Codification (ASC) Topic 320, Investments~~the warrants. The Black-Scholes valuation model takes into account, as of the valuation date, factors including the current exercise price, the expected life of the warrant, the current price of the underlying stock and its expected volatility, expected dividends on the stock, and the risk-free interest rate for the term of the warrant. Using this model, we recorded an initial warrant liability of $4.8 million for the 2012 warrants and $9.4 million for the 2011 warrants, in ~~Debt~~each case as of the initial warrant issuance date. The significant assumptions for the model used for the 2012 warrants were remaining terms of the warrants, the common stock price of $2.97 per share, the warrant exercise price of $2.66 per share, a risk-free interest rate of 0.62% and ~~Equity Securities issued by~~an expected volatility rate of 98%. The significant assumptions for the ~~Financial Accounting Standard Board (“FASB”) in May 1993, our marketable securities~~model used for the 2011 warrants were ~~classified as available-for-sale. In accordance with that standard, these securities are reported~~remaining terms of the warrants, the common stock price of $2.97 per share, the warrant exercise price of $9.92 per share, a risk-free interest rate of 0.31% and an expected volatility rate of 82%. The liability for both the 2012 and 2011 warrants is revalued at ~~market value with unrealized gains~~each reporting period and losses shown as a component of accumulated other comprehensive income (loss). We regularly evaluate the performance of these investments individually for impairment, taking into consideration the investment, volatility and current returns. If a determination is made that a declinechanges in fair value ~~is other-than-temporary,~~are recognized currently in the ~~related securities are written down~~statements of operations under the caption “Adjustment to ~~their estimated~~ fair ~~value. As~~value of common stock warrant liability.”
In August 2010, we issued warrants to purchase 599,550 shares of our common stock in connection with our August 2010 registered direct offering. On December 1, 2011, the unexercised warrants to purchase 589,000 shares of common stock expired. We revalued the liability from September 30, ~~2008~~2011 through the date of expiration and ~~2009,~~there was no impact on the ~~Company had $25.6 million and $0 marketable security investments, respectively.~~
~~Pre-Launch Inventory~~
          ~~Inventory costs~~statement of operations. The common stock warrant liability associated with ~~products that have not yet received regulatory approval are capitalized if~~these warrants no longer exists.
In addition to the 2012 and 2011 warrants, as of June 30, 2012, we ~~believe there is probable future commercial use and future economic benefit. If the probability~~had outstanding warrants to purchase 10,415 shares of future commercial use and future economic benefit cannot be reasonably determined, then costs associated with pre-launch inventory that has not yet received regulatory approval are expensed as research and development expense during the period the costs are incurred. For the year ended September 30, 2009, the Company expensed $6.5 millionour common stock at an exercise price of costs associated with the purchase of recombinant human insulin, as research and development expense after it passed quality control inspection by the Company and transfer of title occurred. The Company plans on submitting the NDA for VIAject^®$5.64. These warrants expired unexercised in ~~December 2009. Until the Company can determine the probability of VIAject~~^® ~~receiving regulatory approval, costs associated with the purchase of recombinant human insulin will continue to be expensed as research and development.~~
~~Comprehensive Income (Loss)~~
          We classify our marketable securities as available for sale, in accordance with ASC Topic 220, Comprehensive Income, issued by the FASB in June 1997. Other Comprehensive Income include changes in equity for unrealized holding gains (losses) on marketable securities, which have arisen during the period. During the year ended September 30, 2009, marketable security investments were sold at a par value and the September 30, 2008 net unrealized loss of $62 was fully recaptured.
33
July 2012.
Interest Income
Interest income consists of interest earned on our cash and cash equivalents and marketable ~~securities, resulting primarily from the $125.6 million in net proceeds received from our initial public offering in May 2007 and follow-on offering in February 2008.~~securities. In November 2007, our board of directors approved investment policy guidelines, the primary objectives of which are the preservation of capital, the maintenance of liquidity and maintenance of appropriate fiduciary control — subject to our business objectives and tax situation.
          ~~Due to the uncertainty in the credit and financial markets, along with our intention to file~~ We have maintained an ~~NDA in December 2009 and secure FDA approval of VIAject~~^®~~, we have modified our~~ investment strategy ~~and~~of investing primarily ~~invested~~ in ~~certain marketable securities,~~a premier commercial money market account, which ~~consist~~consists primarily of ~~short-to-intermediate-term~~short-term debt securities issued by the U.S. government, Treasury securities and U.S. government agencies. The focus on preserving cash and investing in stable securities generated lower returns during the year ended September 30, 2009. During the period from before we file our NDA until the FDA finishes its review of our NDA, weWe intend to maintain this conservative strategy ~~until the credit and financial markets improve and become more stable.~~
~~Exercise of Warrants~~
          In March 2007, we offered the holders of warrants to purchase an aggregate of 149,125 shares of our Series B convertible preferred stock and an aggregate of 3,417,255 shares of our common stock with an exercise price of $5.56 per share the opportunity to exercise such warrants at an exercise price of $3.67, representing a 34% discount in the exercise price. Such holders exercised all of such warrants on a combination of cashless and cash exercise basis. We issued an aggregate of 2,636,907 shares of common stock and received aggregate cash proceeds of approximately $0.4 million in connection with such exercises.
          ~~As a result of the discounted exercise price, in the~~ fiscal ~~quarter ended March 31, 2007, we recorded a deemed dividend charge of approximately $4.5 million for the warrants that were so exercised.~~year 2013.
          ~~As of September 30, 2009, we had warrants outstanding to purchase an aggregate of 118,815 shares of our common stock with an exercise price of $1.41 per share.~~
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations ~~are~~is based on our audited financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various assumptions that we believe are reasonable under the circumstances, the results of
43

which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to our financial statements appearing at the end of this Annual Report on Form 10-K, we believe that the following accounting policies, which we have discussed with our audit committee, are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.
Preclinical Study and Clinical Trial Accruals
In preparing our financial statements, we must estimate accrued expenses pursuant to contracts with multiple research institutions, clinical research organizations and contract manufacturers that conduct and manage preclinical studies, clinical trials and manufacture product for these trials on our behalf. This process involves communicating with relevant personnel to identify services that have been performed on our behalf and estimating the level of services performed and the associated costs incurred for services when we have not yet been invoiced for or otherwise notified of the actual cost. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. The financial terms of these agreements vary and may result in uneven payment flows. To date, we have not adjusted our estimates at any balance sheet date in any material amount. Examples of preclinical study, clinical trial and manufacturing expenses include the following:
• fees paid to contract research organizations in connection with preclinical and toxicology studies and clinical trials;

• fees paid to investigative sites in connection with clinical trials;

• fees paid to contract manufacturers in connection with the production of clinical trial materials; and

• professional service fees.

34
Government Grants
Grants received are recognized as grant income when the grants become receivable, provided there is reasonable assurance that we will comply with the conditions attached to the grant and there is reasonable assurance the grant will be received. We request cash funding under approved grants as expenses are incurred (not in advance) and report these receipts on the statement of operations as a separate line item entitled “Government Grants.” The corresponding expenses are included in research and development expenses. In July and September 2012, we were awarded two National Institutes of Health grants for the development of concentrated ultra-rapid-acting insulin formulations and liquid glucagon formulations, respectively, for use in an artificial pancreas. Both awards are for two years and total approximately $580 thousand each. Work on the grant for the development of concentrated ultra-rapid-acting insulin formulation started in August 2012 and expenses incurred were $88 thousand during the twelve months ended September 30, 2012 and corresponding income and a receivable were recorded.
Share-Based Compensation
~~Stock-Based Compensation~~Stock Incentive Plan
In March 2010, our shareholders approved our 2010 Stock Incentive Plan, which we refer to as the 2010 Plan. Up to 1,350,000 shares of our common stock may be issued pursuant to awards granted under the 2010 Plan, plus 851,908 shares of common stock underlying already outstanding awards under our prior plans. In addition, on March 8, 2012, our stockholders approved an amendment to the 2010 Plan to increase the number of shares of common stock authorized for issuance under the plan solely for the purpose of allowing us to issue an aggregate of 274,192 RSUs to certain of our employees in place of discretionary cash bonuses in connection with the fiscal year ended September 30, 2011.
The contractual life of options granted under the 2010 Plan may not exceed seven years. The 2010 Plan uses a “fungible share” concept under which any awards that are not a full-value award will be counted against the share limit as one (1) share for each share of common stock and any award that is a full-value award will be counted against the share limit as 1.6 shares for each one share of common stock. We have not
44

made any new awards under any prior equity plans after March 2, 2010 — the effective date the 2010 Plan was approved by our stockholders. We will continue to use the Black-Scholes pricing model to assist in the calculation of fair value. The expected life for these grants was calculated in accordance with the simplified method described in the Securities and Exchange Commission Staff Accounting Bulletin (SAB) Topic 14.D.2 in accordance with SAB No. 110. The simplified method was chosen due to our limited history. Until we have adequate history, we will continue to utilize the simplified method.
We recognize compensation costs related to share-based transactions, including employee stock options, in the financial statements based on fair value. The fair value of the stock underlying the options is a significant factor in determining credits or charges to operations appropriate for the ~~stock-based~~share-based payments to both employees and non-employees.
We selected the Black-Scholes valuation model as the most appropriate valuation method for stock option grants to employees, members of our board of directors and non-employees. The fair value of these stock option grants is estimated as of their date of grant using the Black-Scholes valuation model.
Because we lack sufficient company-specific historical and implied volatility information, we based our estimate of expected volatility on the median historical volatility of a group of publicly-traded companies that we believe are comparable to us based on the criteria set forth in ~~Accounting Standards Codification (ASC)~~ASC Topic 718-10-55-37(c) and SAB Topic 14.D, particularly line of business, stage of development, size and financial leverage. We will continue to consistently apply this process using the same companies or, if those companies become no longer comparable, other appropriately comparable companies until a sufficient amount of historical information regarding the volatility of our share price becomes available. However, we will regularly review these comparable companies, and may substitute more appropriate companies if facts and circumstances warrant a change. We use the simplified method that uses the average of (1) the weighted average vesting period and (2) the contractual life of the option, ~~eight~~seven years, asto determine the estimated term of the option. The risk free rate of interest for periods within the contractual life of the stock option is based on the yield of a U.S. Treasury strip on the date the award is granted with a maturity equal to the expected term of the award. We estimate forfeitures based on actual forfeitures during our limited history. Additionally, we have assumed that dividends will not be paid.
For options granted to non-employees and non-directors, primarily consultants ~~serving~~who served on our Scientific Advisory Board, we measure fair value of the equity instruments utilizing the Black-Scholes valuation model, if that value is more reliably measurable than the fair value of the consideration or service received. The fair value of these equity investments ~~are~~were periodically revalued as the options ~~vest~~were vesting and ~~are~~were recognized as expense over the related period of service or the vesting period, whichever iswas longer. ~~As of~~We have not granted options to non-employees and non-directors since the year ending September 30, ~~2009,~~2008. Prior to September 30, 2008, we issued to these non-employees options to purchase an aggregate of ~~377,111~~94,278 shares of our common stock. ~~Because we must revalue~~All of these options for accounting purposes each reporting period, the amount of the stock-based compensation expense related to these non-employee options will increase or decrease, based on changes in the price of our common stock.are currently vested. For the years ended September 30, ~~2009, 2008~~2010, 2011 and ~~2007,~~2012, the ~~stock-based~~share-based compensation expense (income) related to these options was ~~$0.1~~($0.01) million, ~~$0.2~~($0.04) million and ~~$0.7 million,~~$0, respectively.
We grant RSUs to executive officers and employees pursuant to the 2010 Plan, from time to time. Each RSU represents one share of common stock. There is no direct cost to the recipients of RSUs, except for any applicable taxes. Except as set forth below with regard to RSUs awarded to employees in place of discretionary cash bonuses, each award vests in installments on each anniversary of the date of grant, and the costs of the awards are determined as the fair market value of the shares on the date of grant. In all cases, costs are expensed per the vesting schedule outlined in the award. For example, RSUs awarded in December 2010 vest annually over three years, with 50% vesting on the first anniversary of the date of grant and the remainder vesting in two equal installments on each anniversary thereafter, and therefore are expensed 50% in the first year and 25% each year in the next two years. Except as set forth below with regard to RSUs awarded to employees in place of discretionary cash bonuses, each year following the annual vesting date, between January 1^st and March 15th, we will issue common stock for each vested RSU. During the period when the RSU is vested but not distributed, the RSUs cannot be transferred and the grantee has no voting rights. If we declare a dividend, RSU recipients will receive payment based upon the percentage of RSUs that have vested prior to the date of declaration.
In March 2012, we granted RSUs to our employees in place of the discretionary cash bonuses that were established in connection with the fiscal year ended September 30, 2011. The cost of these awards was
45

determined to be the value of the discretionary cash bonuses. These RSUs vested, and the underlying shares were distributed, on September 30, 2012. At that time, the value of the discretionary cash bonuses exceeded the fair market value of the corresponding RSUs.
For the year ended September 30, ~~2009,~~2012, the ~~stock-based~~share-based compensation expense, including expenses associated with stock options and RSUs, was ~~$5.1~~$1.8 million, of which ~~$1.7~~$0.7 million is reflected in research and development expenses and ~~$3.4~~$1.1 million is reflected in general and administrative expenses. For the year ended September 30, ~~2008,~~2011, the ~~stock-based~~share-based compensation expense, including expenses associated with stock options and RSUs, was ~~$6.7~~$5.0 million, of which ~~$1.6~~$2.0 million is reflected in research and development expenses and ~~$5.1~~$3.0 million is reflected in general and administrative expenses. For the year ended September 30, ~~2007,~~2010, the ~~stock-based~~share-based compensation expense was ~~$4.2~~$5.6 million, of which ~~$0.7~~$2.0 million is reflected in research and development expenses and ~~$3.5~~$3.6 million is reflected in general and administrative expenses.
Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. As of September 30, 2009, we had federal net operating loss carryforwards of $100.9 million, Connecticut state net operating loss carryforwards of $100.4 million and federal and local research and development tax credit carryovers of approximately $2.1 million, all of which expire starting in 2024.
At September 30, ~~2009,~~2011 and 2012, we recorded a 100% valuation allowance against our net deferred tax asset of approximately ~~$43.2~~$42.2 million and $47.9 million, respectively, as our management believes it is uncertain that it will be fully realized. If we determine in the future that we will be able to realize all or a portion of our net deferred tax asset, an adjustment to the deferred tax valuation allowance would increase net income in the period in which we make such a determination.
35
As of September 30, 2012, we had net operating loss carry-forwards of approximately $54 million for U.S. federal and $110.2 million for state tax purposes. These loss carry-forwards expire between 2024 and 2032. To the extent these net operating loss carry-forwards are available, we intend to use them to reduce the corporate income tax liability associated with our operations. Section 382 of the U.S. Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carry-forwards that might be used to offset taxable income when a corporation has undergone significant changes in stock ownership. We updated the Section 382 analysis, performed in fiscal year 2010, to incorporate the registered direct offering that we completed in May 2011. As of September 30, 2010, we performed a preliminary Section 382 analysis in connection with the registered direct offering that we completed in August 2010 and believed that an ownership change had occurred. We updated this analysis to take into account the registered direct offering that we completed in May 2011. Based on this further review, we determined that an ownership change under Section 382 occurred on May 12, 2011. We believe that approximately $55.9 million of the $106.9 million federal losses will expire unused as a result of Section 382 limitations. The maximum annual limitation under Section 382 is approximately $2.5 million for 20 years. As of September 30, 2012, we have determined that ownership change, under Section 382, occurred as a result of the June 2012 financing and, therefore, the ability to utilize our current NOLs is further limited. To the extent our use of net operating loss carry-forwards is limited, future income could be subject to corporate income tax earlier than it would if we were able to use net operating loss carry-forwards, which could result in decreased net income.
We also have state research and development credit carry-forwards of approximately $0.5 million, which expire commencing in fiscal 2022.
Results of Operations
Year Ended September 30, ~~2009~~2012 Compared to Year Ended September 30, ~~2008~~2011
Revenue.We did not recognize any revenue during the years ended September 30, ~~2009~~2012 or ~~2008.~~2011.
46

Research and Development Expenses.

Year Ended
September 30, Decrease
2008 2009 $ %
In thousands, except per share amounts
Research and Development $ 32,554 $ 32,325 $ 229 0.7 %

Percentage of net loss 75.1 % 74.7 %

    Year Ended
September 30,
    Decrease

    2011
    2012
    $
    %
    In thousands, except per share amounts
Research and Development
              $ 13,901          $ 12,571          $ 1,330             10 %
Percentage of net loss
                 131.2 %            60.6 %

Research and development expenses were ~~$32.3~~$12.5 million for the year ended September 30, ~~2009,~~2012, a decrease of ~~$0.2~~$1.3 million or ~~0.7%~~10%, from ~~$32.6~~$13.9 million for the year ended September 30, ~~2008.~~2011. This decrease was primarily attributable to reductions of $2.6 million in manufacturing expenses and $0.4 million in regulatory expenses. These decreases were offset in part by an increase of $1.4 million in clinical expenses related primarily to our Phase 1 clinical trial of BIOD-123 and BIOD-125 and a ~~$5.8~~net increase of $0.3 million ~~decrease~~ in research and development ~~costs~~expenses related to ~~our recently completed pivotal Phase 3 clinical trials for VIAject~~^®an increase in the number of preclinical animal studies we conducted and a ~~decrease~~licensing fee paid to Aegis.
The reductions in manufacturing expenses are attributable to savings of ~~$1.5~~$2.2 million as a result of renegotiating the terms of our supply agreement for RHI and $0.4 million in ~~the costs of manufacturing clinical supplies. These decreases were offset by an increase of $5.8~~reduced personnel costs. The $0.4 million ~~for the purchase of recombinant human insulin during the fiscal year~~reduction in ~~order to build commercial supply inventory for VIAject~~^® ~~and an increase of $0.9 million in~~regulatory expenses resulted from lower professional fees for the ~~preparation~~year ended September 30, 2012, as compared to 2011, and lower stock-based compensation costs.
The research and development expenses for the twelve months ended September 30, 2011 were reduced by our receipt in January 2011 of $1.2 million in research grants under the ~~filing~~Internal Revenue Services therapeutic tax credit program and were increased by a $1.4 million severance charge resulting from the retirement of our ~~planned NDA.~~ former Chief Scientific Officer.
Research and development expenses for the year ended September 30, ~~2009~~2012 include ~~$1.6~~$0.7 million in stock-based compensation expense related to options granted to employees. We did not record any stock-based compensation expense for the year ended September 30, 2012 for options granted to non-employees.
In July and September 2012, we received two National Institutes of Health (NIH) awards for the development of concentrated ultra-rapid-acting insulin formulation and glucagon formulation for use in an artificial pancreas. The July 2012 award is intended to fund research to develop a proprietary ultra-rapid-insulin product candidate at high concentrations suited to provide sufficient quantities of insulin in an external artificial pancreas pump device that has limited volume capacity. The July award is for two years and totals $582 thousand. The September 2012 award is intended to fund research to develop a proprietary glucagon product candidate optimized to algorithmically deliver glucagon as part of a bihormonal closed loop system to mitigate hypoglycemic events. The September 2012 award is for two years and totals $583 thousand. For the quarter ended September 30, 2012, we reported $88 thousand in government grants for the high concentration ultra-rapid-insulin product candidate and did not start the glucagon formulation work.
General and Administrative Expenses.
    Year Ended
September 30,
    Decrease

    2011
    2012
    $
    %
    In thousands, except per share amounts
General and Administrative
              $ 9,321          $ 6,816          $ 2,505             27 %
Percentage of net loss
                 88.0 %            32.9 %

General and administrative expenses were $6.8 million for the year ended September 30, 2012, a decrease of $2.5 million, or 27%, from $9.3 million for the year ended September 30, 2011. This decrease is attributable to reductions of $0.2 million in depreciation expense due primarily to fully depreciating our accounting software, $1.9 million in employee and non-employee director stock-based compensation expenses, and other expenses of $0.4 million. General and administrative expenses for the year ended September 30, 2012 include $1.1 million in stock-based compensation expense related to options granted to employees and ~~$0.1 million in stock-based compensation expense related~~non-employee directors.
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Interest and Other Income.
    Year Ended
September 30,
    Increase

    2011
    2012
    $
    %
    In thousands, except per share amounts
Interest and Other Income
              $ 60           $ 80           $ 20              33 %
Percentage of net loss
                 0.57 %            0.39 %

Interest and other income increased to ~~options granted to non-employees.~~
          ~~While we have suspended significant expenditures on our earlier stage product candidates pending further development of our regulatory plans for VIAject~~^®~~, we do not anticipate that our research and development expenses will decrease materially, if at all, as we continue our Phase 3 clinical trial extension program for VIAject~~^®~~, conduct new clinical trials of VIAject~~^®~~, produce validation batches, and purchase recombinant human insulin.~~
~~General and Administrative Expenses.~~

Year Ended
September 30, Decrease
2008 2009 $ %
In thousands, except per share amounts
General and Administrative $ 14,800 $ 10,994 $ 3,806 25.7 %

Percentage of net loss 33.1 % 25.5 %

          ~~General and administrative expenses were $11.0~~$0.08 million for the year ended September 30, ~~2009, a decrease of $3.8 million, or 25.7%,~~2012 from ~~$14.8~~$0.06 million for the year ended September 30, ~~2008. This decrease is attributable to~~2011. The increase resulted primarily from interest on the ~~following items: a decrease of $1.6 million in stock-based compensation charges for~~higher cash balances generated by our June 2012 private placement.
Interest Expense. For the non-employee directors due to a change in vesting policy from immediate vesting to vesting pro rata over one year; a decrease of $0.6 million in professional fees, a decrease of $0.5 million in personnel expenses and a decrease of $0.6 million in travel expenses were due to a one-time event that occurred in 2008. General and administrative expenses for the yearyears ended September 30, ~~2009 include $3.4 million~~2012 and 2011, we had no interest expense.
Adjustments to Fair Value of Common Stock Warrant Liability.
    Year Ended
September 30,
    Decrease

    2011
    2012
    $
    %
    In thousands, except per share amounts
Adjustments to fair value of common stock warrant liability
              $ (12,611 )         $ 1,510          $ 14,121             112 %
Percentage of net loss
                 119 %            7 %

Change in ~~stock-based compensation expense related to options granted to employees. Because we must revalue options granted to non-employees for accounting purposes each reporting period, the amount~~Warrant Valuation.
    Year Ended September 30,

    2011
    2012
    Net change
Warrant:

August 2011
              $ (4,169 )         $ —           $ 4,169
May 2011
                 (8,442 )            709              9,151
June 2012
                 —              801              801
Total
              $ (12,611 )         $ 1,510          $ 14,121

The change in fair value of ~~the stock-based compensation income for the year ended September 30, 2009 was $13 thousand.~~
          ~~We do not expect our general and administrative expenses to increase significantly over the next twelve months as we focus our product development efforts on obtaining regulatory approval for VIAject~~^®~~. Over the longer term, however, we anticipate these expenses will increase as we approach the commercial launch~~derivative instruments-warrants of ~~VIAject~~^®.
36
~~Interest and Other Income.~~

Year Ended
September 30, Decrease
2008 2009 $ %
In thousands, except per share amounts
Interest and Other Income $ 3,010 $ 386 $ 2,624 87.2 %

Percentage of net loss 6.8 % 0.9 %

          Interest and other income decreased to $0.4 million for the year ended September 30, 2009 from $3.0 million for the year ended September 30, 2008. The decrease was due to shifting our investments primarily into treasury securities. The focus on preserving cash and investing in stable securities generated lower returns$(12,611) during the year ended September 30, ~~2009.~~
~~Interest Expense.~~~~For~~2011 was primarily a result of the ~~years~~decrease in the price of the common stock from $5.30 per share at September 30, 2010 to $2.16 per share at September 30, 2011. The change in fair value of derivative instruments-warrants of $1,510 during the year ended September 30, ~~2009 and 2008, we had no interest expense.~~2012 was a result of the increase in the price of the common stock from $2.16 per share at September 30, 2011 to $2.97 per share at September 30, 2012.
Net Loss and Net Loss per Share.
    Year Ended
September 30,
    Increase

    2011
    2012
    $
    %
    In thousands, except per share amounts
Net loss
              $ (10,592 )         $ (20,747 )         $ 10,155             96 %
Net loss per share
              $ (1.36 )         $ (1.91 )

Year Ended
September 30, Decrease
2008 2009 $ %
In thousands, except per share amounts
Net loss $ (43,361 ) $ (43,270 ) $ 91 0.2 %

Net loss per share $ (1.94 ) $ (1.82 )

Net loss was ~~$43.3~~$20.7 million, or ~~$(1.82)~~$(1.91) per share, for the year ended September 30, ~~2009~~2012, compared to ~~$43.4~~$10.6 million, or ~~$(1.94)~~$(1.36) per share, for the year ended September 30, ~~2008.~~2011. The ~~decrease~~increase in net loss was primarily ~~attributable~~due to ~~the decreased expenses described~~an increase in adjustments to fair value of common stock warrant liability, as noted above. ~~While we have suspended significant expenditures of our earlier stage product candidates in order to focus our product developments efforts on obtaining regulatory approval for VIAject~~^®~~, we expect our losses to continue as we initiate additional clinical trials of VIAject~~^® ~~to support our commercialization efforts and, potentially, FDA approval.~~
Year Ended September 30, ~~2008~~2011 Compared to Year Ended September 30, ~~2007~~2010
Revenue.We did not recognize any revenue during the years ended September 30, ~~2008~~2011 or ~~2007.~~2010.
48

Research and Development Expenses.
    Year Ended
September 30,
    Decrease

    2010
    2011
    $
    %
    In thousands, except per share amounts
Research and Development
              $ 26,177          $ 13,901          $ 12,276             46.9 %
Percentage of net loss
                 68.4 %            131.2 %

Year Ended
September 30, Increase
2007 2008 $ %
In thousands, except per share amounts
Research and Development $ 15,939 $ 32,554 $ 16,615 104.2 %

Percentage of net loss 70.7 % 75.1 %

Research and development expenses were ~~$32.6~~$13.9 million for the year ended September 30, ~~2008, an increase~~2011, a decrease of ~~$16.6~~$12.3 million or ~~104.2%~~46.9%, from ~~$15.9~~$26.2 million for the year ended September 30, ~~2007.~~2010. This ~~increase~~decrease was primarily attributable to ~~increased research~~reductions of $6.0 million in clinical expenses, $3.5 million in manufacturing and device development ~~costs~~expenses and $3.5 million in regulatory expenses. These decreases were offset in part by an increase of $0.7 million in expenses related to our ~~recently completed pivotal Phase 3 clinical trials for VIAject~~^®~~. Specific increases~~discovery activities as we increased our preclinical studies in ~~research and development expenses included $7.8 million related to increased clinical trial expenses in 2008; $3.3 million related to increased manufacturing expenses in 2008 for~~ the ~~process development, scale-up and manufacture of commercial batches of VIAject~~^® ~~to support our clinical trials and regulatory submissions; and $2.6 million related to increased personnel costs, non-cash stock-based compensation expenses and consulting fees.~~year ended September 30, 2011. Research and development expenses for the year ended September 30, ~~2008~~2011 were reduced by our receipt in January 2011 of $1.2 million in research grants under the Internal Revenue Service’s therapeutic tax credit program and were increased by a $1.4 million severance charge resulting from the retirement of our former Chief Scientific Officer.
The reductions in clinical expenses reflect reduced expenses of $4.3 million because we conducted two Phase 1 clinical trials during the year ended September 30, 2011, as compared to two 18-month safety extension trials, two tolerability studies and a pump study during the year ended September 30, 2010. In addition, the reductions in clinical expenses reflect reduced professional fees of $1.4 million and reduced personnel costs of $0.3 million as a result of our implementation of cost-saving initiatives. The reductions in manufacturing and device development expenses are attributable to savings of $2.1 million as a result of renegotiating the terms of our recombinant human insulin supply agreement; the completion of our insulin pen development in the year ended September 30, 2010, which resulted in 2010 expenses of $0.7 million that did not recur in the year ended September 30, 2011; and reduced personnel and professional costs of $0.7 million. The $3.5 million reduction in regulatory expenses resulted from lower professional fees in the year ended September 30, 2011 as compared to 2010 because the year ended September 30, 2010 included the filing of our NDA and a 120 day update with the FDA.
Research and development expenses for the year ended September 30, 2011 include ~~$1.3~~$2.0 million in stock-based compensation expense related to options granted to employees. We also recorded a credit of $42 thousand in stock-based compensation income for the year ended September 30, 2011 for options granted to non-employees, which we must revalue for accounting purposes each reporting period.
General and Administrative Expenses.
    Year Ended
September 30,
    Decrease

    2010
    2011
    $
    %
    In thousands, except per share amounts
General and Administrative
              $ 10,980          $ 9,321          $ 1,659             15 %
Percentage of net loss
                 28.7 %            88 %

General and administrative expenses were $9.3 million for the year ended September 30, 2011, a decrease of $1.7 million, or 15%, from $11.0 million for the year ended September 30, 2010. This decrease is attributable to a decrease of $0.9 million in professional fees, $0.2 million in personnel and employee stock-based compensation expenses, $0.1 million in non-employee director stock-based compensation expense and other expenses of $0.4 million. General and administrative expenses for the year ended September 30, 2011 include $3.0 million in stock-based compensation expense related to options granted to employees and ~~$0.2 million~~non-employee directors. We also recorded a credit of $2 thousand in stock-based compensation ~~expense related to~~income for the year ended September 30, 2011 for options granted to ~~non-employees.~~
37
non-employees, which we must revalue for accounting purposes each reporting period.
49

~~General~~Interest and ~~Administrative Expenses.~~Other Income.
    Year Ended
September 30,
    Increase

    2010
    2011
    $
    %
    In thousands, except per share amounts
Interest and Other Income
              $ 17           $ 60           $ 43              253 %
Percentage of net loss
                 0.04 %            0.57 %

Year Ended
September 30, Increase
2007 2008 $ %
In thousands, except per share amounts
General and Administrative $ 8,386 $ 14,800 $ 6,414 76.5 %

Percentage of net loss 37.2 % 33.1 %

          ~~General~~Interest and ~~administrative expenses were $14.8~~other income increased to $0.06 million for the year ended September 30, ~~2008, an increase of $6.4 million, or 76.5%,~~2011 from ~~$8.4~~$0.02 million for the year ended September 30, ~~2007. This~~2010. The increase ~~was~~resulted primarily ~~attributable~~from interest on the higher cash balances generated by our May 2011 financing and by moving our cash to a ~~$4.5 million increase in personnel expense. The balance of~~premium money market fund which eliminated investment fees and yielded a higher return.
Interest Expense. For the increase was attributable to increases in insurance expenses, depreciation expenses and higher legal and consulting fees associated with becoming a public company. General and administrative expenses for the yearyears ended September 30, ~~2008 include $5.1 million in stock-based compensation expense related~~2011 and 2010, we had no interest expense.
Adjustments to ~~options granted~~Fair Value of Common Stock Warrant Liability.
    Year Ended
September 30,
    Increase

    2010
    2011
    $
    %
    In thousands, except per share amounts
Adjustments to fair value of common stock warrant liability
              $ 1,254          $ (12,611 )         $ 13,865             1,106 %
Percentage of net loss
                 3.3 %            119 %

Adjustments to ~~employees. Because we must revalue options granted~~fair value of common stock warrant liability decreased to ~~non-employees for accounting purposes each reporting period, the amount of the stock-based compensation expense for the year ended September 30, 2008 was $2 thousand.~~
~~Interest and Other Income.~~

Year Ended
September 30, Increase
2007 2008 $ %
In thousands, except per share amounts
Interest and Other Income $ 1,902 $ 3,010 $ 1,108 58.3 %

Percentage of net loss 8.4 % 6.8 %

          ~~Interest and other income increased to $3.0~~$(12.6) million for the year ended September 30, ~~2008~~2011 from ~~$1.9~~$1.3 million for the year ended September 30, ~~2007.~~2010. The increase was due to higher balances of cash and cash equivalents in 2008, resulting primarily from the $125.6 million in net proceeds received from our initial public offering in May 2007 and follow-on offering in February 2008.
~~Interest Expense.~~~~For the years ended~~ September 30, ~~2008 and 2007, we had no interest expense.~~
~~Deemed Dividend — Warrants.~~~~On March 20, 2007, we offered the holders of warrants~~2011 adjustment to ~~purchase an aggregate of 78,183 shares of Series B convertible preferred stock and an aggregate of 2,558,724 shares~~fair value of common stock ~~with an exercise~~warrant liability of $12.6 million is comprised of decreases in the value of the May 2011 and August 2010 warrants of $8.4 million and $4.1 million, respectively. The decrease from the prior year was primarily attributable to the closing price of ~~$5.56~~our common stock on September 30, 2011 of $2.16 per share being lower than the ~~opportunity to exercise such warrants at an exercise~~September 30, 2010 closing price of ~~$3.67, representing a 34% discount in the exercise price. Such holders exercised all such warrants on a combination of cashless and cash exercise basis. We issued 2,636,907 shares of~~our common stock of $21.20 per share, for the August 2010 warrants, and ~~received aggregate cash proceeds~~the May 18, 2011 closing price of ~~$0.4 million in connection with such exercises.~~our common stock of $8.24 for the May 2011 warrants. We use the Black-Scholes valuation method to calculate the fair value for the May 2011 warrants and the Monte Carlo simulation method for the August 2010 warrants. As a result, of the ~~discounted exercise price, we recorded a non-cash deemed dividend of approximately $4.5 million~~fair value for the May 2011 and August 2010 warrant liability decreased. The August 2010 warrants ~~that were exercised in the year ended September 30, 2007. No equivalent charge to stockholders was incurred in the year ended September 30, 2008.~~expired on December 1, 2011. The May 2011 warrants will be revalued each reporting period.
Net Loss ~~Applicable to Common Stockholders~~ and Net Loss per Share.
    Year Ended
September 30,
    Decrease

    2010
    2011
    $
    %
    In thousands, except per share amounts
Net loss
              $ (38,290 )         $ (10,592 )         $ 27,698             72.3 %
Net loss per share
              $ (6.34 )         $ (1.36 )

Year Ended
September 30, Increase
2007 2008 $ %
In thousands, except per share amounts
Net loss applicable to common stockholders $ (27,005 ) $ (43,361 ) $ 16,356 60.6 %

Net loss per share $ (1.76 ) $ (1.94 )

Net loss ~~applicable to common stockholders~~ was ~~$43.4~~$10.6 million, or ~~$(1.94)~~$(1.36) per share, for the year ended September 30, ~~2008~~2011, compared to ~~$27.0~~$38.3 million, or ~~$(1.76)~~$(6.34) per share, for the year ended September 30, ~~2007.~~2010. The ~~increase~~decrease in net loss was primarily ~~attributable~~due to ~~the increased~~reduced expenses ~~described~~and adjustments to fair value of common stock warrant liability as noted above.
38
Liquidity and Capital Resources
Sources of Liquidity and Cash Flows
As a result of our significant research and development expenditures and the lack of any approved products or other sources of revenue, we have not been profitable and have generated significant operating losses since we were incorporated in 2003. We ~~have~~initially funded our research and development operations ~~primarily~~ through ~~proceeds from our Series A convertible preferred stock financing in 2005 and our mezzanine and Series B convertible preferred stock financings in 2006. Through December 31, 2006, we had received~~ aggregate gross proceeds of $26.6 million from ~~these sales.~~our private financing transactions that we completed prior to our initial public offering. We received an aggregate of ~~$125.6~~approximately $184 million from our initial public offering in May 2007, ~~and~~our follow-on offering in February ~~2008.~~2008, our registered direct offerings in August 2010 and May 2011 and our private placement in June 2012.
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At September 30, ~~2009,~~2012, we had cash and cash equivalents totaling approximately ~~$54.6~~$39.1 million. To date, we have invested our excess funds primarily in managed money funds with two major financial institutions. All highly liquid investments with an original maturity of less than three months at the date of purchase are categorized as cash equivalents. We plan to continue to invest our cash and cash equivalents in accordance with our approved investment policy ~~guidelines, which set forth our policy to hold investment securities to maturity.~~guidelines.
Net cash used in operating activities was ~~$35.3~~$16.7 million for the year ended September 30, ~~2009, $34.9~~2012, $18.3 million for the year ended September 30, ~~2008~~2011 and ~~$15.5~~$34.4 million for the year ended September 30, ~~2007.~~2010. Net cash used in operating activities for the year ended September 30, 2009 primarily reflects the net loss for the period, offset in part by stock-based compensation, depreciation and amortization expenses and a decrease in income tax receivable, accounts payable, income tax payable and accrued expenses. Net cash used in operations for the years ended September 30, ~~2008~~2012, 2011 and ~~2007~~2010 primarily reflects the net loss for the period, offset in part by depreciation ~~share-base~~and amortization, share-based compensation and changes in ~~accrued expenses, accounts payable and deferred compensation.~~the fair value of the common stock-warrant liability.
Net cash provided by (used in) investing activities was ~~$25.0~~$(0.1) million for the year ended September 30, ~~2009, ($28.4)~~2012, $5.8 million for the year ended September 30, ~~2008~~2011 and ~~($1.4)~~$(6.3) million for the year ended September 30, ~~2007.~~2010. Net cash used in investing activities for the year ended September 30, 2012 reflects the purchase of property and equipment. Net cash provided by investing activities for the year ended September 30, ~~2009~~2011 primarily reflects the sale of marketable securities, ~~partially~~ offset by the purchase of property and equipment. Net cash used in investing activities for the ~~years~~year ended September 30, ~~2008 and 2007~~2010 primarily reflects the ~~purchases~~purchase of marketable securities and of property and ~~equipment and leasehold improvement costs.~~equipment.
Net cash provided by financing activities was ~~$0.2~~$17.1 million for the year ended September 30, ~~2009, $48.0~~2012, $28.2 million for the year ended September 30, ~~2008~~2011 and ~~$79.4~~$9.0 million for the year ended September 30, ~~2007.~~2010. Net cash provided by financing activities ~~in 2009~~for the year ended September 30, 2012 primarily reflects ~~the~~ proceeds from the sale of ~~stock~~our securities in our private placement offering in June 2012 and through our employee stock purchase plan. Net cash provided by financing activities in ~~2008~~2011 primarily reflects proceeds from the sale our ~~follow-on public offering.~~securities in our registered direct offering in May 2011 and through our employee stock purchase plan. Net cash provided by financing activities in ~~2007~~2010 primarily reflects proceeds from the sale of our ~~initial public offering.~~securities in our registered direct offering in August 2010 and through our employee purchase plan.
In July 2008, we entered into a supply agreement with N.V. Organon, which will terminate in December 2011, to purchase specified minimum quantities of recombinant human insulin. We anticipate that our minimum purchase requirements for the next nine consecutive quarters will total as much as $12 million depending on our regulatory plans for VIAject^®.
          ~~On February 12, 2008,~~June 2012, we completed a ~~follow-on public~~private placement of securities in which we issued 4,250,020 shares of our common stock, 3,605,607 shares of our Series B preferred stock and warrants to purchase 2,749,469 shares of our common stock. We received net proceeds, after deducting placement agent fees and other offering expenses, of approximately $17.1 million from this financing.
In May 2011, we completed a registered direct offering of ~~3,260,000~~an aggregate of 12,074,945 shares of our common stock, 1,813,944 shares of our Series A Preferred Stock and warrants to purchase 9,027,772 shares of our common stock at aan exercise price ~~to the public~~ of ~~$15.50~~$2.48 per ~~share and~~share. The warrants will expire on May 17, 2016. We received net proceeds, after deducting placement agent fees and other offering expenses, of approximately $28.0 million from this financing.
In August 2010, we completed a registered direct offering ~~after deducting underwriting discounts and commissions and expenses,~~ of ~~$46.8 million. Certain~~an aggregate of 599,550 shares of our ~~stockholders sold 550,000 shares in the offering. We did not receive any proceeds from the sale of shares from the selling stockholders.~~
          ~~On May 16, 2007, we completed~~common stock and warrants to purchase an ~~initial public offering of 5,750,000~~additional 559,550 shares of our common stock at aan initial exercise price ~~to the public~~ of ~~$15.00~~$18.86 per share. ~~The offering resulted in gross proceeds of $86.3 million.~~ We received net proceeds, ~~from the~~after deducting placement agent fees and other offering expenses, of approximately ~~$78.8~~$8.7 million ~~after deducting underwriting discounts~~from this financing. In December 2010, the exercise price of the warrants was reset to $6.24 per share and ~~commissions~~in May 2011, the exercise price of the warrants was reset to $4.70 per share. In August 2011, warrants for a total of 10,550 shares were exercised and ~~additional offering expenses.~~we received proceeds of approximately $50 thousand. The remaining ~~net proceeds were invested in cash, cash equivalents and short-term investments, in accordance with our investment policy.~~warrants for 589,000 shares expired unexercised on December 1, 2011.
Funding Requirements
We believe that our existing cash, ~~and~~ cash equivalents and restricted cash will be sufficient to fund our anticipated operating expenses and capital expenditures at least ~~through~~until the second calendar quarter of ~~fiscal year 2011.~~2014. We have based this estimate upon assumptions that may prove to be wrong and we could use our available capital resources sooner than we currently expect. ~~For example, if the FDA were to require us to conduct an additional pivotal Phase 3 clinical trial of VIAject~~^®~~, our~~Our existing capital resources ~~may~~are not be sufficient to complete ~~that~~our clinical development ~~program.~~program for an ultra-rapid-acting insulin product candidate or a liquid glucagon formulation. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, and to the extent that we may or may not enter into collaborations with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current anticipated clinical trials.
51

Our future capital requirements will depend on many factors, including:
•   the progress, timing or success of our research and development and clinical programs for our product candidates, including the resulting data from clinical trials of an ultra-rapid-acting insulin formulation or a liquid glucagon formulation;

• our ability to complete our Phase 2 clinical trial of BIOD-123 in a timely manner and the outcome of that trial;

•   the success of our formulation development work to improve the stability, pharmacokinetic and pharmacodynamic characteristics of our ultra-rapid-acting insulin analog-based formulations;

•   our ability to conduct the formulation development work necessary to select a commercial candidate formulation for our glucagon rescue product for the treatment of severe hypoglycemia and commence clinical trials of that formulation;

•   the results of our real-time stability programs for our insulin and glucagon product candidates, including the reproducibility of earlier, smaller scale, stability studies and our ability to accurately project real-time stability on the basis of accelerated testing;

•   our ability to accurately anticipate technical challenges that we may face in the development of a glucagon rescue product candidate;

•   our ability to secure approval by the FDA for ~~VIAject~~^®our product candidates under Section 505(b)(2) of the FFDCA;

• our ability to ~~file our NDA for VIAject~~^® ~~in December 2009 as planned~~conduct pivotal clinical trials and ~~once filed, the length of time that will elapse before our NDA is fully reviewed~~other tests or analyses required by the ~~FDA;~~FDA to secure approval to commercialize an ultra-rapid-acting insulin formulation or a liquid glucagon formulation;
39

• ~~the costs associated with preparing and submitting our MAA for VIAject~~^® ~~to the EMEA;~~
• our ability to ~~market, commercialize and achieve market acceptance~~enter into collaboration arrangements for the commercialization of our product candidates ~~particularly VIAject~~^®;and the success or failure of any such collaborations into which we enter, or our ability to commercialize our product candidates ourselves;

• our ability to enforce our patents for our product candidates and our ability to secure ~~approval by the FDA~~additional patents for ~~VIAject~~^® ~~without conducting additional pivotal clinical trials;~~our product candidates;

• ~~the FDA’s findings regarding data anomalies observed in India in our Phase 3 clinical trial of VIAject~~^® ~~for patients with Type 1 diabetes and the impact of those findings on the timing of a regulatory approval;~~
• ~~the size, endpoints and duration of additional clinical trials of VIAject~~^® ~~in patients with Type 1 diabetes to support our commercialization efforts and, potentially, FDA approval;~~
• ~~the cost to fully develop the 100 IU/cc liquid formulation of VIAject~~^®;
• our ability to ~~establish that~~protect our intellectual property and operate our business without infringing upon the ~~100 IU/cc liquid formulation~~intellectual property rights of ~~VIAject~~^® ~~is well-tolerated in chronic use;~~others;

• the ~~cost~~degree of clinical utility of our product candidates, particularly with regard to ~~develop an~~our ultra-rapid-acting insulin ~~pen program for use with VIAject~~^®;formulations, which have not yet been shown to be clinically superior to existing rapid-acting insulin analogs;

• the ~~cost~~emergence of ~~purchasing recombinant human insulin~~competing technologies and products and other ~~materials~~adverse market developments, such as advancements in glucagon stabilization technologies that could enable a room-temperature rescue product in a portable, easy to ~~build commercial supply inventory for VIAject~~^®~~, taking into account currency exchange rate fluctuations;~~use presentation;

• the ~~costs~~ability of ~~preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims;~~our major suppliers to produce our products in our final dosage form;

• ~~the cost associated with qualifying~~our commercialization, marketing and ~~obtaining regulatory approval of suppliers of insulin~~manufacturing capabilities and ~~manufacturers of our product candidates;~~strategies; and

• our ability to ~~establish~~accurately estimate anticipated operating losses, future revenues, capital requirements and ~~maintain collaborations and the terms and success of the collaborations, including the timing and amount of payments that we might receive from potential strategic collaborators; and~~
• ~~the continued participation of patients in~~ our ~~VIAject~~^® ~~Phase 3 clinical trial extension program, which is designed to run through February 2010.~~needs for additional financing.

We do not anticipate generating product revenue for the next few years. In the absence of additional funding, we expect our continuing operating losses to result in increases in our cash used in operations over the next several years. To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. We do not currently have any commitments for future external funding.
          ~~Additional~~We may receive additional proceeds from the exercise of the warrants that we issued in connection with our May 2011 registered direct offering and our June 2012 private placement, if any of those warrants are exercised for cash. Whether the warrants are exercised for cash will depend on decisions made by the warrant
52

holders and on whether the market price of our common stock exceeds the $9.92 per share warrant exercise price of the May 2011 warrants or the $2.66 per share warrant exercise price of the June 2012 warrants. The May 2011 warrants and the June 2012 warrants will expire on May 17, 2016 and June 26, 2017, respectively.
We have implemented cost saving initiatives to reduce operating expenses, including reducing the number of employees, and we continue to seek additional areas for cost reductions. However, we will also need to raise additional funds and periodically explore sources of equity or debt ~~financing~~financing. We may seek to raise such capital through public or ~~corporate collaboration and licensing arrangements~~private equity financings, partnerships, joint ventures, debt financings, bank borrowings or other sources. However, additional funding may not be available on ~~acceptable~~favorable terms ifor at all. If ~~adequate~~additional funds are ~~not available,~~raised by issuing equity securities, substantial dilution to existing shareholders may result. If we fail to obtain additional capital when needed, we may be required to delay, ~~reduce the scope of~~scale back, or eliminate some or all of our research and development ~~programs, reduce our planned commercialization efforts or obtain funds through arrangements with collaborators or others~~programs. The accompanying financial statements do not include any adjustments that may ~~require us to relinquish rights to certain drug candidates that we might otherwise seek to develop or commercialize independently or enter into corporate collaborations at a later stage~~result from the outcome of ~~development. In addition, any future equity funding will dilute the ownership of our equity investors.~~
40
this uncertainty.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Adopted Accounting Pronouncements
~~Contractual Obligations~~Comprehensive Income
In June 2011, the FASB, issued ASU 2011-05 Presentation of Comprehensive Income, or ASU 2011-05. ASU 2011-05 allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The ~~following table summarizes our significant contractual obligations~~new guidance eliminates the current option to report other comprehensive income and ~~commercial commitments as~~its components in the statement of changes in equity. While ASU 2011-05 changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. In December 2011, the FASB issued ASU 2011-12 Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, or ASU 2011-12. ASU 2011-12 deferred certain aspects of ASU 2011-05 pertaining only to the presentation of reclassification adjustments out of accumulated other comprehensive income and reinstates the previous requirements to present reclassification adjustments either on the face of the statement in which other comprehensive income is reported or to disclose them in a note to the financial statements. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We adopted this guidance in the first quarter of the fiscal year ended September 30, ~~2009 (in thousands):~~

Less Than More Than
Total 1 Year 1-3 Years 3-5 Years 5 Years
Operating lease obligations $ 2,563 $ 537 $ 1,561 $ 465 $ —
Purchase commitments 12,268 5,025 7,243 — —

Total fixed contractual obligations $ 14,831 $ 5,562 $ 8,804 $ 465 $ —

~~Recent Accounting Pronouncements~~
          Effective October 1, 2008, the Company adopted the provisions ASC Topic 820, Fair Value Measurements and Disclosures, which substantially incorporates the FASB Statement of Financial Accounting Standards (SFAS), No. 157, Fair Value Measurements. These provisions define fair value, establish a framework for measuring fair value in generally accepted accounting principles, and expand disclosures about fair value measurements. Portions of these provisions have been deferred for one year for certain non-financial assets and liabilities.2012. The adoption of ~~these provisions did not have a material effect on our financial statements.~~
          During the fourth quarter of 2009, the Company adopted the FASB Accounting Standards Update (“ASU”) No. 2009-01, “Amendments based on Statement of Financial Accounting Standards No. 168 — The FASB Accounting Standards CodificationASU 2011-05 and the ~~Hierarchy of Generally Accepted Accounting Principles” (the “Codification”). The Codification became the single source of authoritative GAAP~~deferrals in the United States, and other than rules and interpretive releases issued by the United States Securities and Exchange Commission (“SEC”). The Codification reorganized generally accepted accounting principles, or GAAP, into a topical format that eliminates the previous GAAP hierarchy and instead established two levels of guidance — authoritative and nonauthoritative. All non-grandfathered, non-SEC accounting literature that was not included in the Codification became nonauthoritative. The adoption of the Codification did not change previous GAAP, but rather simplified user access to all authoritative literature related to a particular accounting topic in one place. Accordingly, the adoptionASU 2011-12 had no impact on ~~the Company’s~~our consolidated financial ~~position and results of operations. All prior references to previous GAAP in the Company’s consolidated financial statements were updated for the new references under the Codification.~~statements.
ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
~~ITEM 7A.~~ ~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~
Our exposure to market risk is limited to our cash, cash equivalents and marketable securities. We invest in high-quality financial instruments, as permitted by the terms of our investment policy guidelines. Currently, our ~~investments~~excess funds are ~~primarily limited to highly liquid~~invested in a premium commercial money market ~~investments.~~fund with one major financial institution. We do not hedge interest rate exposure. A portion of our investments may be subject to interest rate risk and could fall in value if interest rates were to increase. ~~The effective duration~~
Because most of our ~~portfolio is currently less than one year, which we believe limits interest rate and credit risk. We do not hedge interest rate exposure.~~
          ~~Pursuant to our supply agreement with N.V. Organon, our purchases of insulin are denominated in Euros. Most of our other~~ transactions are denominated in United States dollars, ~~and~~we do not ~~present a~~have any material exposure to fluctuations in currency exchange rates.
ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
~~ITEM 8.~~ ~~FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA~~
Refer to page F-1.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL ~~DISCLOSURES~~DISCLOSURE

Not applicable.
53

~~ITEM 9A.~~ ~~CONTROLS AND PROCEDURES~~
ITEM 9A.    CONTROLS AND PROCEDURES
Management’s Evaluation of Disclosure Controls and Procedures
We are required to maintain disclosure controls and procedures designed to ensure that material information related to us is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the
41
Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, ~~2009~~2012 and, based on this evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of September 30, ~~2009.~~2012. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on our assessment, management concluded that, as of September 30, ~~2009,~~2012, our internal control over financial reporting is effective based on those criteria.
          ~~Our independent registered public accountants have issued an audit report on our assessment of our internal control over financial reporting. This report appears below.~~
42

~~Report of Independent Registered Public Accounting Firm~~
~~Board of Directors and Stockholders~~
~~Biodel Inc.~~
~~Danbury, Connecticut~~
          ~~We have audited Biodel Inc.’s (a development stage company) internal control over financial reporting as of September 30, 2009, based on criteria established in~~~~Internal Control — Integrated Framework~~issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Biodel Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Controls and Procedures, Management’s Annual Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
          We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
          A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
          Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
          ~~In our opinion, Biodel Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2009, based on the COSO criteria.~~
          We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Biodel Inc. as of September 30, 2009 and 2008, and the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2009 and for the period from December 3, 2003 to September 30, 2009 and our report dated December 14, 2009 expressed an unqualified opinion thereon.
~~/s/ BDO Seidman, LLP~~
~~New York, New York~~
~~December 14, 2009~~
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during the fiscal quarter ended September 30, ~~2009~~2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
43
54

PART III
~~ITEM 9B.~~ ~~OTHER INFORMATION~~
          On December 14, 2009, the Company entered into indemnification agreements with certain of its directors and executive officers. Each indemnification agreement is in the form currently in effect between Company and its other directors and executive officers.
44

~~PART III~~
Certain information required by Part III is omitted from this Annual Report on Form 10-K because we will file a definitive proxy statement within 120 days after the end of our fiscal year for our ~~2009~~2013 annual meeting of stockholders, or proxy statement, and the information included in the proxy statement is incorporated herein by reference.
ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
~~ITEM 10.~~ ~~DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE~~
Certain information required by this Item is contained under the heading “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K. Other information required by this Item will appear ~~under the headings “Election of Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance”~~ in our proxy statement ~~which sections are~~and is incorporated herein by reference.
We have adopted a written code of business conduct and ethics that applies to our principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. Our code of business conduct and ethics, which also applies to our directors and all of our officers and employees, can be found on our website, which is located atwww.biodel.com. We intend to disclose any amendments to, or waivers from, our code of business conduct and ethics that are required to be publicly disclosed pursuant to rules of the Securities and Exchange Commission and the NASDAQ ~~Global~~Capital Market by filing such amendment or waiver with the Securities and Exchange Commission and by posting it on our website.
ITEM 11.    EXECUTIVE COMPENSATION
~~ITEM 11.~~ ~~EXECUTIVE COMPENSATION~~
The information required by this Item will appear under the heading “Executive Compensation” including “Compensation Discussion and Analysis”, “Director Compensation”, “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in our proxy statement ~~which sections are~~and is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item will appear under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance under Equity Compensation Plans” in our proxy statement, which sections are incorporated herein by reference.
ITEM 13.    CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
~~ITEM 13.~~ ~~CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE~~
The information required by this Item will appear ~~under the headings “Certain Relationships and Related Transactions” and “Corporate Governance”~~ in our proxy statement ~~which sections are~~and is incorporated herein by reference.
ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES
~~ITEM 14.~~ ~~PRINCIPAL ACCOUNTANT FEES AND SERVICES~~
The information required by this Item will appear ~~under the heading “Auditors’ Fees”~~ in our proxy statement ~~which section~~and is incorporated herein by reference.
PART IV
ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES
~~ITEM 15.~~ ~~EXHIBITS AND FINANCIAL STATEMENT SCHEDULES~~
(1) Financial Statements: See Index to Financial Statements and Schedules.
(2) Financial Statement Schedules: Not applicable.
(3) Exhibits: The Exhibit Index annexed to this report is incorporated by reference.
45
55

SIGNATURES
~~SIGNATURES~~
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
            BIODEL INC.
        ~~BIODEL INC.~~
By:

/s/ ERROL DE SOUZA
~~By:~~   ~~/s/Solomon S. Steiner~~
        ~~Dr. Solomon S. Steiner~~

Dr. Errol De Souza
President and Chief Executive Officer
Date: December ~~14, 2009~~
21, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/  ERROL DE SOUZA
Errol De Souza

~~Signature~~
President and Chief Executive Officer
(Principal Executive Officer), Director
    ~~Title~~ ~~Date~~
December 21, 2012

/s/  GERARD J. MICHEL
Gerard J. Michel

Chief Financial Officer, Vice President,
Corporate Development and Treasurer
(Principal Financial and Accounting Officer)
December 21, 2012

/s/~~Solomon S. Steiner~~
  JULIA R. BROWN
Julia R. Brown
~~Solomon S. Steiner~~
~~Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)~~ ~~December 14, 2009~~

Director
December 21, 2012

/s/~~Gerard Michel~~
  BARRY H. GINSBERG
Barry H. Ginsberg
~~Gerard Michel~~
~~Chief Financial Officer, Vice President, Corporate Development and Treasurer (Principal Financial and Accounting Officer)~~ ~~December 14, 2009~~

Director
December 21, 2012

/s/~~Barry Ginsberg~~
  IRA W. LIEBERMAN
Ira W. Lieberman
~~Barry Ginsberg~~
~~Director~~ ~~December 14, 2009~~

Director
December 21, 2012

/s/~~David Kroin~~
  DANIEL LORBER
Daniel Lorber
~~David Kroin~~
~~Director~~ ~~December 14, 2009~~

Director
December 21, 2012

/s/~~Ira W. Lieberman~~
  BRIAN J.G. PEREIRA
Brian J.G. Pereira
~~Ira W. Lieberman~~
~~Director~~ ~~December 14, 2009~~

Director
December 21, 2012

/s/~~Daniel Lorber~~
  DAVEY S. SCOON
Davey S. Scoon
~~Daniel Lorber~~
~~Director~~ ~~December 14, 2009~~

~~/s/Brian J.G. Pereira~~
Director
~~Brian J.G. Pereira~~
    ~~Director~~
December ~~14, 2009~~21, 2012

56

Exhibits Index
Exhibit
Number
Description of Document
3.1

~~/s/Charles Sanders~~
~~Charles Sanders~~
~~Director~~ ~~December 14, 2009~~
~~/s/Scott A. Weisman~~
~~Scott A. Weisman~~
~~Director~~ ~~December 14, 2009~~
46
~~Exhibits Index~~
~~Exhibit~~
~~Number~~ ~~Description of Document~~
~~3.1~~ Registrant’s Second Amended and Restated Certificate of Incorporation (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
3.2

Certificate of Designation of Series A Convertible Preferred Stock of the Registrant (Incorporated by reference to exhibit 4.6 to the Registrant’s Current Report on Form 8-K filed on May 19, 2011).
3.3
Certificate of Amendment to Registrant’s Second Amended and Restated Certificate of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on June 11, 2012).
3.4
Certificate of Designation of Series B Convertible Preferred Stock of the Registrant (Incorporated by reference to Exhibit 4.8 to the Registrant’s Current Report on Form 8-K filed on June 27, 2012).
3.5
Certificate of Amendment of Registrant’s Second Amended and Restated Certificate of Incorporation, as amended.
3.6
Registrant’s Amended and Restated Bylaws (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
4.1

Specimen Common Stock Certificate (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
4.2

Form of Warrant to Purchase Shares of Common Stock issued in the Registrant’s May 2011 registered direct offering (Incorporated by reference to exhibit 4.7 to the Registrant’s Current Report on Form 8-K filed on May 13, 2011).
4.3
Form of Warrant issued in the Registrant’s June 2012 private placement (Incorporated by reference to ~~Scott Weisman~~Exhibit 4.9 to the Registrant’s Current Report on Form 8-K filed on June 21, 2012).
10.1
2010 Stock Incentive Plan, as amended March 8, 2012 (Incorporated by reference to Exhibit A of the Registrant’s Definitive Proxy Statement on Schedule 14A filed on January 26, 2012).
10.2
2010 Incentive Stock Option Agreement (Incorporated by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q filed on May 7, 2010).
10.3
2010 Non Statutory Stock Option Agreement (Incorporated by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q filed on May 7, 2010).
10.4
2010 Restricted Stock Unit Agreement (Incorporated by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q filed on May 7, 2010).
10.5
Form of Indemnity Agreement entered into between the Registrant and ~~McGinn Smith Holdings LLC to Purchase Shares~~its directors and certain of ~~Series A convertible preferred stock~~its executive officers (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
~~4.3~~
10.6
    Form of Subscription and Rights Agreement by and among the Registrant and the holders of the Series A convertible preferred stock (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
~~4.4~~     Amended and Restated Registration Rights Agreement, dated September 19, 2006, by and among the Registrant and other parties named therein (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
~~10.1~~ Form of Indemnity Agreement entered into between the Registrant and each of Albert Cha, Robert Feldstein, David Kroin, Daniel Lorber, Ira Lieberman, Charles Sanders, Roderike Pohl, and Solomon Steiner, Paul Sekhri, Erik Steiner, Samuel Wertheimer, R. Timmis Ware, Andreas Pfützner, and Scott Weisman (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
~~10.2~~
Amended and Restated 2004 Stock Incentive Plan (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
~~10.3~~
10.7

2005 Employee Stock Purchase Plan (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
~~10.4~~
10.8

2005 Non-Employee Directors’ Stock Option Plan (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
~~10.5~~
10.9
    ~~Amended and Restated~~
Employment Agreement, dated March ~~20, 2007, as amended November 20, 2007,~~26, 2010, between the Registrant and ~~Solomon S. Steiner~~Errol B. De Souza (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on ~~November 20, 2007)~~April 1, 2010).
57

Exhibit
Number
Description of Document
~~10.7~~
10.10
    Amended and Restated Consulting Agreement entered into on November 13, 2007, effective June 5, 2007, between the Registrant and Dr. Andreas Pfützner (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on November 14, 2007).
~~10.8†~~     Manufacturing Agreement, dated December 20, 2005 between the Registrant and Cardinal Health — PTS, LLC (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
~~10.9~~
Change of Control Agreement entered into between the Registrant and certain of its executive officers (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
~~10.10~~
10.11

Executive Severance Agreement entered into between the Registrant and certain of its executive officers (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
~~10.11~~
10.12

Lease Agreement, dated February 2, 2004, between the Registrant and Mulvaney Properties, LLC and amendment thereto dated September 29, 2006 (Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1 (333-140504)).
~~10.12~~
10.13

Commercial Lease, dated July 23, 2007, by and between the Registrant and Mulvaney Properties LLC. (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on July 27, 2007).
47
10.14

~~Exhibit~~
~~Number~~ ~~Description of Document~~
~~10.13~~
Lease Amendment, dated October 1, 2007, between the Registrant and Mulvaney Properties LLC (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on October 4, 2007).
~~10.14~~
10.15

Amendment to Lease Agreement, dated February 2, 2004, as amended, by and between the Registrant and Mulvaney Properties LLC. (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on July 27, 2007).
~~10.15~~
10.16
    Severance Agreement, dated November 14, 2007, by and between the Registrant and F. Scott Reding (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on November 14, 2007).
~~10.16~~
Offer Letter, dated November 12, 2007, by and between the Registrant and Gerard J. Michel. (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on November 14, 2007).
10.17

Form of Incentive Stock Option Agreement for 2004 Amended and Restated Stock Incentive Plan. (Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed on December 21, 2007).
10.18

Form of Option Agreement for 2005 Non-Employee Directors’ Stock Option Plan. (Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed on December 21, 2007).
10.19

Base salaries of Executive Officers of the Registrant.
10.20

Summary of the Registrant’s Non-Employee Director Compensation.
10.21†

Supply Agreement, dated July 7, 2008, between the Registrant and N.V. Organon (Incorporated by reference to exhibit 10.3 the Registrant’s Quarterly Report on Form 10-Q filed on August 11, 2008).
10.22*
10.22†

Letter Agreement, dated November 12, 2009, between the Registrant and N.V. Organon, amending the Supply Agreement, dated July 7, 2008, between the parties. (Incorporated by reference to exhibit 10.22 to Registrant’s Annual Report on Form 10-K filed on December 14, 2009).
~~21.1~~
10.23†

Letter Agreement, dated July 25, 2011, between the Registrant and N.V. Organon amending the Supply Agreement dated July 7, 2008 (Incorporated by reference to Exhibit 10.27 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011 filed on December 15, 2011).
10.24†
License Agreement, effective as of June 8, 2012, between Aegis Therapeutics, LLC and the Registrant (Incorporated by reference to Exhibit 10.01 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 filed on August 14, 2012).
10.25
Securities Purchase Agreement, dated as of June 21, 2012, among the Registrant and the purchasers named therein (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on June 21, 2012).
21.1
Subsidiaries of the Registrant.
58

Exhibit
Number
Description of Document
23.1

Consent of BDO ~~Seidman,~~USA, LLP, Independent Registered Public Accounting Firm.
~~24.1~~
31.01
    ~~Powers of Attorney (included on signature page).~~
~~31.01~~
Chief Executive Officer — Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02

Chief Financial Officer — Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01

Chief Executive Officer and Chief Financial Officer — Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document.*
101.SCH
XBRL Taxonomy Extension Schema Document.*
101.CAL
XBRL Taxonomy Calculation Linkbase Document.*
101.LAB
XBRL Taxonomy Label Linkbase Document.*
101.PRE
XBRL Taxonomy Presentation Linkbase Document.*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.*

† Confidential treatment granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

* ~~Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities and Exchange Commission.~~submitted electronically herewith

48
Attached as Exhibit 101 to this are the following formatted in XBRL (Extensible Business Reporting Language): (i) Balance Sheets; (ii) Statements of Operations, (iii) Statements of Stockholders’ Equity; (iv) Statements of Comprehensive Loss; (v) Statements of Cash Flows; and (vi) Notes to Financial Statements.
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, is deemed not filed for purposes of section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.
59

BIODEL INC.

INDEX TO FINANCIAL STATEMENTS
Page
Report of independent registered public accounting firm
         F-2
Balance sheets
         F-3
Statements of operations
         F-4
Statements of stockholders’ equity
         F-5
Statements of ~~cash flows~~comprehensive loss
         F-7
~~Notes to financial statements~~
Statements of cash flows
         F-8
Notes to financial statements
F-10

F-1

Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Biodel Inc.
Danbury, Connecticut
We have audited the accompanying balance sheets of Biodel Inc. (a development stage company) as of September 30, ~~2009~~2012 and ~~2008~~2011 and the related statements of operations, stockholders’ equity, ~~and~~ cash flows and comprehensive loss for each of the three years in the period ended September 30, ~~2009~~2012 and the statements of operations, stockholders’ equity and cash flows for the period from December 3, 2003 (inception) to September 30, ~~2009.~~2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Biodel Inc. at September 30, ~~2009~~2012 and ~~2008,~~2011, and the results of its operations and its cash flows for each of the three years in the period ended September 30, ~~2009~~,2012, and for the period from December 3, 2003 (inception) to September 30, ~~2009,~~2012, in conformity with accounting principles generally accepted in the United States.
     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Biodel Inc.’s internal control over financial reporting as of September 30, 2009, based on criteria established in~~Internal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated December 14, 2009 expressed an unqualified opinion thereon.~~
/s/ BDO ~~Seidman,~~USA, LLP

New York, New York
December ~~14, 2009~~21, 2012
~~F-2~~
F-2

Biodel Inc.
(A Development Stage Company)
Balance Sheets
(In thousands, except share and per share amounts)

September 30,
2008 2009
ASSETS

Current:
Cash and cash equivalents $ 64,731 $ 54,640
Marketable securities, available for sale 25,552 —
Taxes receivable 1,988 752
Prepaid and other assets 1,130 482

Total current assets 93,401 55,874
Property and equipment, net 3,931 3,695
Intellectual property, net 59 56
Other assets 120 —

Total assets $ 97,511 $ 59,625

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current:
Accounts payable $ 813 $ 1,007
Accrued expenses:
Clinical trial expenses 4,163 5,647
Payroll and related 1,420 1,117
Accounting and legal fees 509 325
Severance 268 183
Other 839 643
Income taxes payable 1,012 165

Total current liabilities 9,024 9,087
Commitments
Stockholders’ equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized, none outstanding — —
Common stock, $.01 par value; 100,000,000 shares authorized; 23,698,558 and 23,803,672 issued and outstanding 237 238
Additional paid-in capital 171,506 176,764
Accumulated other comprehensive loss (62 ) —
Deficit accumulated during the development stage (83,194 ) (126,464 )

Total stockholders’ equity 88,487 50,538

Total liabilities and stockholders’ equity $ 97,511 $ 59,625

    September 30,

    2011
    2012
ASSETS
Current:

Cash and cash equivalents
              $ 38,701          $ 39,050
Restricted cash
                 60              60
Taxes receivable
                 35              34
Grant receivable
                 —              88
Other receivable
                 1              9
Prepaid and other assets
                 399              295
Total current assets
                 39,196             39,536
Property and equipment, net
                 2,253             1,552
Intellectual property, net
                 49              46
Long term other assets
                 7              —
Total assets
              $ 41,505          $ 41,134

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current:

Accounts payable
              $ 222           $ 285
Accrued expenses:

Clinical trial expenses
                 763              488
Payroll and related
                 1,118             1,248
Accounting and legal fees
                 191              244
Severance
                 688              141
Other
                 204              273
Income taxes payable
                 103              101
Total current liabilities
                 3,289             2,780
Common stock warrant liability
                 996              7,338
Severance payable, long term portion
                 142              —
Total liabilities
                 4,427             10,118
Commitments

Stockholders’ equity:

Convertible preferred stock, $.01 par value; 50,000,000 shares authorized, 1,813,944 and 5,419,551 issued and outstanding
                 18              54
Common stock, $.01 par value; 25,000,000 shares authorized; 9,661,868 and 14,174,545 issued and outstanding
                 96              142
Additional paid-in capital
                 212,310             226,913
Deficit accumulated during the development stage
                 (175,346 )            (196,093 )
Total stockholders’ equity
                 37,078             31,016
Total liabilities and stockholders’ equity
              $ 41,505          $ 41,134

See accompanying notes to financial statements.
~~F-3~~

F-3

Biodel Inc.
(A Development Stage Company)
Statements of Operations
(In thousands, except share and per share amounts)

December 3,
2003
(Inception) to
Year Ended September 30, September 30,
2007 2008 2009 2009
Revenue $ — $ — $ — $ —

Operating expenses:
Research and development 15,939 32,554 32,325 90,051
General and administrative 8,386 14,800 10,994 36,645

Total operating expenses 24,325 47,354 43,319 126,696
Other (income) and expense:
Interest and other income (1,902 ) (3,010 ) (386 ) (5,489 )
Interest expense — — — 78
Loss on settlement of debt — — — 627

Operating loss before tax provision (benefit) (22,423 ) (44,344 ) (42,933 ) (121,912 )
Tax provision (benefit) 125 (983 ) 337 (508 )

Net loss (22,548 ) (43,361 ) (43,270 ) (121,404 )
Charge for accretion of beneficial conversion rights — — — (603 )
Deemed dividend — warrants (4,457 ) — — (4,457 )

Net loss applicable to common stockholders $ (27,005 ) $ (43,361 ) $ (43,270 ) $ (126,464 )

Net loss per share — basic and diluted $ (1.76 ) $ (1.94 ) $ (1.82 )

Weighted average shares outstanding — basic and diluted 15,354,898 22,390,434 23,746,598

    Year Ended September 30,

    2010
    2011
    2012
    December 3,
2003
(Inception) to
September 30,
2012
Revenue
              $ —           $ —           $ —           $ —
Operating expenses:

Research and development
                 26,177             13,901             12,571             142,700
Government grants
                 —              —              (88 )            (88 )
General and administrative
                 10,980             9,321             6,816             63,762
Total operating expenses
                 37,157             23,222             19,299             206,374
Other (income) and expense:

Interest and other income
                 (17 )            (60 )            (80 )            (5,646 )
Interest expense
                 —              —              —              78
Adjustments to fair value of common stock warrant liability
                 1,254             (12,611 )            1,510             (9,847 )
Loss on settlement of debt
                 —              —              —              627
Loss before tax provision (benefit)
                 (38,394 )            (10,551 )            (20,729 )            (191,586 )
Tax provision (benefit)
                 (104 )            41              18              (553 )
Net loss
                 (38,290 )            (10,592 )            (20,747 )            (191,033 )
Charge for accretion of beneficial conversion
rights
                 —              —              —              (603 )
Deemed dividend — warrants
                 —              —              —              (4,457 )
Net loss applicable to common stockholders
              $ (38,290 )         $ (10,592 )         $ (20,747 )         $ (196,093 )
Net loss per share — basic and diluted*
              $ (6.34 )         $ (1.36 )         $ (1.91 )
Weighted average shares outstanding — basic and diluted*
                 6,040,467             7,788,741             10,882,688

*   Restated for a one for four (1:4) reverse stock split effective on June 11, 2012.

See accompanying notes to financial statements.
~~F-4~~

F-4

Biodel Inc.
(A Development Stage Company)
Statements of Stockholders’ Equity
(In thousands, except share and per share amounts)

Deficit
Accumulated Accumulated
Common Stock Series A Preferred stock Series B Preferred stock Additional Other During the Total
$01 Par Value $.01 Par Value $.01 Par Value Paid in Comprehensive Development Stockholders’
Shares Amount Shares Amount Shares Amount Capital Income (loss) Stage Equity
Shares issued to employees 732,504 $ 7 — $ — — $ — $ (7 ) $ $ — $ —
January 2004 Proceeds from sale of common stock 4,581,240 46 — — — — 1,308 — 1,354
Net loss — — — — — — — (774 ) (774 )

Balance, September 30, 2004
5,313,744 53 — — — — 1,301 — (774 ) 580
Additional stockholder contributions — — — — — — 514 — 514
Share-based compensation — — — — — — 353 — 353
Shares issued to employees and directors for services 42,656 1 — — — — 60 — 61
July 2005 Private placement — Sale of Series A preferred stock, net of issuance costs of $379 — — 569,000 6 — — 2,460 — 2,466
Founder’s compensation contributed to capital — — — — — — 63 — 63
Net loss — — — — — — — — (3,383 ) (3,383 )

Balance, September 30, 2005
5,356,400 54 569,000 6 — — 4,751 — (4,157 ) 654
Share-based compensation — — — — — — 1,132 — 1,132
July 2006 Private placement — Sale of Series B preferred stock, net of issuance costs of $1,795 — — — — 5,380,711 54 19,351 — 19,405
July 2006 — Series B preferred stock units issued July 2006 to settle debt — — — — 817,468 8 3,194 — 3,202
Shares issued to employees and directors for services 4,030 — — — — — 23 — 23
Accretion of fair value of beneficial conversion charge — — — — — — 603 (603 ) —
Net loss — — — — — — — — (8,068 ) (8,068 )

Balance, September 30, 2006
5,360,430 54 569,000 6 6,198,179 62 29,054 — (12,828 ) 16,348
May 2007 Proceeds from sale of common stock 5,750,000 58 — — — — 78,697 — 78,755
Conversion of preferred stock on May 16, 2007 6,407,008 64 (569,000 ) (6 ) (6,198,179 ) (62 ) 4 — —
Share-based compensation — — — — — — 4,224 — 4,224
Shares issued to employees, non-employees and directors for services 2,949 — — — — — 16 — 16
Stock options exercised 3,542 — — — — — 5 — 5
March 2007 Warrants exercised 2,636,907 26 — — — — 397 — 423

Deemed dividend — warrants — — — — — — 4,457 (4,457 ) —
Net loss — — — — — — — (22,548 ) (22,548 )

Balance, September 30, 2007
20,160,836 202 — — — — 116,854 — (39,833 ) 77,223
Proceeds from sale of common stock 3,260,000 32 — — — — 46,785 — 46,817
Issuance of restricted stock 9,714 — — — — — 172 — 172
Share-based compensation — — — — — — 6,503 — 6,503
Stock options exercised 174,410 1 — — — — 901 — 902
Warrants exercised 79,210 1 — — — — 111 — 112
Net unrealized (loss) on Marketable Securities — — — — — — — (62 ) — (62 )
Proceeds from sale of stock — ESPP 14,388 1 — — — — 180 — 181
Net loss — — — — — — — (43,361 ) (43,361 )

Balance, September 30, 2008
23,698,558 $ 237 — $ — — $ — $ 171,506 $ (62 ) $ (83,194 ) $ 88,487

    Common Stock
$01 Par Value
    Series A
Preferred stock
$.01 Par Value
    Series B
Preferred stock
$.01 Par Value

    Shares
    Amount
    Shares
    Amount
    Shares
    Amount
    Additional
Paid in
Capital
    Accumulated
Other
Comprehensive
Income (loss)
    Deficit
Accumulated
During the
Development
Stage
    Total
Stockholders’
Equity
Balance at Inception (December 3, 2003)
                 —           $ —              —           $ —              —           $ —           $ —           $ —           $ —           $ —
Shares issued to employees
                 183,126             2              —              —              —              —              (2 )            —              —              —
January 2004 Proceeds from sale of common stock
                 1,145,306             11              —              —              —              —              1,343             —              —              1,354
Net loss
                 —              —              —              —              —              —              —              —              (774 )            (774 )
Balance, September 30, 2004
                 1,328,432          $ 13              —           $ —              —           $ —           $ 1,341          $ —           $ (774 )         $ 580
Additional stockholder contributions
                 —              —              —              —              —              —              514              —              —              514
Stock-based compensation
                 —              —              —              —              —              —              353              —              —              353
Shares issued to employees and directors for services
                 10,658             —              —              —              —              —              61              —              —              61
July 2005 Private placement — Sale of Series A preferred stock, net of issuance costs of $379
                 —              —              569,000             6              —              —              2,460             —              —              2,466
Founder’s compensation contributed to capital
                 —              —              —              —              —              —              63              —              —              63
Net loss
                 —              —              —              —              —              —              —              —              (3,383 )            (3,383 )
Balance, September 30, 2005
                 1,339,090          $ 13              569,000          $ 6              —           $ —           $ 4,792          $ —           $ (4,157 )         $ 654
Stock-based compensation
                 —              —              —              —              —              —              1,132             —              —              1,132
July 2006 Private placement — Sale of Series B preferred stock, net of issuance costs of $1,795
                 —              —              —              —              5,380,711             54              19,351             —              —              19,405
July 2006 — Series B preferred stock units issued July 2006 to settle debt
                 —              —              —              —              817,468             8              3,194             —              —              3,202
Shares issued to employees and directors for services
                 988              —              —              —              —              —              23              —              —              23
Accretion of fair value of beneficial conversion charge
                 —              —              —              —              —              —              603              —              (603 )            —
Net loss
                 —              —              —              —              —              —              —              —              (8,068 )            (8,068 )
Balance, September 30, 2006
                 1,340,078          $ 13              569,000          $ 6              6,198,179          $ 62           $ 29,095          $ —           $ (12,828 )         $ 16,348
May 2007 Proceeds from sale of common stock
                 1,437,500             14              —              —              —              —              78,741             —              —              78,755
Conversion of preferred stock on May 16, 2007
                 1,601,749             16              (569,000 )            (6 )            (6,198,179 )            (62 )            52              —              —              —
Stock-based compensation
                 —              —              —              —              —              —              4,224             —              —              4,224
Shares issued to employees, non-employees and directors for services
                 732              —              —              —              —              —              16              —              —              16
Stock options exercised
                 885              —              —              —              —              —              5              —              —              5
March 2007 Warrants exercised
                 659,226             7              —              —              —              —              416              —              —              423
Deemed dividend — warrants
                 —              —              —              —              —              —              4,457             —              (4,457 )            —
Net loss
                 —              —              —              —              —              —              —              —              (22,548 )            (22,548 )
Balance, September 30, 2007
                 5,040,170          $ 50              —           $ —              —           $ —           $ 117,006          $ —           $ (39,833 )         $ 77,223
Proceeds from sale of common stock
                 815,000             8              —              —              —              —              46,809             —              —              46,817
Issuance of restricted stock
                 2,428             —              —              —              —              —              172              —              —              172
Stock-based compensation
                 —              —              —              —              —              —              6,503             —              —              6,503
Stock options exercised
                 43,600             1              —              —              —              —              901              —              —              902
Warrants exercised
                 19,802             —              —              —              —              —              112              —              —              112
Net unrealized loss on Marketable Securities
                 —              —              —              —              —              —              —              (62 )            —              (62 )
Proceeds from sale of stock — ESPP
                 3,596             —              —              —              —              —              181              —              —              181
Net loss
                 —              —              —              —              —              —              —              —              (43,361 )            (43,361 )
Balance, September 30, 2008
                 5,924,596          $ 59              —           $ —              —              —           $ 171,684          $ (62 )         $ (83,194 )         $ 88,487
Stock-based compensation
                 —              —              —              —              —              —              5,064             —              —              5,064
Stock options exercised
                 4,413             —              —              —              —              —              25              —              —              25
Net unrealized gain on Marketable Securities
                 —              —              —              —              —              —              —              62              —              62
Proceeds from the sale of stock — ESPP
                 21,863             —              —              —              —              —              170              —              —              170
Net loss
                                                                                                                         (43,270 )            (43,270 )
Balance, September 30, 2009
                 5,950,872          $ 59              —           $ —              —           $ —           $ 176,943          $ —           $ (126,464 )         $ 50,538
Registered direct financing
                 599,550             6              —              —              —              —              8,706             —              —              8,712
Initial value of warrants issued in a registered direct
                 —              —              —              —              —              —              (2,915 )            —              —              (2,915 )
Stock-based compensation
                 —              —              —              —              —              —              5,621             —              —              5,621
Stock options exercised
                 8,076             —              —              —              —              —              68              —              —              68
Net unrealized gain on marketable securities
                 —              —              —              —              —              —              —              1              —              1
Proceeds from the sale of stock — ESPP
                 41,393             1              —              —              —              —              324            �� —              —              325
Net loss
                 —              —              —              —              —              —              —              —              (38,290 )            (38,290 )

See accompanying notes to financial statements.
~~F-5~~

F-5

Biodel Inc.
(A Development Stage Company)
Statements of Stockholders’ Equity
(In thousands, except share and per share amounts)

Deficit
Accumulated Accumulated
Common Stock Series A Preferred stock Series B Preferred stock Additional Other During the Total
$01 Par Value $.01 Par Value $.01 Par Value Paid in Comprehensive Development Stockholders’
Shares Amount Shares Amount Shares Amount Capital Income (loss) Stage Equity
Balance, September 30, 2008
23,698,558 $ 237 — $ — — $ — $ 171,506 $ (62 ) $ (83,194 ) $ 88,487
Share-based compensation 5,064 5,064
Stock options exercised 17,661 — — — — — 25 — — 25
Net unrealized gain on Marketable Securities — — — — — — — 62 — 62
Proceeds from sale of stock — ESPP 87,453 1 — — — — 169 — — 170
Net loss (43,270 ) (43,270 )

Balance, September 30, 2009
23,803,672 $ 238 — $ — — $ — $ 176,764 $ — $ (126,464 ) $ 50,538

    Common Stock
$01 Par Value
    Series A
Preferred stock
$.01 Par Value
    Series B
Preferred stock
$.01 Par Value

    Shares
    Amount
    Shares
    Amount
    Shares
    Amount
    Additional
Paid in
Capital
    Accumulated
Other
Comprehensive
Income (loss)
    Deficit
Accumulated
During the
Development
Stage
    Total
Stockholders’
Equity
Balance, September 30, 2010
                 6,599,891          $ 66              —           $ —              —           $ —           $ 188,747          $ 1           $ (164,754 )         $ 24,060
Registered direct financing
                 3,018,736             30              1,813,944             18              —              —              27,913             —              —              27,961
Initial value of warrants issued in a registered direct offering
                 —              —              —              —              —              —              (9,438 )            —              —              (9,438 )
Stock-based compensation
                 —              —              —              —              —              —              4,920             —              —              4,920
Stock options exercised
                 104              —              —              —              —              —              —              —              —              —
Warrants exercised
                 10,549             —              —              —              —              —              50              —              —              50
RSU’s granted
                 15,537             —              —              —              —              —              —              —              —              —
Net unrealized loss on marketable securities
                 —              —              —              —              —              —              —              (1 )            —              (1 )
Proceeds from the sale of stock — ESPP
                 17,051             —              —              —              —              —              118              —              —              118
Net loss
                 —              —              —              —              —              —              —              —              (10,592 )            (10,592 )
Balance, September 30, 2011
                 9,661,868          $ 96              1,813,944          $ 18              —           $ —           $ 212,310          $ —           $ (175,346 )         $ 37,078
Proceeds from the sale of unregistered securities
                 4,250,020             43              —              —              3,605,607             36              16,999             —              —              17,078
Initial value of warrants issued in private placement financing
                 —              —              —              —              —              —              (4,832 )            —              —              (4,832 )
Stock-based compensation
                 —              —              —              —              —              —              1,828             —              —              1,828
Proceeds from the sale of stock — ESPP
                 10,776             —              —              —              —              —              27              —              —              27
RSUs issued to settle bonus liability
                 191,719             2              —              —              —              —              582              —              —              584
RSUs granted
                 60,409             1              —              —              —              —              (1 )            —              —              —
Net loss
                 —              —              —              —              —              —              —              —              (20,747 )            (20,747 )
Company re-purchase of fractional shares from the reverse stock split
                 (247 )            —              —              —              —              —              —              —              —              —
Balance, Septermber 30, 2012
                 14,174,545          $ 142              1,813,944          $ 18              3,605,607          $ 36           $ 226,913          $ —           $ (196,093 )         $ 31,016

See accompanying notes to financial statements.
~~F-6~~

F-6

Biodel Inc.
(A Development Stage Company)
Statements of Comprehensive Loss
(In thousands)
    Year Ended September 30,

    2010
    2011
    2012
Net loss
              $ (38,290 )         $ (10,592 )         $ (20,747 )
Unrealized holding gains arising during the period
                 1              —              —
Comprehensive loss
              $ (38,289 )         $ (10,592 )         $ (20,747 )

See accompanying notes to financial statements.
F-7

Biodel Inc.
(A Development Stage Company)
Statements of Cash Flows
(In thousands, except share and per share amounts)

December 3, 2003
(Inception) to
September 30,
2007 2008 2009 2009
Cash flows from operating activities:

Net loss $ (22,548 ) $ (43,361 ) $ (43,270 ) $ (121,404 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 254 567 877 2,149
Founder’s compensation contributed to capital — — — 271
Share-based compensation for employees and directors 3,567 6,434 4,970 15,204
Share-based compensation for non-employees 657 241 94 2,325
Loss on settlement of debt — — — 627
Write-off of capitalized patent expense — 208 — 208
Write-off of loan to related party — — — 41
(Increase) decrease in:
Prepaid expenses and other assets (430 ) (745 ) 768 (482 )
Income taxes receivable — (1,988 ) 1,236 (752 )
Increase (decrease) in:
Accounts payable 830 (1,374 ) 194 1,007
Income tax payable 255 917 (847 ) 165
Deferred compensation (500 ) — — —
Accrued expenses and other liabilities 2,406 4,198 715 8,133

Total adjustments
7,039 8,458 8,007 28,896

Net cash used in operating activities
(15,509 ) (34,903 ) (35,263 ) (92,508 )

Cash flows from investing activities:

Purchase of property and equipment (1,315 ) (2,769 ) (637 ) (5,809 )
Purchase of marketable securities — (25,614 ) — (25,614 )
Sale of marketable securities — — 25,614 25,614
Capitalized intellectual properties (66 ) (17 ) — (298 )
Loan to related party — — — (41 )

Net cash provided by (used in) investing activities
(1,381 ) (28,400 ) 24,977 (6,148 )

Cash flows from financing activities:

Options exercised 5 902 25 932
Warrants exercised 423 112 — 535
Deferred public offering costs (1,268 ) — — (1,458 )
Stockholder contribution — — — 1,660
Net proceeds from sale of Series A preferred stock — — — 2,466
Net proceeds from employee stock purchase plan — 181 170 351
Net proceeds from sale of common stock 80,213 46,817 — 127,030
Proceeds from bridge financing — — — 2,575
Net proceeds from sale of Series B preferred stock — — — 19,205

Net cash provided by financing activities
79,373 48,012 194 153,295

Net increase (decrease) in cash and cash equivalents
62,483 (15,291 ) (10,091 ) 54,640
Cash and cash equivalents, beginning of period
17,539 80,022 64,731 —

Cash and cash equivalents, end of period
$ 80,022 $ 64,731 $ 54,640 $ 54,640

Supplemental disclosures of cash flow information:

Cash paid for interest and income taxes was:
Interest $ — $ — $ — $ 9
Income taxes 44 88 111 246
Non-cash financing and investing activities:

Settlement of debt with Series B preferred stock $ — $ — $ — $ 3,202
Accrued expenses settled with Series B preferred stock — — — 150
Deemed dividend — warrants 4,457 — — 4,457
Accretion of fair value of beneficial charge on preferred stock — — — 603
Conversion of convertible preferred stock to common stock 68 — — 68
    Year Ended September 30,

    2010
    2011
    2012
    December 3,
2003
(Inception) to
September 30,
2012
Cash flows from operating activities:

Net loss
              $ (38,290 )         $ (10,592 )         $ (20,747 )         $ (191,033 )
Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization
                 991              938              725              4,803
Founder’s compensation contributed to capital
                 —              —              —              271
Share-based compensation for employees and directors
                 5,628             4,964             1,828             27,624
Share-based compensation for non-employees
                 (7 )            (44 )            —              2,274
Loss on settlement of debt
                 —              —              —              627
Write-off of capitalized patent expense
                 —              —              38              246
Write-off of loan to related party
                 —              —              —              41
Adjustment to fair value of common stock warrant liability
                 1,254             (12,611 )            1,510             (9,847 )
(Increase) decrease in:
                ��
Prepaid expenses and other assets
                 117              (41 )            111              (295 )
Income taxes receivable
                 636              81              1              (34 )
Grant receivable
                 —              —              88              88
Other receivable
                 (11 )            10              (8 )            (9 )
Increase (decrease) in:

Accounts payable
                 982              (1,767 )            63              285
Income tax payable
                 (120 )            58              (2 )            101
Accrued expenses and other liabilities
                 (5,561 )            753              (128 )            3,199
Total adjustments
                 3,909             (7,659 )            4,052             29,198
Net cash used in operating activities
                 (34,381 )            (18,251 )            (16,695 )            (161,835 )
Cash flows from investing activities:

Purchase of property and equipment
                 (292 )            (189 )            (59 )            (6,349 )
Purchase of marketable securities
                 (6,000 )            —              —              (31,614 )
Sale of marketable securities
                 —              6,000             —              31,614
Capitalized intellectual properties
                 —              —              —              (298 )
Loan to related party
                 —              —              —              (41 )
Net cash (used in) provided by investing activities
                 (6,292 )            5,811             (59 )            (6,688 )
Cash flows from financing activities:

Restricted cash
                 (150 )            90              —              (60 )
Options exercised
                 68              —              —              1,000
Warrants exercised
                 —              50              —              585
Net proceeds from employee stock purchase plan
                 325              118              27              821
Deferred public offering costs
                 —              —              —              (1,458 )
Stockholder contribution
                 —              —              —              1,660
Net proceeds from sale of Series A preferred stock 2005
                 —              —              —              2,466
Net proceeds from sale of Series A preferred stock 2011
                 —              2,685             —              2,685
Net proceeds from sale of common stock
                 8,712             25,276             —              161,018
Proceeds from bridge financing
                 —              —              —              2,575
Net proceeds from sale of Series B preferred stock 2006
                 —              —              —              19,205
Net proceeds from sale of Series B preferred stock 2012
                 —              —              8,491             8,491
Net proceeds from sale of unregistered common stock — private placement
                 —              —              8,585             8,585
Net cash provided by financing activities
                 8,955             28,219             17,103             207,573
Net (decrease) increase in cash and cash equivalents
                 (31,718 )            15,779             349              39,050
Cash and cash equivalents, beginning of period
                 54,640             22,922             38,701             —
Cash and cash equivalents, end of period
              $ 22,922          $ 38,701          $ 39,050          $ 39,050
Cash paid for interest and income taxes was:

Interest
              $ —           $ —           $ —           $ 9
Income taxes
                 60              —              20              326
See accompanying notes to financial statements.
~~F-7~~

F-8

    Year Ended September 30,

    2010
    2011
    2012
    December 3,
2003
(Inception) to
September 30,
2012
Non-cash financing and investing activities:

Warrants issued in connection with registered direct offering
              $ 2,915          $ 9,438          $ —           $ 12,353
Warrants issued in connection with unregistered common stock — private placement
                 —              —              4,832             4,832
Settlement of debt with Series B preferred stock
                 —              —              —              3,202
Accrued expenses settled with Series B preferred stock
                 —              —              —              150
Deemed dividend — warrants
                 —              —              —              4,457
Accretion of fair value of beneficial charge on preferred stock
                 —              —              —              603
Conversion of convertible preferred stock to common stock
                 —              —              —              68
Issuance of restricted stock units to settle accrued bonus
                 —              —              584              584

See accompanying notes to financial statements.
F-9

Biodel Inc.
(A Development Stage Company)

Notes to Financial ~~Statement~~Statements
(In thousands, except share and per share amounts)
1.    Business and Basis of Presentation
Business
Biodel Inc. ~~(“Biodel”~~and its wholly owned subsidiary (collectively, “Biodel” or the “Company”, and formerly Global Positioning Group Ltd.) is a development stage specialty pharmaceutical company located in Danbury, Connecticut. The Company was incorporated in the State of Delaware on December 3, 2003 and commenced operations in January 2004. The Company ~~is focused~~formed a wholly owned subsidiary in the United Kingdom in October 2011 (“Biodel UK Limited”). This subsidiary has been inactive since its inception.
The Company focuses on the development and commercialization of innovative treatments for diabetes. The Company develops product candidates by applying its proprietary formulation technologies to existing drugs in order to improve their therapeutic results. The Company’s initial development efforts are focused on peptide hormones.diabetes that may be safer, more effective and more convenient for patients. The Company’s most advanced ~~product candidate, VIAject~~^®~~, has been studied in two pivotal Phase 3 clinical trials for~~program involves developing proprietary formulations of injectable recombinant human insulin (“RHI”) designed to be more rapid-acting than the ~~treatment of~~“rapid-acting” mealtime insulin analogs presently used to treat patients with Type 1 and Type 2 diabetes. ~~Earlier stage product candidates include VIAtab™, a sublingual tablet formulation of insulin.~~ The Company, ~~has developed all of~~therefore, refers to these formulations as its ~~product candidates utilizing its proprietary VIAdel™ technology that allows~~“ultra-rapid-acting” insulin formulations. In addition to the Company’s RHI-based formulations, the Company is using its formulation technologies to develop new ultra-rapid-acting formulations of insulin analogs. These insulin analog-based formulations generally use the same or similar excipients as the Company’s RHI-based formulations and are designed to be more rapid-acting than the “rapid-acting” mealtime insulin analogs, but they may present characteristics that are different from those offered by the Company’s RHI-based formulations.
In April 2012, the Company announced top-line results from a Phase 1 clinical trial of two RHI-based formulations, BIOD-123 and BIOD-125. In this clinical trial, BIOD-123 and BIOD-125 achieved the Company’s target pharmacokinetic, pharmacodynamic and toleration profiles. In May 2012, the Company selected two insulin analog-based formulations, BIOD-238 and BIOD-250, to study in a Phase 1 clinical trial. Based on its assessment of these two formulations, the ~~interaction between peptide hormones~~Company selected BIOD-123 as its lead RHI-based product candidate, and ~~small molecules.~~in the third calendar quarter of 2012, the Company began enrolling patients in a Phase 2 clinical trial of BIOD-123. This Phase 2 clinical trial is designed to assess the clinical impact of BIOD-123 relative to Humalog®. The trial is being conducted at investigative centers in the United States and is expected to enroll approximately 130 randomized patients with Type 1 diabetes. We expect to announce top-line results from this Phase 2 clinical trial in the third calendar quarter of 2013.
In May 2012, we selected two insulin analog-based formulations, BIOD-238 and BIOD-250, to evaluate in a Phase 1 clinical trial. BIOD-238 and BIOD-250 generally use the same or similar excipients as BIOD-123 and are intended to be optimized for rapid absorption and injection site toleration. We began enrolling patients in the Phase 1 clinical trial in the third calendar quarter of 2012. This trial is designed to compare the pharmacokinetic and injection site toleration profiles of these formulations relative to a rapid-acting mealtime insulin analog. We expect to announce top-line results from this clinical trial in the first calendar quarter of 2013. In parallel with the Phase 1 clinical trial of BIOD-238 and BIOD-250, we have continued our formulation development work to improve the stability characteristics of our ultra-rapid-acting insulin analog-based formulations.
In addition to our ultra-rapid-acting insulin formulation program, we are developing a liquid glucagon formulation for use as a rescue treatment for diabetes patients experiencing severe hypoglycemia, or very low concentrations of blood glucose. To date, we have not selected a lead formulation to advance into clinical trials. We are continuing to conduct preclinical testing to develop formulations that achieve a combination of pharmacokinetic, pharmacodynamic and stability characteristics that we believe would be required for a glucagon rescue treatment product to be commercially successful.
Basis of Presentation
The Company is in the development stage, as defined by Financial Accounting Standards Board (“FASB”) ASC 915 (prior authoritative literature: Statement of Financial Accounting Standards No. 7),
F-10

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)
“Accounting and Reporting by Development Stage Enterprises”, 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.
On ~~April 12, 2007,~~June 11, 2012, the Company effected a ~~0.7085 for one (0.7085:1)~~one-for-four reverse ~~stock~~ split ~~(see Note 11).~~of its outstanding common stock. All references in these financial statements and accompanying notes to units of common stock or per share amounts are reflective of the reverse split for all periods reported. (See Note 13.)
2.    Summary of Significant Accounting Policies
Research and Development Costs
The Company is in the business of research and development and, therefore, research and development costs include, but are not limited to, salaries and benefits, lab supplies, preclinical fees, clinical trial and related clinical manufacturing costs, allocated overhead costs and professional service providers. Research and development costs are expensed when incurred. Research and development costs aggregated ~~$15,939, $32,554,~~$26,177, $13,901 and ~~$32,325~~$12,483 for the years ended September 30, ~~2007, 2008~~2010, 2011 and ~~2009,~~2012, respectively.
Government Grants
Grants received are recognized as grant income when the grants become receivable, provided there is reasonable assurance that the Company will comply with the conditions attached to the grant and there is reasonable assurance the grant will be received. The Company requests cash funding under approved grants as expenses are incurred (not in advance) and report these receipts on the statement of operations as a separate line item entitled “Government Grants” with the corresponding expenses are included in research and development. In July and September 2012, the Company was awarded two National Institutes of Health grants for the development of concentrated ultra-rapid-acting insulin formulation and glucagon formulation, respectively, for use in an artificial pancreas. Both awards are for two years and total approximately $580 each. Work on the grant for the development of concentrated ultra-rapid-acting insulin formulation started in August 2012 and expenses incurred were $88 during the twelve months ended September 30, 2012, and corresponding income and a receivable were recorded. In January 2011, the Company received $1,200 in tax credits under the Internal Revenue Service’s therapeutic tax credit program which was recorded as a credit to reduce our research and development expenses.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates and assumptions including, but not limited to, accruals, income taxes payable, forfeiture rate used in the computation of share-based compensation and deferred tax assets. Actual results may differ from those estimates.
Cash and Cash Equivalents
The Company considers currency on hand, demand deposits and all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash equivalents. AtAs of September 30, ~~2009,~~2011 and 2012, the Company had cash and cash equivalents of ~~$54,640~~$38,701 and $39,050, respectively, and they are primarily held in ~~U.S. treasury denominated,~~a premium commercial money market ~~accounts.~~
~~Marketable securities~~
     The Company’s marketable securities were classified as available-for-sale and were reported at market value with unrealized gains and losses shown as a component of accumulated other comprehensive income (loss). The Company regularly evaluates the performance of these investments individually for impairment, taking into consideration the investment, volatility and current returns. If a determination is made that a decline in fair value is other-than-temporary, the related fund is written down to its estimated fair value. At September 30, 2008, marketable securities total $25,552. Due to the short-term need for funds and uncertainty in the credit and financial market, the Company modified its investment strategy and primarily invested in money market accounts comprised of treasury securities. At September 30, 2009, the Company had no marketable security investments.
~~F-8~~
account.
F-11

Biodel Inc.
(A Development Stage Company)

Notes to Financial ~~Statement~~Statements — (Continued)
(In thousands, except share and per share amounts)
Restricted Cash
Restricted cash was $60 as of September 30, 2011 and 2012. This amount was held in a money market account with a bank to secure a credit card purchasing agreement utilized to facilitate employee travel and certain ordinary purchases.
In February 2012, the Company brought action against one of its vendors before the American Arbitration Association in New York relating to disputed fees charged to the Company for inventory storage. As part of the arbitration stipulation, the Company established a $1,500 escrow account and recorded an accrual of $741 toward this claim. During the quarter ended June 30, 2012, the Company paid $500 from the escrow account. On July 30, 2012, the Company received a judgment from the arbitrator stating the Company’s final amount due was $55. The remaining escrow balance of $945 was removed from the escrow account and transferred to cash. The remaining accrual of $186 was reversed and recorded in research and development expense during the quarter ended September 30, 2012.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents and accounts payable ~~and accrued expenses~~ approximate their fair values due to their short term maturities.
Pre-Launch Inventory
Inventory costs associated with ~~products~~product candidates that have not yet received regulatory approval are capitalized if the Company believes there is probable future commercial use and future economic benefit. If the probability of future commercial use and future economic benefit cannot be reasonably determined, then pre-launch inventory costs associated with ~~pre-launch inventory that has not yet received regulatory approval~~such product candidates are expensed as research and development expense during the period the costs are incurred. Because all of its product candidates are in early stages of preclinical or clinical development, the Company currently expenses all purchases of pre-launch inventory as research and development, and expects to continue to do so until it can determine the probability of regulatory approval for the applicable product candidate.
For the ~~year~~years ended September 30, ~~2009,~~2011 and 2012, the Company expensed ~~$6.5 million~~$2,409 and $170, respectively, of costs associated with the purchase of ~~recombinant human insulin,~~RHI and glucagon as research and development expense after itsuch materials passed quality control inspection by the Company and transfer of title occurred. ~~The Company plans on submitting the NDA application for VIAject~~^® ~~in December 2009. Until the Company can determine the probability of VIAject~~^® ~~receiving regulatory approval, costs associated with the purchase of recombinant human insulin will continue to be expensed as research and development (see Note 7).~~
Intellectual Property
     ~~The intangible asset consists~~Intangible assets consist primarily of capitalized costs associated with ~~VIAject~~^®the Company’s ultra-rapid-acting insulin patents and the purchase of two domain addresses. They are amortized using the straight-line method over twenty years. If the Company determines that a patent will not result in future revenues, the cost related to such patent will be expensed in full on the date of that determination. ~~Amortization~~Intellectual property amortization expense for the years ended September 30, ~~2007, 2008~~2010, 2011 and ~~2009~~2012 was ~~$13, $13~~$3, $4 and $3, respectively.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation or amortization. Major improvements are capitalized, while maintenance and repairs are expensed in the period the cost is incurred. Property and equipment are depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized using the straight-line method over their estimated useful lives, or the remaining term of the lease, whichever is ~~less.~~shorter. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed from the accounts and resulting gains or losses are included in other income (expense) in the statement of operations. Estimated useful ~~life~~lives for each asset category isare as follows: Furniture and fixtures — 7 ~~years,~~years; Leasehold improvements — estimated useful life or remaining term
F-12

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)

of lease, whichever is ~~shorter,~~shorter; Laboratory equipment — 7 ~~years,~~years; Manufacturing equipment — 5 ~~years,~~years; Device development— 5 ~~years,~~years; Facility equipment— 3 years and 7 ~~years,~~years; Computer equipment — 5 ~~years~~years; and Computer software — 3 years.
Impairment of Long-Lived Assets
Whenever events or changes in circumstances indicate that the carrying amounts of a long-lived asset may not be recoverable, the Company reviews these assets for impairment and determines whether adjustments are needed to carrying values. There were no adjustments to the carrying value of long-lived assets at September 30, ~~2008~~2011 and ~~2009.~~2012.
Warrant Liability
The Company applies the provisions of Accounting Standards Codification Topic 480 (“ASC 480”) (formerly FASB Staff Position 150-5 (FSP 15-5)), Issuers Accounting under FASB Statement No. 150 for Freestanding Warrants and other Similar Instruments on Shares that are Redeemable or Distinguishing Liabilities from Equities. Pursuant to ASC 480, a freestanding financial instrument (other than outstanding share) that, at inception, embodies an obligation to repurchase the issuer’s shares and “requires or may require” the obligation to be settled by transferring assets, qualifies as a liability (if the obligation is conditional, the number of conditions is irrelevant).
The Company issued warrants in June 2012 and recorded a liability determined by the Black-Scholes valuation model. The Black-Scholes valuation model was used because the June 2012 warrants do not contain a repricing provision. The Black-Scholes valuation model takes into account, as of the valuation date, factors including the current exercise price, the expected life of the warrant, the current price of the underlying stock and its expected volatility, expected dividends on the stock, and the risk-free interest rate for the term of the warrant. These warrants will be revalued at each reporting period and changes in fair value are recognized currently in the statements of operations under the caption “Adjustment to fair value of common stock warrant liability.”
The Company issued warrants in May 2011 and recorded a liability determined by the Black-Scholes valuation model. The Black-Scholes valuation model was used because the May 2011 warrants do not contain a repricing provision. These warrants will be revalued at each reporting period and changes in fair value are recognized currently in the statements of operations under the caption “Adjustment to fair value of common stock warrant liability.”
The Company issued warrants in August 2010 and recorded a liability determined by the Monte Carlo simulation method, which was used because the August 2010 warrants contain a re-pricing provision. The Monte Carlo simulation is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of future expected stock prices of the Company and its peer group and minimize standard error.
On December 2, 2011, the unexercised warrants to purchase 589,000 shares of common stock expired. The Company revalued the liability associated with these warrants from September 30, 2011 through the date of expiration and there was no material impact on the statement of operations. The common stock warrant liability associated with these warrants no longer exists.
Comprehensive ~~Income (Loss)~~Loss
     ~~The Company classifies its marketable securities as available for sale. Other~~ Comprehensive ~~Income (Loss) include~~Loss is comprised of net loss and changes in equity for unrealized holding ~~gains/(losses)~~gains on marketable securities ~~which have arose~~ during the period. ~~During the year ended September 30, 2009, marketable security investments were sold at par value~~
F-13

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and ~~the September 30, 2008 unrealized loss of $62 was fully recaptured.~~per share amounts)
Income Taxes
The Company uses the asset and liability method of accounting for deferred income taxes. The provision for income taxes includes income taxes currently payable and those deferred as a result of temporary differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is provided to reduce deferred tax assets to the amount of future tax benefit when it is more likely than not that some portion of the deferred tax assets will not be realized. Projected future taxable income and ongoing tax planning strategies are considered and evaluated when assessing the need for a valuation allowance. Any increase or decrease in a valuation allowance could have a material adverse or beneficial impact on the Company’s income tax provision and net income or loss in the period which the determination is made.
~~F-9~~
~~Biodel Inc.~~
~~(A Development Stage Company)~~
~~Notes to Financial Statements — (Continued)~~
~~(In thousands, except share and per share amounts)~~
     The Company adopted the provisions of Accounting Standards Codification (ASC) Topic 740, Income Taxes, with respect to uncertain tax positions (substantially incorporating the Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48) effective October 1, 2007. These provisions clarify the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. Recognition thresholds and measurement attributes were prescribed for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Guidance was also provided on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. The adoption had no resulting effect on our financial statements. See Note 8 for additional information.
Concentration of Risks and Uncertainties
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. The Company deposits excess cash with major financial institutions in the United States. Balances may exceed the amount of insurance provided on such deposits. The Company believes that its investment policy guideline for its excess cash maintains safety and liquidity through its policies on credit requirements, diversification and investment maturity.
The Company has experienced significant operating losses since inception. At September 30, ~~2009,~~2012, the Company had a deficit accumulated during the development stage of ~~$126,464.~~$196,093. The Company has generated no revenue to date. The Company has funded its operations to date principally from the sale of securities. The Company expects to incur substantial additional operating losses for the next several years and will need to obtain additional financing in order to complete the clinical development of ~~VIAject~~^®,an ultra-rapid-acting insulin or a glucagon rescue product, launch and commercialize ~~VIAject~~^®,the product if it receives regulatory approval, and continue research and development programs. There can be no assurance that such financing will be available or will be at terms acceptable to the Company.
The Company is currently developing its first product candidates and has no products that have received regulatory approval. Any products developed by the Company will require approval from the ~~U.S. Food and Drug Administration (“FDA”)~~FDA or foreign regulatory agencies prior to commercial sales. There can be no assurance that the Company’s products will receive the necessary approvals. If the Company is denied such approvals or such approvals are delayed, it would have a material adverse effect on the Company’s future operating results.
To achieve profitable operations, the Company must successfully develop, test, manufacture and market products, as well as secure the necessary regulatory approvals. There can be no assurance that any such products can be developed successfully or manufactured at an acceptable cost and with appropriate performance characteristics, or that such products will be successfully marketed. These factors would have a material adverse effect on the Company’s future financial results.
~~Share-Based~~Stock-Based Compensation
In March 2010, the stockholders of the Company approved a new 2010 Stock Incentive Plan (the “2010 Plan”). The 2010 Plan replaces the 2004 Stock Incentive Plan and 2005 Non-Employee Directors Stock Option Plan. In addition, on March 8, 2012, the Company’s stockholders approved an amendment to the 2010 Plan to increase the number of shares of common stock authorized for issuance thereunder solely for the purpose of allowing the Company to issue an aggregate of 274,192 restricted stock units to certain of the Company’s employees in place of an aggregate of $823 in discretionary cash bonuses in connection with the fiscal year ended September 30, 2011 (the “2011 Bonus RSUs”). The Company will continue to use the Black-Scholes pricing model to assist in the calculation of fair value. The expected life for grants was calculated in accordance with the simplified method described in the Securities and Exchange Commission Staff Accounting Bulletin (SAB) Topic 14.D.2 in accordance with SAB No. 110. The simplified method was
F-14

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)

chosen due to limited Company history. Until the Company has adequate history, it will continue to utilize the simplified method (see Note 11).
The Company recognizes ~~share-based~~stock-based compensation arising from compensatory ~~share-based~~stock-based transactions using the fair value at the grant date of the award. Determining the fair value of ~~share-based~~stock-based awards at the grant date requires judgment. The Company uses an option-pricing model (the Black-Scholes valuation model) to assist in the calculation of fair value. Due to its limited history, the Company uses the ~~“calculated value~~“simplified method” which relies on comparable company historical volatility and uses the average of (1) the weighted average vesting period and (2) the contractual life of the option, or seven or eight years, asto determine the estimated term of the option. The Company bases its estimates of expected volatility on the median historical volatility of a group of publicly traded companies that it believes are comparable to the Company based on the line of business, stage of development, size and financial leverage.
The risk-free rate of interest for periods within the contractual life of the stock option award is based on the yield of U.S. Treasury strips on the date the award is granted with a maturity equal to the expected term of the award. The Company estimates forfeitures based on actual forfeitures during its limited history. Additionally, the Company has assumed that dividends will not be paid.
For stock options granted to non-employees, the Company measures fair value of the equity instruments utilizing the Black-Scholes valuation model, if that value is more reliably measurable than the fair value of the consideration or service received. The fair value of these instruments ~~are~~is periodically revalued as the options vest, and ~~are~~is recognized as expense over the related period of service or vesting period, whichever is longer. The total cost expensed (credited) for options granted to non-employees for the years ended September 30, ~~2007, 2008~~2010, 2011 and ~~2009~~2012 was ~~$657, $241,~~$(7), $(44) and ~~$94~~$0, respectively.
The Company expenses ratably over the vesting period the cost of the stock options granted to employees and directors. The total compensation cost ~~expensed~~ for the years ended September 30, ~~2007, 2008~~2010, 2011 and ~~2009~~2012 was ~~$3,567, $6,434,~~$5,628, $4,964 and ~~$4,970~~$1,828, respectively. At September 30, ~~2009,~~2012, the total compensation cost related to non-vested options not yet recognized was ~~$9,203,~~$1,637, which will be recognized over the next three years assuming the employees complete their service period for vesting of the options. The Black-Scholes valuation model assumptions are as follows and were determined as discussed above:
    Year Ended September 30,

    2010
    2011
    2012
Expected life (in years)
                 2.72 – 5.25             3.77 – 5.25             3.0 – 4.75
Expected volatility
                 64 – 77 %            65 – 72 %            58 – 76 %
Expected dividend yield
                 0 %            0 %            0 %
Risk-free interest rate
                 0.77 – 2.69 %            0.75 – 1.97 %            0.39 – 0.91 %
Weighted-average grant date fair value
              $ 16.37          $ 6.36          $ 2.54

~~F-10~~
Participating Securities
In June 2008 the Financial Accounting Standards Board (“FASB”) issued ASC 260-10-55 Earnings Per Share — Overall (formerly Financial Statement Position Emerging Issues Task Force 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities) (“ASC 260-10-55”). ASC 260-10-55 provides that securities and unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.
Warrant Liability — Given that the warrant holders will participate fully on any dividends or dividend equivalents, the Company determined that the warrants are participating securities and therefore are subject to ASC 260-10-55. These securities were excluded from the per share calculation for all years since their inclusion would be anti-dilutive.
F-15

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)

Year Ended September 30,
2007 2008 2009
Expected life (in years) 5.25 5.25 5.25
Expected volatility 60 - 70 % 57 - 60 % 59 - 68 %
Expected dividend yield 0 % 0 % 0 %
Risk-free interest rate 4.23% - 4.96 % 2.36% - 4.42 % 1.00% - 3.19 %
Weighted-average grant date fair value $ 11.09 $ 13.92 $ 2.69

~~Subsequent Events~~
     ~~Effective April 1, 2009,~~Stock-based Compensation — Given that the holders of Restricted Stock Unit awards (“RSUs”) will only receive dividends or dividend equivalents on RSUs that have vested prior to the Company adopted the provisions of ASC Topic 855, Subsequent Events (substantially incorporating SFAS No. 165, Subsequent Events) which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issueddeclaring dividends as well as forfeiting their rights to receive dividends or are available to be issued. The provisions set forth: (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of these provisions did not have an effectdividend equivalents on the Company’s financial position and results of operations. The Company evaluated all events or transactions that occurred after September 30, 2009 through December 14, 2009, the date it issued these financial statements. During the period,any unvested portion, the Company ~~did~~determined that the RSUs are non-participating securities and therefore are not ~~have any material recognizable or unrecognizable subsequent events.~~subject to ASC 260-10-55.
Recent Accounting Pronouncements
In ~~August 2009,~~June 2011, the ~~Financial~~FASB issued ASU 2011-05 Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While ASU 2011-05 changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. In December 2011, the FASB issued ASU 2011-12 Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards ~~Board (“FASB”) issued ASU 2009-5 Fair Value Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value~~Update No. 2011-05 (“ASU ~~2009-5”~~2011-12”). ASU ~~2009-5 provides amendments~~2011-12 deferred certain aspects of ASU 2011-05 pertaining only to ~~Subtopic 820-10, Fair Value Measurements~~the presentation of reclassification adjustments out of accumulated other comprehensive income and ~~Disclosures-Overall, for~~reinstates the ~~fair value measurement~~previous requirements to present reclassification adjustments either on the face of ~~liabilities. ASU 2009-5 clarifies that in circumstances~~the statement in which other comprehensive income is reported or to disclose them in a ~~quoted price in an active market for~~note to the ~~identical liability is not available, a reporting entity is required to measure fair value. ASU 2009-5~~financial statements. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this guidance in the ~~Company for interim and annual periods~~first quarter of the fiscal year ending ~~after~~ September 30, ~~2009.~~2012. The ~~Company does not expect the~~ adoption of ASU ~~2009-5 to have a material impact on its consolidated results of operations or financial position.~~
     Effective October 1, 2008, the Company adopted the provisions of ASC Topic 820, Fair Value Measurements and Disclosures (substantially incorporating SFAS No. 157, Fair Value Measurements). These provisions define fair value, establish a framework for measuring fair value in generally accepted accounting principles, and expand disclosures about fair value measurements. The FASB has agreed to defer for one year the effective date for certain provisions with respect to non-financial assets and liabilities. The adoption of this accounting pronouncement did not have a material effect on the Company’s financial statements.
     During the fourth quarter of 2009, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2009-01, “Amendments based on Statement of Financial Accounting Standards No. 168 – The FASB Accounting Standards Codification2011-05 and the ~~Hierarchy of Generally Accepted Accounting Principles” (the “Codification”). The Codification became the single source of authoritative GAAP~~deferrals in the United States, and other than rules and interpretive releases issued by the United States Securities and Exchange Commission (“SEC”). The Codification reorganized GAAP into a topical format that eliminates the previous GAAP hierarchy and instead established two levels of guidance – authoritative and nonauthoritative. All non-grandfathered, non-SEC accounting literature that was not included in the Codification became nonauthoritative. The adoption of the Codification did not change previous GAAP, but rather simplified user access to all authoritative literature related to a particular accounting topic in one place. Accordingly, the adoptionASU 2011-12 had no impact on the Company’s consolidated financial ~~position~~statements.
3.    Fair Value Measurement
ASC Topic 820 (“ASC 820”), originally issued as SFAS No. 157, Fair Value Measurements) applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, ASC 820 does not require any new fair value measurements. The fair value framework requires the categorization of assets and ~~results~~liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. The three levels of ~~operations. All prior references~~inputs used are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to ~~previous GAAP in~~the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
As of September 30, 2011 and 2012, the Company had assets and liabilities that fell under the scope of ASC 820. The fair value of the Company’s ~~consolidated financial statements were updated~~warrant liability was determined by the Monte Carlo simulation method for the ~~new references under~~warrants issued in connection with the ~~Codification.~~
~~F-11~~
Company’s August 2010 financing and by the Black-Scholes valuation model for the warrants issued in connection with the Company’s May 2011 and June 2012 financings. The Monte Carlo simulation method is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of future expected stock prices of the Company and its peer group and minimize standard error. The Black-Scholes valuation
F-16

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)
~~3. Marketable Securities~~
     ~~The Company classifies~~
model takes into account, as of the valuation date, factors including the current exercise price, the expected life of the warrant, the current price of the underlying stock and its expected volatility, expected dividends on the stock, and the risk-free interest rate for the term of the warrant. Accordingly, the Company’s fair value measurements of its marketable securities are classified as ~~available for sale. The Company determines the appropriate classification of debt and equity securities at the time of purchase and re-evaluates such designation as of each balance sheet date.~~
     The Company invests in certain marketable securities, which consist primarily of short-to-intermediate-term debt securities issued by the U.S. government, U.S. government agencies and municipalities and investment grade corporate securities. The Company only invests in marketable securities with active secondary or resale markets to ensure portfolio liquiditya Level 1 input, and the ~~ability to readily convert investments into cash to fund current operations, or satisfy other cash requirements~~Company’s fair value measurements of its warrant liability is classified as ~~needed. Due to the nature~~a Level 3 input.
The fair value of the ~~Company as a development stage company~~Company’s financial assets and its funding needs at times being uncertain, the Company has classified all marketable securities as available-for-sale. The unrealized gains and losses on these securities are included in accumulated other comprehensive income as a separate component of stockholders’ equity. The specific-identification method is used to determine the cost of a security sold or the amount reclassified from accumulated other comprehensive income into earnings.
     As of September 30, 2008, the Company conducted a periodic review to identify and evaluate each investment that has an unrealized loss. Any unrealized loss identified as other-than-temporary is recorded directly in the Statement of Operations.
     As of September 30, 2008 the Company concluded the unrealized losses were temporary because (1) the Company believes the market value is partially due to global and current economic conditions which are at unprecedented levels and (2) the securities continue to be of high quality and interest has been paid when due. The Company does not believe any unrealized losses represent an other-than-temporary impairment based on its evaluation of available evidence as of September 30, 2008. If in the future the Company determines that any decline is other-than-temporary, the Company would have to recognize the loss in its Statement of Operations. Unrealized gains and losses are recorded in accumulated other comprehensive income in the Company’s Balance Sheet.
     ~~Marketable securities classified as available for sale are measured~~liabilities carried at fair value ~~based~~and measured on ~~quoted market prices.~~ a recurring basis are as follows:
Description
    Fair Value at
September 30,
2012
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Market Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
Assets:

Cash and cash equivalents
              $ 39,050          $ 39,050          $ —           $ —
Restricted cash
                 60              60              —              —
Subtotal
                 39,110             39,110             —              —
Liabilities:

Common stock warrant liability
                 (7,338 )            —              —              (7,338 )
Subtotal
                 (7,338 )            —              —              (7,338 )
Total
              $ 31,772          $ 39,110          $ —           $ (7,338 )

Description
    Fair Value at
September 30,
2011
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Market Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
Assets:

Cash and cash equivalents
              $ 38,701          $ 38,701          $ —           $ —
Restricted cash
                 60              60              —              —
Subtotal
                 38,761             38,761             —              —
Liabilities:

Common stock warrant liability
                 (996 )            —              —              (996 )
Subtotal
                 (996 )            —              —              (996 )
Total
              $ 37,765          $ 38,761          $ —           $ (996 )

The ~~amortized cost, gross unrealized gains~~Company recognizes transfers into and ~~losses and fair value~~out of ~~investment securities at September 30, 2008 are summarized below. As~~the levels indicated above on the actual date of ~~September 30, 2009,~~ the ~~Company had no marketable security investments.~~

September 30, 2008
Amortized Gross Unrealized Fair
Cost Gains Losses Value
Short term marketable securities

Commercial paper $ 998 $ — $ (1 ) $ 997
Certificates of deposits 1,999 1 — 2,000
US government agency securities 10,170 — (54 ) 10,116
Corporate and agency bonds 4,010 — (8 ) 4,002
Discount and bank notes 8,437 — — 8,437

Total $ 25,614 $ 1 $ (63 ) $ 25,552

~~F-12~~
event or change in circumstances that caused the transfer of change. All changes within Level 3 can be found in the following Level 3 reconciliation table:
Balance at September 30, 2009
  $ —
August 2010 warrant — initial fair value at the date of issuance
(2,915 )
Increase in fair value
(1,254 )
Balance at September 30, 2010
(4,169 )
May 2011 warrant — initial fair value at the date of issuance
(9,438 )
Exercise of warrants
29
Decrease in fair value
12,582
Balance at September 30, 2011
(996 )
F-17

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)
June 2012 warrant — initial fair value at the date of issuance
(4,832 )
Increase in fair value
(1,510 )
Balance at September 30, 2012
  $ (7,338 )

     AsThe following table presents the Company’s liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of September 30, ~~2009,~~2011 and September 30, 2012:
Description
    Quoted
Prices in
Active
Markets for
identical
Assets and
Liabilities
(Level 1)
    Significant
other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Balance
as of
September 30,
2011
    Quoted
Prices in
Active
Markets for
identical
Assets and
Liabilities
(Level 1)
    Significant
other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Balance as of
September 30,
2012
Derivative liabilities related to Warrants
              $ —           $ —           $ 996           $ 996           $ —           $ —           $ 7,338          $ 7,338

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the twelve months ended September 30, 2012 and September 30, 2011:
Description
    Balance at
September 30,
2010
    Fair Value of
warrants
upon issuance
    Unrealized
(gains)
or losses
    Balance
as of
September 30,
2011
    Fair Value of
warrants
upon issuance
    Unrealized
(gains) or
losses
    Balance as of
September 30,
2012
Derivative liabilities related to Warrants
              $ 4,169          $ 9,438          $ (12,611 )         $ 996           $ 4,832      ��   $ 1,510          $ 7,338

The unrealized gains or losses on the derivative liabilities are recorded as a change in fair value of derivative liabilities in the Company’s statement of operations. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, the Company ~~classifies~~reviews the assets and liabilities that are subject to ASC Topic 815-40. At each reporting period, all assets and liabilities for which the ~~securities~~fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as ~~current since all investments are in U.S. Treasury based money market accounts with original maturities of three months or less at the date of purchase.~~Level 3.
4.    Net Loss per Share
Net loss per share information is determined using the two-class method, which includes the weighted-average number of common shares outstanding during the period and other securities that participate in dividends (“participating securities”). The Company considers the outstanding warrants participating securities because they include rights to participate in dividends with the common stock on a one-for-one basis. In applying the two-class method, earnings are allocated to both common stock shares and warrants based on their respective weighted-average shares outstanding for the period. Since losses are not allocated to the participating securities, the two-class method results in the same loss per common share calculated using the basic method for the periods presented in these financial statements.
Basic and diluted net loss per share has been calculated by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding during the period. All potentially dilutive common shares have been excluded from the calculation of weighted average common shares outstanding since their inclusion would be ~~antidilutive.~~anti-dilutive.
F-18

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)
The amount of options, warrants shares of preferred stock and ~~warrants~~restricted stock units excluded are as follows:

Year Ended September 30,
2007 2008 2009
Common shares underlying warrants for Series A Preferred Stock 198,025 118,815 118,815
Stock options 1,685,974 3,135,390 3,407,633
    Year Ended September 30,

    2010
    2011
    2012
Common shares issuable upon conversion of Series A Preferred Stock
                 —              453,486             453,486
Common shares issuable upon conversion of Series B Preferred Stock
                 —              —              3,605,607
Common shares underlying warrants issued for common stock
                 629,254             2,875,647             5,006,398
Stock options
                 1,158,891             1,365,350             1,546,454
Restricted stock units
                 62,264             121,677             68,153

5.    Property and ~~equipment~~Equipment
Property and equipment consists of the following:
    September 30,

    2011
    2012
Furniture and fixtures
              $ 324           $ 324
Leasehold improvements
                 1,548             1,548
Construction-in-progress
                 38              0
Laboratory equipment
                 1,886             1,945
Manufacturing equipment
                 655              655
Facility equipment
                 65              65
Computer equipment and other
                 1,308             1,308
Sub-Total
                 5,824             5,845
Less: Accumulated depreciation and amortization
                 3,571             4,293
Total
              $ 2,253          $ 1,552

September 30,
2008 2009
Furniture and fixtures $ 313 $ 318
Leasehold improvements 1,546 1,549
Construction-in-progress 121 15
Laboratory equipment 1,381 1,612
Manufacturing equipment 144 372
Facility equipment 50 50
Device development — 157
Computer equipment and other 1,150 1,270

Sub-Total 4,705 5,343
Less: Accumulated depreciation and amortization 774 1,648

Total $ 3,931 $ 3,695

Depreciation expense for the years ended September 30, ~~2007, 2008~~2010, 2011 and ~~2009~~2012 was ~~$543, $554~~$989, $935 and ~~$874,~~$722, respectively.
6.    Related Party Transactions
The following is a description of material transactions, other than compensation arrangements, since the Company’s incorporation on December 3, 2003 to which the Company has been a party and in which any of its directors, executive officers or persons who it knows held more than five percent of any class of capital stock, including their immediate family members who had or will have a direct or indirect material interest. The Company believes that the terms obtained or consideration paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would have been paid or received, as applicable, in arm’s-length transactions.
Consulting and Clinical Research Services
     ~~Effective December 2008,~~ Dr. Andreas Pfützner ~~is no longer our~~served as the Company’s Chief Medical Officer in ~~Europe.~~Europe until December 2008. During the fiscal year ended September 30, 2008, we paid Dr. Pfützner ~~has been retained as a consultant~~$386 in connection with his services in this capacity. Dr. Pfützner continues to perform consulting services for ~~ongoing clinical trials being conducted~~us from time to time, and during the fiscal years ended September 30, 2010, 2011 and 2012, we paid Dr. Pfützner $50, $11 and $0, respectively, in ~~Europe.~~
~~F-13~~
~~Biodel Inc.~~
~~(A Development Stage Company)~~
~~Notes to Financial Statements — (Continued)~~
~~(In thousands, except share and per share amounts)~~
consulting fees. During the fiscal years ended September 30, ~~2007~~2010, 2011 and ~~2008, the Company~~2012, we paid approximately ~~$926~~$867, $86 and ~~$2,710,~~$51, respectively, in clinical related costs to the Institute for Clinical Research and Development in Mainz, Germany, where ~~Andreas~~Dr. Pfützner ~~our former Chief Medical Officer in Europe, served~~serves as its managing director. Dr. Pfützner is majority
F-19

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)

owner of the Institute together with his spouse. In July 2007, Steiner Ventures, LLC loaned Dr. Pfützner approximately $200. As of September 30, 2010, the remaining balance on the loan was approximately $89. Dr. Solomon Steiner, our former Chief Scientific Officer, was the sole managing member of Steiner Ventures, LLC at that time. Also at that time, Dr. Steiner and his spouse ~~are majority shareholders~~jointly owned 54% of ~~the institute.~~
     ~~On April 1, 2005, the Company entered into a consulting agreement with Dr. Pfützner to provide consulting services in connection~~Steiner Ventures, LLC, with the research and development of the Company’s product candidates. The consulting agreement was amended and restated effective June 5, 2007. The initial term of the amended and restated agreement terminated on June 5, 2009 and automatically renews for successive one-year terms until the agreementbalance split equally among their four adult children, including Erik Steiner. Erik Steiner is terminated by either party on prior written notice in accordance with the terms of the agreement. Under the agreement, Dr. Pfützner is entitled to receive $2 for each full business day devoted to the performance of his services in addition to a non-refundable payment of $150 per annum for the two-year period commencing June 5, 2007. Dr. Pfützner is bound by non-competition and non-solicitation covenants that prohibit him from competing with the Company during the term of the agreement and for one year after termination of the agreement.our Vice President, Operations.
Issuance of Series A Convertible Preferred Stock
Between March and July 2005, the Company issued and sold an aggregate of 35,000 shares of its Series A convertible preferred stock (see Note 9)11) to two executive officers and one director.
     ~~McGinnSmith~~McGinn, Smith & Company, Inc. (“MSI”) served as placement agent in connection with the offering of the Series A convertible preferred stock pursuant to a letter agreement (the “Letter Agreement”), for which MSI received $280 (excluding $15 reimbursement for expenses) and warrants to purchase 55,900 shares of Series A convertible preferred stock at $5.00 per share. The fair value of the warrants was $121 and was computed using the Black-Scholes valuation model using the following assumptions: term of 7 years; volatility rate of 90%; risk free rate of 3.65% and a dividend yield of 0.0%, which was treated as cost of raising capital. A former member of the Board of Directors of the Company was a managing director of MSI until May 2007.
In July 2005, Steiner Ventures LLC, (“SV”), an entity controlled by Dr. Solomon S. Steiner, ~~Chairman and~~ Chief ~~Executive~~Scientific Officer, entered into a subscription agreement with the Company to purchase 60,000 shares of the Series A convertible preferred stock at a price of $5.00 per share which could be accepted by the Company at any time until July 2006. At a meeting of the Board of Directors held on October 24, 2005, the Board of Directors approved, with the agreement of SV, the amendment of that subscription agreement into a subscription to purchase 12 Units in the Bridge Financing ~~(see Note 9)~~ for $300. The Company accepted this subscription and SV purchased the Units.
Since all securities contemplated to be issued pursuant to the SV subscription agreement were to be issued at fair value, no value was ascribed to the subscription agreement or amendment.
Bridge Financing
Between February and May 2006, the Company completed a Bridge Financing (see Note 9)11). Four executive officers and one director purchased an aggregate of 23 units, or $575, as part of the financing. These units were subsequently settled with 182,540 shares of Series B convertible preferred stock ~~(see Note 9)~~ and warrants to purchase 98,275 shares of common stock.
In connection with the sales of units in the Bridge Financing, the Company paid MSI an aggregate commission of $70 and issued to MSI additional warrants to purchase 22,222 shares of Series B convertible preferred stock and a warrant to purchase 11,963 shares of common stock. The fair value of the warrants was $22 as computed using the Black-Scholes valuation model using the following assumptions: term of 3.5 years; volatility rate of 50%; risk free rate of 5.05% and a dividend yield of 0.0%.
Issuance of Series B Convertible Preferred Stock
On July 19, 2006, the Company issued and sold 38,071 shares of Series B convertible preferred stock (see Note 9)11) and a warrant to purchase 20,496 shares of common stock to its Chief Executive Officer in exchange for a $150 bonus that was earned by him during the calendar year ended December 31, 2005 but voluntarily deferred. At September 30, 2005, the Company accrued $113 of the bonus and the balance of $37 was expensed in fiscal 2006. The full amount of the accrued bonus was exchanged for Series B convertible preferred stock on July 19, 2006.
F-20

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)
In connection with the issuance of the Series B convertible preferred stock, the Company retained MSI to serve as placement agent pursuant to an amendment to the Letter Agreement. MSI was paid (a) an aggregate commission of $350 from the sale of the Series B convertible preferred stock, (b) a warrant to purchase 126,903 shares of Series B convertible preferred stock and (c) a warrant to purchase 68,322 shares of common stock. On July 19, 2006, the Company also sold and issued to a director 12,690 shares of Series B convertible preferred stock and a warrant to purchase 6,832 shares of common stock. At the completion of the Series B
~~F-14~~

~~Biodel Inc.~~
~~(A Development Stage Company)~~
~~Notes to Financial Statements — (Continued)~~
~~(In thousands, except share and per share amounts)~~
preferred stock financing, the lead investor remitted the monies for its investment in the Series B Round net of offering-related expenses incurred by the investor group for which the Company was responsible. Total offering expenses were approximately $2,000, of which $1,470 was commissions for the placement of the offering. A director of the Company had arranged to pay for an investment in the Series B preferred stock financing (the “Investment”) utilizing a portion of commissions due. Since the monies due for the commission were not received by the Company, the purchase price of the Investment could not be deducted from the monies received. The fair values of the warrants for common stock were $126 and $13 and were computed using the Black-Scholes valuation model using the following assumptions: term of 3.5 years; volatility rate of 50%; risk free rate of 5.05% and a dividend yield of 0.0%. The fair value of the warrants for preferred stock was $167 and was computed using the Black-Scholes valuation model using the following assumptions: term of 3.5 years; volatility rate of 50%; risk free rate of 4.70% and a dividend yield of 0.0%. These amounts were treated as cost of raising capital.
7. Commitments
~~Deferred Compensation~~

~~On December 15, 2005, the Board of Directors authorized a bonus to be paid to SV, if the Chairman and~~ Chief Executive Officer ~~directed the completion of a successful financing in excess of $10,000. Pursuant to that board resolution,~~Employment Agreement

On March 30, 2010, the Company ~~owed SV $250 because~~announced the appointment of Errol B. De Souza, Ph.D., as the ~~issuance~~Company’s President, Chief Executive Officer and a Director. In connection with his appointment, Dr. De Souza signed an employment agreement, dated March 26, 2010, setting forth the terms of his employment. The agreement provides for an initial term of employment for the ~~Series B convertible preferred stock during~~period from March 29, 2010 to March 28, 2014 and it continues for successive one-year terms unless the ~~year ended September 30, 2006 but payment was deferred~~agreement is terminated by ~~Dr. Steiner. The Company recorded compensation expense for this bonus and had reflected the balance as due to related~~either party ~~at September 30, 2006. The balance was paid~~on 120 days prior written notice in ~~July 2007.~~

Separately, Dr. Steiner voluntarily deferred his calendar year compensation of $250. The Company recorded compensation expense for this salary and had reflected the balance as deferred compensation at September 30, 2006. The balance was paid in July 2007.

~~7. Commitments~~

~~Change of Control Agreements and Severance Agreements~~

~~In June 2008, the Company entered into change of control agreements and severance agreements~~accordance with ~~two of its executive officers.~~

~~Pursuant to~~ the terms of the ~~change~~agreement. The agreement provides for an annual salary of ~~control~~$450 and eligibility for a target bonus of 50% of the annual salary. In addition, Dr. De Souza was granted options to purchase 175,000 Shares of the Company’s common stock pursuant to the Company’s 2010 Plan. These options vest over a four-year period, with 25% vesting on the first anniversary of the grant date and the rest vesting in equal monthly amounts over the next three years.

The Company may terminate the agreement with ~~its executive officers, they are each~~or without cause. Dr. De Souza will not be entitled to severance benefits if the ~~following upon termination of~~Company terminates his employment for cause, or if he terminates his employment without good reason, as defined in the agreement. If the Company terminates Dr. De Souza’s employment without cause, or he terminates his employment with the Company ~~occurring within two years of a change of control, unless such termination is by the executive officer~~ for ~~other than~~ good reason, ~~or by the Company for cause (each as defined in the agreement):~~he is entitled to:

•

two times his then current salary, plus two times his target annual ~~base salary earned through~~bonus for the ~~termination date;~~fiscal year in which he is terminated, plus the pro rata amount of his target annual bonus for the fiscal year in which he is terminated;


	•		inCOBRA benefits until the ~~event the executive officer satisfied the performance criteria for an annual bonus prior to termination, a portion~~earlier of the ~~annual bonus based on~~end of the ~~number of days worked during~~24th month after the ~~year;~~date his employment with the Company ends or the date his COBRA coverage expires;


	•		~~if the performance criteria were not fully satisfied, but the board~~24 months of ~~directors determines that the criteria could have been satisfied had the executive officer remained employed for the full fiscal year, an amount equal to the average~~acceleration of ~~the annual bonus paid to the executive officer over the last three fiscal years, portioned based on the number of days worked during the year (the “Average Annual Bonus”);~~his outstanding equity compensation awards; and


	•		~~any~~full vesting of his outstanding equity compensation ~~previously deferred by~~awards, if the ~~executive officer and any accrued paid time-off;~~

	•		~~annual base salary for a period of 18~~Company terminates his employment without cause, or he resigns within 12 months following a change in control, as defined in the ~~date of termination;~~

	•		health insurance and, under certain circumstances, life, disability and other insurance benefits for a period of 18 months or until the executive officer qualifies for similar benefits from another employer;

	•		~~150% of the Average Annual Bonus (paid in addition to the bonus described immediately above);~~agreement.

~~F-15~~

F-21

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)

	•		~~acceleration of all outstanding options; and~~

	•		~~extension of the exercisability of options.~~

Change in Control and Severance Agreements

~~Under~~Certain employees have agreements which provide for payouts in the ~~change of control agreement, if~~event that the Company ~~terminates~~consummates a change in control. The amount of compensation due as a result of this event is approximately $4,552, as set forth in the ~~executive officer’s employment for cause or the executive officer terminates his employment with the Company without good reason, then the executive officer is not~~agreements. These employees are also entitled to full vesting of their outstanding equity awards. These agreements also provide for routine severance ~~payments or other benefits.~~

~~Pursuant to the Company’s severance agreement with its officers each executive officer is entitled to the following upon termination~~compensation. As of ~~employment with the Company, unless such termination is by the executive officer for other than good reason or by the Company for cause:~~September 30, 2012, no amounts have been accrued.

	•		~~annual base salary earned through the termination date;~~

	•		~~in the event the executive officer satisfied the performance criteria for an annual bonus prior to termination, a portion of the annual bonus based on the number of days worked during the year;~~

	•		if the performance criteria were not fully satisfied, but the board of directors determines that the criteria could have been satisfied had the executive officer remained employed for the full fiscal year, the Average Annual Bonus;

	•		~~any compensation previously deferred by the executive officer and any accrued paid time-off;~~

	•		~~annual base salary for a period of 18 months following the date of termination;~~

	•		~~health insurance for a period of 18 months or until the executive officer qualifies for similar benefits from another employer;~~

	•		~~150% of the Average Annual Bonus (paid in addition to the bonus described immediately above);~~

	•		~~acceleration of all outstanding options; and~~

	•		~~extension of the exercisability of the options.~~

~~The aggregate amount of base salary for both executives is $615. Bonuses for the executives are at the discretion of, and awarded by the Board of Directors.~~

Former Chief Scientific Officer General ~~Counsel Severance Agreement~~Release

Effective ~~January 1, 2009, R. Timmis Ware,~~December 14, 2010, Dr. Solomon Steiner, the Company’s former ~~General Counsel and Secretary, resigned~~Chief Scientific Officer, retired from all his management positions with the Company. ~~Pursuant~~On the same date, the Company and Dr. Steiner executed a general release agreement. Dr. Steiner is therefore entitled to receive the ~~Company’s~~ severance benefits set forth in his employment agreement with ~~Mr. Ware, Mr. Ware will receive~~the Company that were conditioned upon his signing the release. We recorded a bonus, continuation of salary and certain benefits until June 30, 2010. Furthermore, the agreement permits for the acceleration of the vesting of options to purchase 170,445 shares of common stock at exercise prices between $1.41 through $18.16 that remain exercisable through the original expiration date. The charge of ~~approximately $277~~$1,360 for ~~the lump sum payment,~~ salary, bonus and ~~benefit~~benefits continuation for ~~eighteen~~twenty-four months and an option acceleration modification charge of ~~approximately $100 were recorded.~~$7 in the three months ended December 31, 2010. As of September 30, ~~2009~~2012, the Company has paid ~~$138~~$1,219 in salary, bonus and benefits continuation per the terms of the ~~$277 obligation, which leaves of $139~~agreement and $141 has been classified as a short term obligation.

~~Former Chief Financial Officer Severance Agreement~~Leases

On November 13, 2007, F. Scott Reding, the Company’s former Chief Financial Officer, Chief Accounting Officer and Treasurer, resigned from all his positions with the Company. In connection with Mr. Reding’s resignation, the Company and Mr. Reding entered into a severance agreement that established the terms of Mr. Reding’s separation of employment. The charge of $482 for the lump sum payment, salary and benefit continuation for two years were recorded in the year ended September 30, 2008. The charge of $482 includes lump sum payment and payment for the continuation of salary and certain benefits for two years. As of September 30, ~~2009,~~2012, the Company ~~has paid $451 of the $482 obligation, which leaves $31 as a short term obligation.~~

~~Leases~~

~~As of September 30, 2009, the Company leases~~leased three facilities in Danbury, ~~Connecticut with Mulvaney Properties, LLC, which is controlled by a non-affiliated stockholder of the Company.~~Connecticut.

The Company ~~entered into~~renewed its ~~first~~ lease for laboratory space in ~~February 2004, which was subsequently renewed in September 2006.~~January 2010 for three years. The ~~Company expects to renew this~~ lease ~~prior to its expiry~~will expire in January ~~2010.~~2013. This lease provides for annual basic lease payments of ~~$64,~~$65, plus operating expenses.

~~F-16~~

~~Biodel Inc.~~
~~(A Development Stage Company)~~

~~Notes to Financial Statements — (Continued)~~
(In ~~thousands, except share and per share amounts)~~

~~In July~~October 2007, the Company ~~entered into a second~~amended its lease for its corporate office, which ~~was subsequently amended in October 2007. The October 2007 amendment~~ increased the term from a five ~~year~~years to a seven ~~year term~~years beginning on August 1, 2007 ~~until~~and ending on July 31, 2014. The renewal option was also amended from a five year to a seven year term. This lease provides for annual basic lease payments of $357, plus operating expenses.

In ~~December 2008,~~January 2010, the Company ~~entered into a~~renewed its third lease agreement for additional office space adjacent to its laboratory space. ~~The lease is for fourteen months beginning December 1, 2008 and ending on January 30, 2010.~~ The Company has agreed to use the leased premises only for offices, laboratories, research, development and light manufacturing. ~~The Company expects to renew this lease prior to its expiry in January 2010.~~ This lease provides for annual basic lease payments of $29, plus operating expenses.

Lease expense for the years ended September ~~30, 2007, 2008~~2010, 2011, and ~~2009~~2012 was ~~$195, $383~~$624, $633, and ~~$591,~~$636, respectively.

Minimum lease payments under these agreements as of September 30, ~~2009,~~2012, as well as equipment leases subsequently entered into, are as follows:

Years Ending September 30,
2013	$	594
2014		463
2015		—
Total	$	1,057

Years Ending September 30,
2010 537
2011 502
2012 519
2013 540
2014 465

Total $ 2,563

Purchase Commitments

The Company contracted with N.V. Organon, a global producer of ~~insulin,~~RHI, to supply the Company with all of the ~~insulin~~RHI that the Company will need for testing and manufacturing of the Company’s product candidates. ~~As subsequently amended in November 2009,~~In July 2011, the ~~agreement~~Company executed an amendment with N.V. Organon, ~~will terminate in December 2011. As~~which extends the term of ~~September~~the existing supply agreement to June 30, ~~2009,~~2018 and releases the Company ~~had~~from any purchase commitments ~~of approximately $12,268 associated with~~until the ~~signing of a renewed contract with Organon.~~

Years Ending September 30,
2010 $ 5,025
2011 7,243

Total $ 12,268

~~8. Income Taxes~~

Effective October 1, 2007, the Company adopted the provisions of FIN48, which was incorporated into the Codification within ASC Topic 740, Income Taxes, with respect to uncertain tax positions. The Company did not recognize any increase or decrease in the liability for unrecognized tax benefits related to tax positions taken in prior periods as a result of the adoption, therefore, there was no corresponding adjustment to retained earnings.

~~F-17~~

third

F-22

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)

calendar quarter of 2014. These commitments commence in the third calendar quarter of 2014 and extend through the second calendar quarter of 2018 for a total purchase commitment of approximately 160 kilograms of RHI. Both parties have the right to terminate the agreement with six months notice, with the Company having the option to purchase significant additional quantities if the supplier terminates the agreement prior to June 30, 2018. As of September 30, 2012, the Company had purchase commitments of approximately $18,020 associated with the signing of the renewed contract with N.V. Organon.

Years Ending September 30,
2013	$	—
2014		1,078
2015	��	4,367
2016		4,488
2017		4,577
2018		3,510
Total	$	18,020

8. Income Taxes

The Company ~~did not have any liabilities for unrecognized~~files its tax ~~positions as of October 1, 2007 (adoption date). During~~returns on a fiscal year basis. For the ~~year~~years ended September 30, ~~2009,~~2010, 2011 and 2012, the Company ~~performed a review on~~paid only state taxes.

The provision (benefit) for income taxes is as follows:

	Year Ended September 30,
	2010			2011		2012
Current expense
Federal	$	—		$	—	$	—
State		(104	)		41		18
Actual tax provision (benefit)	$	(104	)	$	41	$	18

The following reconciles the ~~research and development activities that occurred in~~amount of tax expense at the state of Connecticut that supports our Connecticut research and development credits and refunds. The results of that study decreased income tax receivable and the corresponding reserve relating to an anticipated tax refund from the state of Connecticut for research and development activities. For the year-ended September 30, 2009, this resulted in a 1% increasefederal statutory rate to the ~~Company’s effective~~ tax ~~rate. The reserve does not include interest or penalties based on the nature of the liability. The Company plans~~provision (benefit) in operations:

	Year Ended September 30,
	2010			2011			2012
Federal statutory rate		34.00	%		34.00	%		34.00	%
Federal taxes at statutory rate	$	(13,054	)	$	(3,587	)	$	(7,028	)
Tax expense on permanent differences (a)		2,296			(2,631	)		1,137
Tax benefit on research and business credits		(425	)		—			—
State taxes, net of federal tax effect		23			19			12
State benefit, net operating loss		(2,990	)		(163	)		(312	)
Valuation allowance increase (b)		14,156			6,382			6,164
Connecticut research and development refund		(30	)		—			—
Reserve for uncertain tax positions		4			—			—
Other		(84	)		21			45
Actual tax provision (benefit)	$	(104	)	$	41		$	18

(a)

Permanent differences were derived from share based compensation and adjustments to common stock warrant liability.

(b)

Net of the Section 382 Adjustment.

F-23

Biodel Inc.
(A Development Stage Company)

Notes to ~~treat any future interest or penalties as operating expense.~~Financial Statements — (Continued)
(In thousands, except share and per share amounts)

The following table summarized the activity related to the Company’s liabilities for uncertain tax ~~liabilities:~~positions:

	Year Ended September 30,
	2010			2011			2012
Balance, beginning of year	$	188		$	86		$	75
Increase related to current year tax position		5			—			—
Increase related to prior year’s tax position		—			—			—
Decrease related to prior year’s tax position		(107	)		(11	)		—
Balance, at end of year	$	86		$	75		$	75

Year Ended September 30,
2007 2008 2009
Balance, beginning of year $ — $ 75 $ 988
Increase related to current year tax position 75 913 6
Increase related to prior year’s tax position — — 107
Decrease related to prior year’s tax position — — (913 )

Balance, at end of year $ 75 $ 988 $ 188

The Company files U.S. federal and state tax returns and has determined that its major tax jurisdictions are the United States and Connecticut. The tax years through ~~2008~~2011 remain open due to net operating loss ~~carryovers~~ and are subject to examination by the appropriate governmental agencies in the United States and ~~Connecticut.~~Connecticut carry-forwards.

~~The provision (benefit) for income taxes is as follows:~~

Year Ended September 30,
2007 2008 2009
Current expense
Federal $ — $ — $ —
State 125 (983 ) 337

Deferred expense — — —
Actual tax provision (benefit) $ 125 $ (983 ) $ 337

AtAs of September 30, ~~2009,~~2012, the Company had net operating loss (“NOL”) carry-forwards of approximately $53,994 (net of Section 382 limitation discussed below) for U.S. federal tax purposes and $110,182 for state tax purposes. These loss carry-forwards expire between 2024 and 2032. To the extent these net operating loss carry-forwards are available, the Company intends to use them to reduce the corporate income tax liability associated with its operations.

The ability of the Company to utilize its NOL carry-forwards to reduce future taxable income is subject to various limitations under the Internal Revenue Code Section 382 (“Section 382”). The utilization of such carry-forwards may be limited upon the occurrence of certain ownership changes, including the purchase or sale of stock by 5% shareholders and the offering of stock by the Company during any three-year period resulting in an aggregate change of more than 50% in the beneficial ownership of the Company. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of a Company’s taxable income that can be offset by these carry-forwards. As of September 30, 2011, the Company completed a study of the impact of Section 382 limitation on future payments and determined that the statutory provisions limited the Company’s ability to realize future tax benefits. Accordingly, the Company decreased federal net operating loss ~~carryforwards~~carry-forwards by approximately $55,890 and federal research and development credit carry-forwards by $1,815.

As of September 30, 2012, the Company has determined that ownership change, under Section 382, occurred as a result of the June 2012 financing and therefore, the ability to utilize its current NOLs is further limited.

The Company also has state research and development credit carry-forwards of approximately ~~$100,900~~$477, which expire commencing in fiscal 2024 through 2029 and $100,400 of state net operating loss carryforwards, which expire commencing in fiscal 2024 through 2029. The Company also has federal and state research and development credit carryovers of approximately $2,100, which expire commencing in fiscal 2024.

~~F-18~~

2022.

~~Biodel Inc.~~
~~(A Development Stage Company)~~

~~Notes to Financial Statement~~
~~(In thousands, except share and per share amounts)~~

The major components of deferred tax assets and valuation allowances and deferred tax liabilities at September 30, ~~2008~~2011 and ~~2009~~2012 are as follows:

September 30,
2008 2009
Deferred Tax Assets

Net operating losses $ 26,889 $ 39,959
Research and development credit 1,652 2,149
Depreciation of fixed assets 121 284
Other 222 802

Total deferred tax asset 28,884 43,195
Valuation Allowance (28,763 ) (43,195 )

Net Deferred Tax Assets 121 —

Deferred Tax Liabilities

Other (121 ) —

Total deferred tax liabilities (121 ) —

Net Deferred Tax Asset (liabilities)
$ — $ —

F-24

~~The Company files its tax returns on a fiscal year basis. For the years ended September 30, 2007, 2008~~Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and ~~2009, the Company only had to pay state taxes.~~per share amounts)

~~During the year ended September 30, 2009, the Company performed a book-to-tax reconciliation that adjusted the deferred tax assets and valuation allowance by approximately $300.~~

	September 30,
	2011			2012
Deferred Tax Assets
Net operating losses	$	23,699		$	24,969
Capitalized expense		16,936			21,907
Research and development credits		477			477
Depreciation of fixed assets		303			51
Other		765			453
Total deferred tax asset		42,180			47,857
Valuation Allowance		(42,180	)		(47,857	)
Net Deferred Tax Assets	$	—		$	—

As the Company has not yet achieved profitable ~~operations,~~operation, management does not believe that it is more likely than not that the tax benefits as of September 30, ~~2009~~2012 will be realized and therefore has recorded a valuation allowance against its deferred tax ~~asset.~~assets.

9. Financings

June 2012 Private Placement

In June 2012, the Company completed a private placement (the “2012 Private Placement”) of an aggregate of 4,250,020 shares of the Company’s common stock, 3,605,607 shares of the Company’s Series B preferred stock and warrants to purchase an aggregate of 2,749,469 shares of common stock at an exercise price of $2.66 per share. For each unit, consisting of either a share of common stock or Series B preferred stock and a warrant to purchase 0.35 of a share of common stock, the purchasers in the June 2012 Private Placement paid a negotiated price of $2.355. The ~~following reconciles~~warrants are immediately exercisable and will expire on June 26, 2017, five years from the ~~amount~~original issuance date of ~~tax expense~~June 27, 2012. The Company received net proceeds, after deducting placement agents’ fees and other transaction expenses, of approximately $17,100 from the 2012 Private Placement.

Each share of Series B preferred stock is convertible into one share of the Company’s common stock at any time at the ~~federal statutory rate~~option of the holder, except that the securities purchase agreement that the Company entered into in connection with the 2012 Private Placement (the “Securities Purchase Agreement”) provides that a holder will be prohibited from converting shares of Series B preferred stock into shares of common stock if, as a result of such conversion, such holder, together with its affiliates, would beneficially own more than 9.98% of the total number of shares of common stock then issued and ~~taxes~~outstanding. In the event of the Company’s liquidation, dissolution or winding up, holders of the Series B preferred stock will receive a payment equal to $0.01 per share of Series B preferred stock before any proceeds are distributed to the holders of common stock. After the payment of this preferential amount, and subject to the rights of holders of any class or series of capital stock specifically ranking by its terms senior to the Series B preferred stock, holders of Series B preferred stock and holders of the Company’s Series A preferred stock will participate ratably in the distribution of any remaining assets with the common stock and any other class or series of capital stock that participates with the common stock in such distributions. Shares of Series B preferred stock will generally have no voting rights, except as required by law and except that the consent of the holders of a majority of the outstanding Series B preferred stock will be required to amend the terms of the Series B preferred stock. Holders of Series B preferred stock are entitled to receive, and the Company is required to pay, dividends on ~~loss~~shares of the Series B preferred stock equal (on an as-if-converted-to-common-stock basis) to and in the same form as ~~reflected~~dividends (other than dividends in ~~operations:~~

Year Ended
September 30,
2007 2008 2009
Federal statutory rate 34.00 % 34.00 % 34.00 %
Federal taxes at statutory rate $ (9,080 ) $ (15,077 ) $ (14,597 )
Tax expense on permanent differences 2,958 2,293 1,741
Tax benefit on research and business credits (186 ) (325 ) (325 )
State taxes, net of federal tax effect 33 61 43
State benefit, net operating loss (1,877 ) (2,784 ) (1,249 )
Valuation allowance increase 8,498 14,972 14,432
Connecticut research and development refund — (1,988 ) (40 )
Reserve for uncertain tax positions — 913 6
Other (221 ) 952 326

Actual tax provision $ 125 $ (983 ) $ 337

~~F-19~~

the form of common stock) actually paid on shares of the common stock when, as and if such dividends (other than dividends in the form of common stock) are paid on shares of the common stock.

F-25

Biodel Inc.
(A Development Stage Company)

Notes to Financial ~~Statement~~Statements — (Continued)
(In thousands, except share and per share amounts)

As required by the Securities Purchase Agreement, the Company filed a Registration Statement on Form S-3 (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) on July 27, 2012, which was within 30 days after the closing of the 2012 Private Placement. The Registration Statement, which was declared effective on August 13, 2012, registers the resale of the shares of common stock and Series B preferred stock issued and sold in the 2012 Private Placement, the shares of common stock issuable upon conversion of the Series B preferred stock issued and sold in the 2012 Private Placement, and the shares of common stock issuable upon exercise of the warrants issued and sold in the 2012 Private Placement. Pursuant to the terms of the Securities Purchase Agreement, the Company agreed to pay liquidated damages to the purchasers in the 2012 Private Placement if, after effectiveness of the Registration Statement and subject to certain specified exceptions, the Company suspends the use of the Registration Statement or the Registration Statement ceases to remain continuously effective as to all the securities for which it is required to be effective (each such event, a “Registration Default”). Subject to specified exceptions, for each 30-day period or portion thereof during which a Registration Default remains uncured, the Company is obligated to pay liquidated damages to each purchaser in cash in an amount equal to 1.0% of the aggregate purchase price paid by each such purchaser in the 2012 Private Placement, up to a maximum of 8.0% of such aggregate purchase price. As of the date of these financial statements, the Company does not believe that it is probable that it will be obligated to pay any such liquidated damages. Accordingly, the Company has not established an accrual for liquidated damages.

In the event that the Company enters into a merger or change of control transaction, the holders of the warrants issued in the 2012 Private Placement will be entitled to receive consideration as if they had exercised the warrants immediately prior to such transaction, or they may require the Company to purchase the unexercised warrants at the Black-Scholes value (as defined in the warrant) of the warrant on the date of such transaction. The holders have up to 30 days following any such transaction to exercise this right. As a result of this provision, the Company recognizes the warrants as liabilities at their fair value on each reporting date.

At September 30, 2012, the fair value of the warrant liability utilizing the Black-Scholes valuation model was approximately $5,633.

During the year ended September 30, 2012, the Company recorded an adjustment to fair value of common stock warrant liability of $801, within Other (income) expense, to reflect a decrease in the valuation of the warrants from date of issuance to September 30, 2012.

The following summarizes the changes in value of the warrant liability from the date of issuance through September 30, 2012:

Balance at September 30, 2011	$	—
Initial fair value, at the date of issuance		4,832
Increase in fair value		801
Balance at September 30, 2012	$	5,633

May 2011 Registered Direct Offering

In May 2011, the Company completed a registered direct offering of an aggregate of 3,018,736 shares of the Company’s common stock, 453,486 shares of the Company’s Series A preferred stock and warrants to purchase 2,256,929 shares of the Company’s common stock. The shares and warrants were sold in units consisting of (i) one share of common stock and (ii) one warrant to purchase 0.1625 of a share of common stock, at an exercise price of $9.92 per share of the Company’s common stock. However, one investor also purchased units consisting of one share of Series A preferred stock and a warrant to purchase 0.1625 of a share of common stock. No fractional warrants were issued. Each unit was sold at a price of $8.64 per unit. These units were not issued or certificated. The shares and warrants were immediately separated. The warrants will expire on May 17, 2016, five years from the issuance date of May 18, 2011. The Company received net

F-26

9.Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)

proceeds, after deducting placement agent fees and other offering expenses, of approximately $28.0 million from this financing.

Each share of Series A preferred stock is convertible into one quarter of a share of the Company’s common stock at any time at the option of the holder, provided that the holder will be prohibited from converting the shares of Series A preferred stock into shares of the Company’s common stock if, as a result of such conversion, the holder, together with its affiliates, would beneficially own more than 9.98% of the total number of shares of the Company’s common stock then issued and outstanding. In the event of the Company’s liquidation, dissolution or winding up, holders of the Series A preferred stock will receive a payment equal to $0.01 per share of Series A preferred stock before any proceeds are distributed to the holders of the Company’s common stock. After the payment of this preferential amount, and subject to the rights of holders of any class or series of capital stock specifically ranking by its terms senior to the Series A preferred stock, holders of Series A preferred stock will participate ratably in the distribution of any remaining assets with the Company’s common stock and any other class or series of capital stock that participates with the common stock in such distributions. Shares of Series A preferred stock will generally have no voting rights, except as required by law and except that the consent of the holders of a majority of the outstanding Series A preferred stock will be required to amend the terms of the Series A preferred stock. The Series A preferred stock will not be entitled to receive any dividends, unless and until specifically declared by the Company’s board of directors.

In the event that the Company enters into a merger or change of control transaction, the holders of the warrants issued in the May 2011 financing will be entitled to receive consideration as if they had exercised the warrant immediately prior to such transaction, or they may require the Company to purchase the unexercised warrants at the Black-Scholes value (as defined in the warrant) of the warrant on the date of such transaction. As per the terms of the warrants, the holders have up to 30 days following any such transaction to exercise this right. As a result of this provision, the Company recognizes the warrants as liabilities at their fair value on each reporting date.

The Company’s warrant liability is marked-to-market each reporting period with the change in fair value recorded as a gain or loss within Other Expense (“Adjustment to fair value of common stock warrant liability”), until the warrants are exercised, expire or other facts and circumstances lead the warrant liability to be reclassified as an equity instrument. Because the warrants issued in the May 2011 financing do not contain a re-pricing provision, the Company is using the Black-Scholes valuation model to estimate the fair value of the warrants. Using this model, the Company recorded an initial warrant liability of $9,438 as of May 18, 2011 (the warrant issuance date). The significant assumptions of the model were warrants and common stock outstanding, remaining terms of the warrants, the per stock price of $2.06, a risk-free rate of 1.89% and expected volatility rate of 75%.

During the year ended September 30, 2012, the Company recorded an adjustment to fair value of common stock warrant liability of $709, within Other (income) expense, to reflect the increase in the valuation of the warrants from September 30, 2011 to September 30, 2012 due to the increase in the value of the Company’s common stock price from September 30, 2011 to September 30, 2012. At September 30, 2012, the fair value of the warrant liability determined utilizing the Black-Scholes valuation model was approximately $1,705.

The following summarizes the changes in value of the warrant liability from the date of issuance through September 30, 2012:

Balance at September 30, 2010	$	—
Initial fair value, at the date of issuance		9,438
Decrease in fair value		(8,442	)
Balance at September 30, 2011		996
Increase in fair value		709
Balance at September 30, 2012	$	1,705

F-27

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)

August 2010 Registered Direct Offering

In August 2010, the Company sold to two institutional investors an aggregate of 599,550 units, with each unit consisting of (i) one share of common stock and (ii) one warrant to purchase one share of common stock, for a purchase price of $15.72 per unit. These units were not issued or certificated. The shares and warrants were immediately separated and the Company issued 599,550 shares of its common stock and warrants to purchase an additional 599,550 shares of the Company’s common stock. This financing resulted in net proceeds of $8,700.

In August 2011, one investor exercised 10,550 warrants, at $4.70 per share, and the Company received proceeds totaling approximately $50. Subsequently, on December 1, 2011 the remaining 589,000 warrants expired unexercised.

Fair Value Assumptions Used in Accounting for Warrant Liability

The Company has determined its warrant liability to be a Level 3 fair value measurement and used the Black Scholes valuation model to calculate the fair value for the fiscal year ended September 30, 2011 and 2012.

At the measurement date, the Company estimated the fair value for the June 2012 warrants using the Black-Scholes valuation model using the following assumptions:

	September 30, 2012
June 2012 Financing
Stock price	$	2.97
Exercise price	$	2.66
Risk-free interest rate		0.62	%
Expected remaining term		4.74	years
Expected volatility		98	%
Dividend yield		0	%
Warrants outstanding June 2012 registered direct		2,749,469

The Company estimated the fair value for the May 2011 warrants using the Black-Scholes valuation model at the measurement dates of September 30, 2012 and 2011, respectively using the following assumptions:

	September 30, 2011			September 30, 2012
May 2011 Financing
Stock price	$	2.16		$	2.97
Exercise price	$	9.92		$	9.92
Risk-free interest rate		0.96	%		0.31	%
Expected remaining term		4.63	years		3.63	years
Expected volatility		75	%		82	%
Dividend yield		0	%		0	%
Warrants outstanding May 2011 registered direct		2,256,929			2,256,929

Risk-Free Interest Rate. This is the United States Treasury rate for the measurement date having a term equal to the expected remaining term of the warrant. An increase in the risk-free interest rate will increase the fair value and the associated derivative liability.

Expected Remaining Term. This is the period of time over which the warrant is expected to remain outstanding and is based on management’s estimate, taking into consideration the remaining contractual life.

F-28

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)

Expected Volatility. This is a measure of the amount by which the stock price has fluctuated or is expected to fluctuate. Since the Company’s stock has been traded for the expected remaining term of the warrants, the Company uses its own historic volatility over the retrospective period corresponding to the expected remaining term of the warrants on the measurement date. Extra weighting is attached to those companies most similar in terms of size and business activity. An increase in the expected volatility will increase the fair value and the associated derivative liability.

Dividend Yield. The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease the fair value and the associated derivative liability.

Participating Securities

If at any time the Company grants, issues or sells securities or other property to holders of any class of common stock the holders of the warrants are entitled to also acquire those same securities as if they held the number of shares of common stock acquirable upon complete exercise of the warrants.

As such, given that the warrant holders will participate fully on any dividends or dividend equivalents, the Company determined that the warrants are participating securities and therefore are subject to ASC 260-10-55 earnings per share. These securities were excluded for the years ended September 30, 2012, 2011 and 2010 earnings per share calculation since their inclusion would be anti-dilutive.

10. Stockholders’ Equity

Common Stock

The Company’s authorized common stock consists of ~~100,000,000~~62,500,000 shares of a single class of common stock, having a par value of $0.01 per share. The holders of the common stock are entitled to one vote for each share and have no cumulative voting rights or preemptive rights.

~~As of September 30, 2009,~~On June 27, 2012 the Company ~~had warrants outstanding to purchase~~completed a private placement of an aggregate of ~~118,815~~4,250,020 shares of ~~its~~ common stock, ~~with~~3,605,607 shares of Series B preferred stock and warrants to purchase 2,256,929 shares of common stock at an exercise price of ~~$1.41~~$2.66 per share. The Company received net proceeds, after deducting placement agent fees and other offering expenses of approximately $17,100 from this financing.

On May 12, 2011, the Company completed a registered direct offering of an aggregate of 3,018,736 shares of common stock, 1,813,944 shares of Series A preferred stock and warrants to purchase 2,256,929 shares of common stock at an exercise price of $9.92 per share. The Company received net proceeds, after deducting placement agent fees and other offering expenses, of approximately $28,000 from this financing.

On August 24, 2010, the Company completed a registered direct offering of an aggregate of 599,550 shares of common stock and warrants to purchase an additional 599,550 shares of common stock at an exercise price of $18.864. The Company received net proceeds, after deducting placement agent fees and other offering expenses, of approximately $8,700 from this financing.

On February 12, 2008, the Company completed a follow-on public offering of ~~3,260,000~~815,000 shares of its common stock at a price to the public of ~~$15.50~~$62.00 per share. The Company received net proceeds from this offering, after deducting underwriting discounts and commissions and expenses, of $46,817. Certain of the Company’s stockholders sold ~~550,000~~137,500 shares in the offering. The Company did not receive any proceeds from the sale of shares from the selling stockholders.

On May 16, 2007, the Company completed an initial public offering of ~~5,750,000~~1,437,500 shares of its common stock at a price to the public of ~~$15.00~~$60.00 per share. The offering resulted in gross proceeds of $86,300. The Company received net proceeds from the offering of approximately $78,800 after deducting underwriting discounts and commissions and additional offering expenses. The completion of the initial public offering

F-29

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)

resulted in the conversion of the Company’s Series A and B convertible preferred stock. A total of ~~6,407,008~~1,601,749 shares of common stock were issued upon the conversion of the preferred stock.

As of September 30, 2012, the Company had the following warrants outstanding:

(i)

May 2011 financing —

(a)

warrants to purchase 1,962,163 shares of the Company’s common stock with an exercise price of $9.92 per share and

(b)

Series A preferred stock — warrants to purchase 294,766 shares of the Company’s common stock with an exercise price of $9.92 per share.

(ii)

June 2012 financing —

(a)

warrants to purchase 1,487,507 shares of the Company’s common stock with an exercise price of $2.66 per share and

(b)

Series B convertible preferred stock — warrants to purchase 1,261,922 shares of the Company’s common stock with an exercise price of $2.66 per share.

Preferred Stock

The Company is authorized to issue up to 50,000,000 shares of preferred stock, having a par value of $0.01 per share. The Company’s preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Company’s Board of Directors, without further action by stockholders, and may include voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation and conversion, redemption rights and sinking fund provisions. The issuance of preferred stock could reduce the rights, including voting rights, of the holders of common stock and, therefore, could reduce the value of the common stock. In particular, specific rights granted to holders of preferred stock could be used to restrict the Company’s ability to merge with or sell the Company’s assets to a third party, thereby preserving control of the Company by existing management.

~~F-20~~

Series A Preferred Stock May 2011 Financing

As part of the May 2011 registered direct offering, the Company issued 1,813,944 shares of the Company’s Series A preferred stock to one investor. The investor purchased units consisting of one share of Series A preferred stock and a warrant to purchase 0.1625 of a share of common stock. No fractional warrants were issued. Each unit was at a price of $8.84 per unit.

Each share of Series A preferred stock is convertible into one share of the Company’s common stock at any time at the option of the holder, provided that the holder will be prohibited from converting the shares of series A preferred stock into shares of the Company’s common stock if, as a result of such conversion, the holder, together with its affiliates, would beneficially own more than 9.98% of the total number of shares of the Company’s common stock then issued and outstanding. In the event of the Company’s liquidation, dissolution or winding up, holders of the Series A preferred stock will receive a payment equal to $0.01 per share of Series A preferred stock before any proceeds are distributed to the holders of the Company’s common stock. After the payment of this preferential amount, and subject to the rights of holders of any class or series of capital stock specifically ranking by its terms senior to the Series A preferred stock, holders of Series A preferred stock will participate ratably in the distribution of any remaining assets with the Company’s common stock and any other class or series of capital stock that participates with the common stock in such distributions. Shares of Series A preferred stock will generally have no voting rights, except as required by law and except that the consent of the holders of a majority of the outstanding Series A preferred stock will be required to amend the terms of the Series A preferred stock. The Series A preferred stock will not be entitled to receive any dividends, unless and until specifically declared by the Company’s board of directors.

F-30

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)

Series A ~~Convertible~~ Preferred Stock July 2005 Private Placement

~~The Company~~In July 2005, the company authorized 1,050,000 shares of its Series A ~~convertible~~ preferred stock ~~with certain rights~~ and ~~privileges,~~completed a private placement of 569,000 shares of these shares, of which ~~569,000 and~~ 0 shares were issued and outstanding as of September 30, 2007. In addition, in connection with the July 2006 ~~and 2007, respectively. In July 2005,~~private placement, the Company ~~completed a private placement of 569,000~~issued warrants to purchase shares of ~~its Series~~the Company’s series A ~~convertible~~ preferred ~~stock and received proceeds~~stock. All such warrants were expired as of ~~$2,845. Fees incurred as part of the private placement totaled $379.~~September 30, 2012.

In connection with the Series A ~~convertible~~ preferred stock issuance, the Company entered into a registration rights agreement with the purchasers of its stock, which provided, among other things, for liquidated damages if the Company were initially unable to register and obtain an effective registration of the securities within the allotted time. The stockholders could not demand registration until one hundred and eighty (180) days after the Company had effected a qualified initial public offering. The penalties were (i) one and three quarters (1³/4 %)(1-3/4%) percent of the aggregate number of shares of underlying common stock for each month, or part thereof, after a ninety (90) day period that a registration statement was not filed with the SEC or (ii) one (1%) percent of the aggregate number of shares of underlying common stock for each month if the forgoing filed registration statement was not declared effective by the SEC within one hundred and twenty (120) days.

Each share of Series A ~~convertible~~ preferred stock was automatically ~~convertible~~ into a number of shares of common stock equal to the quotient of $3.54 divided by $1.00 immediately subsequent to the date of the initial public offering.

As part of the compensation agreement, the placement agent received ~~279,500~~69,875 Series A ~~Warrants.~~warrants. Each warrant consists of the right to purchase one share of fully paid and non-assessable common stock for a period of seven years which ~~expires~~expired on July 12, 2012. ~~The exercise price~~

Series B Preferred Stock June 2012 Private Placement

In June 2012, the Company completed a private placement of each warrant is $1.00 per share. The exercise price may be paid in cash or by tendering common stock. The warrants are transferable and provide for anti-dilution protection. The Company evaluated the warrants to ascertain if they should be recorded as equity instruments, or if they contained features which require them to be recorded as derivative liabilities, and concluded they should be classified as equity instruments on the balance sheet.

~~As a result~~an aggregate of 4,250,020 shares of the ~~conversion option, the Company considered the features contained in the Series A convertible preferred~~Company’s common stock, ~~to ascertain whether the~~3,605,607 shares ~~contained a beneficial conversion feature. The Company determined that the issuance~~ of the ~~Series A convertible preferred stock did not result in a beneficial conversion feature.~~

Company’s Series B Convertible Preferred Stock and warrants to purchase an aggregate of 2,749,469 shares of common stock at an exercise price of $2.66 per share. For each unit consisting of either a share of common stock or Series B preferred stock and a warrant to purchase 0.35 of a share of common stock, the purchasers in the June 2012 Private Placement paid a negotiated price of $2.355.

Each share of Series B preferred stock is convertible into one share of the Company’s common stock at any time at the option of the holder, except that the securities purchase agreement that the Company entered into in connection with the 2012 Private Placement (the “Securities Purchase Agreement”) provides that a holder will be prohibited from converting shares of Series B preferred stock into shares of common stock if, as a result of such conversion, such holder, together with its affiliates, would beneficially own more than 9.98% of the total number of shares of common stock then issued and outstanding. In the event of the Company’s liquidation, dissolution or winding up, holders of the Series B preferred stock will receive a payment equal to $0.01 per share of Series B preferred stock before any proceeds are distributed to the holders of common stock. After the payment of this preferential amount, and subject to the rights of holders of any class or series of capital stock specifically ranking by its terms senior to the Series B preferred stock, holders of Series B preferred stock and holders of the Company’s Series A preferred stock will participate ratably in the distribution of any remaining assets with the common stock and any other class or series of capital stock that participates with the common stock in such distributions. Shares of Series B preferred stock will generally have no voting rights, except as required by law and except that the consent of the holders of a majority of the outstanding Series B preferred stock will be required to amend the terms of the Series B preferred stock. Holders of Series B preferred stock are entitled to receive, and the Company is required to pay, dividends on shares of the Series B preferred stock equal (on an as-if-converted-to-common-stock basis)

F-31

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)

to and in the same form as dividends (other than dividends in the form of common stock) actually paid on shares of the common stock when, as and if such dividends (other than dividends in the form of common stock) are paid on shares of the common stock.
As required by the Securities Purchase Agreement, the Company filed a Registration Statement on Form S-3 (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) on July 27, 2012, which was within 30 days after the closing of the 2012 Private Placement. The Registration Statement, which was declared effective on August 13, 2012, registers the resale of the shares of common stock and Series B preferred stock issued and sold in the 2012 Private Placement, the shares of common stock issuable upon conversion of the Series B preferred stock issued and sold in the 2012 Private Placement, and the shares of common stock issuable upon exercise of the warrants issued and sold in the 2012 Private Placement. Pursuant to the terms of the Securities Purchase Agreement, the Company agreed to pay liquidated damages to the purchasers in the 2012 Private Placement if, after effectiveness of the Registration Statement and subject to certain specified exceptions, the Company suspends the use of the Registration Statement or the Registration Statement ceases to remain continuously effective as to all the securities for which it is required to be effective (each such event, a “Registration Default”). Subject to specified exceptions, for each 30-day period or portion thereof during which a Registration Default remains uncured, the Company is obligated to pay liquidated damages to each purchaser in cash in an amount equal to 1.0% of the aggregate purchase price paid by each such purchaser in the 2012 Private Placement, up to a maximum of 8.0% of such aggregate purchase price. As of the date of these financial statements, the Company does not believe that it is probable that it will be obligated to pay any such liquidated damages. Accordingly, the Company has not established an accrual for liquidated damages.
Series B Preferred Stock July 2006 Private Placement
     ~~The~~In July 2006, the Company authorized 6,500,000 shares of its Series B ~~convertible~~ preferred stock ~~(“Series B Preferred Stock”)~~and completed a private placement of 5,380,711 of these shares, of which ~~6,198,179 and~~ 0 shares were issued and outstanding as of September 30, ~~2006 and 2007, respectively.~~2007. In addition, in connection with the July 2006 private placement the Company ~~completed a private placement of 5,380,711~~issued warrants to purchase shares of ~~its~~the Company’s Series B preferred stock and received gross proceeds of $21,200 as part of the private placement, fees incurred totaled $1,795. Additionally in July 2006, 817,468 shares of Series B preferred stock and 440,105 common stockstock. All such warrants were ~~issued to repay the Company’s Bridge Financing units.~~
     ~~Each share~~expired as of Series B convertible preferred stock was automatically convertible into a number of shares of common stock equal to the quotient of $3.94 divided by $1.00 immediately subsequent to the date of the initial public offering.
     As part of the compensation agreement relating to the Series B Preferred Stock transaction, the placement agent received 126,903 Agent Series B Preferred Warrants and 68,322 common stock warrants. Each such warrant consisted of the right to purchase one share of Series B Preferred Stock for a period of seven years which expires on July 19, 2013. The exercise price of each warrant was $5.56 per share. The exercise price was payable in cash or by tendering common stock. In the event the Company issued common stock or rights to purchase common stock below the then conversion price, then the price per share at which the Series B preferred stock was to be converted would be reduced to the weighted average of the existing conversion price per share and the price per share of the newly-issued stock or rights.
     Also, as part of the compensation agreement relating to the bridge financing transaction, the placement agent received an aggregate of 22,222 Series B Preferred warrants and 11,963 common stock warrants. Each warrant consisted of the right to purchase one share of fully paid and non-assessable common stock for a period of seven years which expires on July 19,September 30, 2012. The exercise price of each warrant was $5.56 per share. The exercise price was payable in cash or by tendering common stock. In the event the Company issued common stock or rights to purchase common stock below the then conversion price, then the price per share at which the Series B preferred stock was to be converted would be reduced to the weighted average of the existing conversion price per share and the price per share of the newly-issued stock or rights.
~~F-21~~

~~Biodel Inc.~~
~~(A Development Stage Company)~~

~~Notes to Financial Statement~~
~~(In thousands, except share and per share amounts)~~

The Company evaluated all the warrants to ascertain if they should be recorded as equity instruments, or if they contained features which require them to be recorded as derivative liabilities and concluded they should be classified as equity on the balance sheet.

As a result of the conversion option, the Company considered the features contained in the Series B ~~convertible~~ preferred stock to ascertain whether the shares contained a beneficial conversion feature and determined that the issuance of the Series B ~~convertible~~ preferred stock resulted in a beneficial conversion feature in the amount of $603.

~~The completion of the Company’s initial public offering in May 2007 resulted in the conversion of 6,407,008 shares of the Company’s Series A and B convertible preferred stock.~~

Shares Reserved for Future Issuance

As of September 30, ~~2009,~~2012, the Company reserved shares of common stock for future issuance as follows:

2010 stock incentive plan
~~2004 stock incentive plan~~	~~4,700,000~~2,201,908
2005 employee stock purchase plan	~~1,500,000~~
~~2005 Non-employee directors’ stock option plan~~	~~500,000~~
~~Exercise of warrants issued to placement agent~~	~~118,815~~


~~Total~~	~~6,818,815~~450,000
Common shares issuable upon conversion of Series A Preferred Stock		453,486
Common shares issuable upon conversion of Series B Preferred Stock		3,605,607
Warrants issued in connection with May 2011 registered direct offering		2,256,929
Warrants issued in connection with June 2012 private placement		2,749,469
Total		11,717,399

2004 Stock Incentive Plan ~~as amended~~
The Company established the 2004 Stock Incentive Plan on October 1, 2004 (the “Plan”) ~~and~~, as amended in March ~~2007.~~2007, and subsequently replaced by the 2010 Stock Incentive Plan. The Plan provides for the granting
F-32

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)

of shares of common stock or securities convertible into or exercisable for shares of common stock, including stock options (“Incentive Stock Options”) to directors, employees, consultants and advisors of or to the Company. Incentive Stock Options can be awarded only to persons who are employees of the Company at the time of the grant. Stock options are exercisable at the conclusion of the vesting period. Employees can exercise their vested shares up to 90 days after termination of services. ~~A total of 4,700,000 options to purchase the equivalent number of shares of common stock may be issued pursuant to the Stock Incentive Plan.~~ No awards may be granted under the ~~plan~~Plan after ~~October 1, 2014.~~the effective date of the 2010 Plan.
The Plan is be administered by either the Board of Directors of the Company or a Committee thereof, which determines the terms and conditions of the awards granted under the Plan, including the recipient of the award, the nature of the award, the exercise price of the award, the number of shares subject to the award and the exercisability thereof.
Non-employee directors are not entitled to receive awards other than the non-qualified stock options the plan directs be issued to non-employee directors.
2010 Stock Incentive Plan
In March 2010, the shareholders of the Company approved the 2010 Stock Incentive Plan (the “2010 Plan”). Up to 1,350,000 shares of the Company’s common stock may be issued pursuant to awards granted under the 2010 Plan, plus 851,908 shares of common stock underlying already outstanding awards under the Company’s prior plans. As of September 30, 2012, the Company had 1,546,454 shares of common stock subject to outstanding awards. The contractual life of options granted under the 2010 Plan may not exceed seven years. The 2010 Plan uses a “fungible share” concept under which any awards that are not a full-value award will be counted against the share limit as one (1) share for each share of common stock and any award that is a full-value award will be counted against the share limit as 1.6 shares for each one share of common stock. The Company has not made any new awards under any prior equity plans after March 2, 2010 — the effective date the 2010 Plan was approved by the Company’s stockholders. The 2010 Plan replaces the 2004 Stock Incentive Plan and 2005 Non-Employee Directors Stock Option Plan.
2005 Employee Stock Purchase Plan
The Company’s 2005 Employee Stock Purchase Plan, or the Purchase Plan, was adopted by its Board of Directors and approved by its stockholders on March 20, 2007. The Purchase Plan became effective upon the closing of the Company’s initial public offering. The Purchase Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code.
Under the Purchase Plan, eligible employees may contribute up to 15% of their eligible earnings for the period of that offering withheld for the purchase of common stock under the Purchase Plan. The employee’s purchase price is equal to the lower of: 85% of the fair market value per share on the start date of the offering period in which the employee is enrolled or 85% of the fair market value per share on the semi-annual purchase date. The Purchase Plan imposes a limitation upon a participant’s right to acquire common stock if immediately after the purchase, the employee would own 5% or more of the total combined voting power or value of the Company’s common stock or of any of its affiliates not eligible to participate in the Purchase Plan. The Purchase Plan provides for an automatic rollover when the purchase price for a new offering period is lower than previously established purchase price(s). The Purchase Plan also provides for a one-time election that allows an employee the opportunity to enroll into a new offering period when the new offering is higher than their current offering price. This election must be made within 30 days from the start of a new offering period. Offering periods are twenty-seven months in length. The compensation cost in connection with the plan for the years ended September 30, ~~2008~~2010, 2011 and ~~2009~~2012 was ~~$49~~$454, $53 and ~~$233,~~$16, respectively.
~~F-22~~

~~Biodel Inc.~~
~~(A Development Stage Company)~~

~~Notes to Financial Statement~~
~~(In thousands, except share and per share amounts)~~

An aggregate of ~~1,500,000~~450,000 shares of common stock are reserved for issuance pursuant to purchase rights to be granted to the Company’s eligible employees under the Purchase Plan. The Purchase Plan shares are

F-33

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)

replenished annually on the first day of each fiscal year by virtue of an evergreen provision. The provision allows for share replenishment equal to the lesser of 1% of the total number of shares outstanding on that date or ~~100,000~~25,000 shares. As of September 30, ~~2009,~~2011 and 2012, a total of ~~1,318,220~~341,097 and 355,321 shares, respectively, were reserved and available for issuance under this plan. ~~As of~~For the years ended September 30, ~~2009,~~2010, 2011 and 2012, the Company issued ~~101,841~~a total of 66,852, 83,903 and 94,679 shares, respectively, under the Purchase Plan.
2005 Non-Employee Directors’ Stock Option Plan
The Company’s 2005 Non-Employee Directors’ Stock Option Plan ~~or the Directors’ Plan,~~(the “Directors’ Plan”) was adopted by its Board of Directors and approved by its stockholders on March 20, ~~2007.~~2007 and subsequently replaced with the 2010 Stock Incentive Plan. The Directors’ Plan became effective upon the closing of the Company’s initial public offering. An aggregate of ~~500,000~~125,000 shares of common stock ~~are~~were reserved for issuance under the Directors’ Plan. Upon the effective date of the registration statement in connection with the Company’s initial public offering, each of its non-employee directors automatically received an initial option to purchase ~~25,000~~6,250 shares of common stock.Upon appointment, non-employee directors receive a one-time grant of an option to purchase 6,250 shares of common stock. ~~Each~~Annually, non-employee ~~director who is first elected or appointed to the Company’s Board of Directors after the closing of the Company’s initial public offering will~~directors receive ~~an initial option to purchase 25,000 shares of common stock on the date of his or her election or appointment. In addition, each non-employee director receives~~ an option to purchase ~~20,000~~5,000 shares of common ~~stock on an annual basis.~~stock. Effective March 3, 2009, these shares vest ~~prorata~~pro rata over one year. However, in the event a non-employee director has not served since the date of the preceding annual meeting of stockholders, that director will receive an annual grant that has been reduced pro rata for each full quarter prior to the date of grant during which such person did not serve as a non-employee director.
The fair value per share is being recognized as compensation expense over the applicable vesting period. The fair value per share for ~~award~~awards granted as of December 31, 2008 through September 30, ~~2009 were~~2012 was calculated using the Black-Scholes valuation model.
The fair value of the common stock for the grants from December 23, 2004 through November 1, 2006 was determined using a retrospective valuation. The fair value of the common stock for the grants during December 2006 and subsequently ~~were~~was determined contemporaneously with the grants.
~~F-23~~

The following table summarizes the stock option activity through September 30, 2012:

Options
    Number
    Weighted
Average
Exercise Price
    Weighted
Average
Remaining
Contractual
Life in Years
    Aggregate
Intrinsic Value
Balance, September 30, 2004
                 —           $ —                        $   —
Granted
                 96,358             5.64                          —
Outstanding balance, September 30, 2005
                 96,358             5.64                          —
Granted
                 115,401             22.60                          —
Forfeited, expired
                 15,054             13.60                          —
Outstanding balance, September 30, 2006
                 196,705             12.92                          —
Granted
                 238,961             55.84                          —
Exercised
                 886              5.64                          —
Forfeited, expired
                 13,283             22.60                          —
Outstanding balance, September 30, 2007
                 421,497             27.20                          —
Granted
                 431,849             67.52                          —
Exercised
                 43,604             20.72                          —
Forfeited, expired
                 25,892             44.16                          —
Outstanding balance, September 30, 2008
                 783,850             55.68                          —
Granted
                 152,875             10.76                          —
Exercised
                 4,416             5.64                          —
Forfeited, expired
                 80,398             55.52                          —
F-34

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)
Options
    Number
    Weighted
Average
Exercise Price
    Weighted
Average
Remaining
Contractual
Life in Years
    Aggregate
Intrinsic Value
Outstanding balance, September 30, 2009
                 851,911             47.24                          —
Granted
                 328,530             16.37                          —
Exercised
                 8,081             8.43                          —
Forfeited, expired
                 13,469             52.16                          —
Outstanding balance, September 30, 2010
                 1,158,891             38.72                          —
Granted
                 290,834             6.36                          —
Exercised
                 104              5.64                          —
Forfeited, expired
                 84,271             38.48                          —
Outstanding balance, September 30, 2011
                 1,365,350             32.68                          —
Granted
                 215,877             2.54                          —
Forfeited, expired
                 34,773             32.09                          —
Outstanding balance September 30, 2012
                 1,546,454          $ 27.80                 4           $   —
Exercisable shares, September 30, 2012
                 1,197,230          $ 33.39             3           $ —

Restricted Stock Units
The Company grants restricted stock units (“RSUs”) to executive officers and employees pursuant to the 2010 Plan from time to time. There is no direct cost to the recipients of RSUs, except for any applicable taxes.
In addition, on March 8, 2012, the Company’s stockholders approved an amendment to the 2010 Plan to increase the number of shares of common stock authorized for issuance thereunder solely for the purpose of allowing the Company to issue an 191,719 restricted stock units to certain of the Company’s employees in place of an aggregate of $823 in discretionary cash bonuses in connection with the fiscal year ended September 30, 2011 (the “2011 Bonus RSUs”). The 2011 Bonus RSUs vested and were distributed on September 30, 2012. The Company had previously accrued and expensed the $823 in the fiscal year ended September 30, 2011. The 2011 Bonus RSUs vested in full and was distributed on September 30, 2012. Since the total fair value of the 2011 Bonus RSUs did not exceed the discretionary aggregate cash bonus value of $823, the Company did not record any additional stock-based compensation expense in the year ended September 30, 2012. The accrued bonus liability was settled in March 2012 and, accordingly, the liability, net of taxes, in the amount of $582 was reversed into additional paid-in-capital. Each RSU award that was granted in December 2010 to our executive officers and employees represents one share of common stock and each award vests annually over three years, with fifty percent vesting on the first anniversary of the date of grant and the remainder vesting in two equal installments on each anniversary thereafter. Each year following the annual vesting date, between January 1st and March 15th, the Company will issue common stock for each vested RSU. During the period when the RSU is vested but not distributed, the RSUs cannot be transferred and the grantee has no voting rights. If the Company declares a dividend, RSU recipients will receive payment based upon the percentage of RSUs that have vested prior to the date of declaration. The costs of the awards, determined as the fair market value of the shares on the grant date, are expensed per the vesting schedule outlined in the award. For example, the December 2010 RSU awards vest over three years and are expensed 50% the first year and 25% the next two years; whereas, the December 2009 RSU awards are expensed ratably over the four year vesting period.
Based on historical experience of option cancellations, the Company has estimated an annualized forfeiture rate of 9% for employee RSUs. Forfeiture rates will be adjusted over the requisite service period when actual forfeitures differ, or are expected to differ, from the estimate. As of September 30, 2012, the executives, the board of directors and employees had 350,148 vested and distributed RSUs.
F-35

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)
The stock-based compensation expense associated with the RSUs has been recorded in the statement of operations and in additional paid-in-capital on the balance sheets is as follows:
    September 30,

    2010
    2011
    2012
Stock compensation expense — RSUs
              $ 205           $ 585           $ 1,202

At September 30, 2012, there was $418 of total unrecognized stock-based compensation expense related to RSU awards granted under the 2004 Stock Incentive Plan and the 2010 Plan. This expense is expected to be recognized over the remaining vesting periods up to four years.
The following table summarizes ~~the stock option~~RSU activity from October 1, 2010 through September 30, ~~2009:~~2012:

Weighted
Average Aggregate
Number Exercise Price Intrinsic Value
Balance, September 30, 2004 — $ —
Granted 385,432 1.41 $ 1,526

Outstanding balance, September 30, 2005 385,432 1.41 $ 1,526
Granted 461,602 5.65
Forfeited, expired 60,222 3.40

Outstanding balance, September 30, 2006 786,812 3.23 $ 1,287
Granted 955,842 13.96
Exercised 3,542 1.41 $ 14
Forfeited, expired 53,138 5.65

Outstanding balance, September 30, 2007 1,685,974 6.80 $ 1,273
Granted 1,727,397 16.88
Exercised 174,410 5.18 33
Forfeited, expired 103,571 11.04

Outstanding balance, September 30, 2008 3,135,390 $ 13.92 $ 832
Granted 611,500 2.69 $ 1,682
Exercised 17,661 1.41 $ 70
Forfeited, expired 321,596 13.88

Outstanding balance, September 30, 2009 3,407,633 $ 11.81 $ 2,514

Exercisable shares, September 30, 2009 1,818,056 $ 10.66 $ 1,464

    Shares
    Weighted
Average
Grant-Date
Fair Value
Non-vested and outstanding balance at September 30, 2009
                 —           $ —
Shares granted
                 62,510             15.80
Shares forfeited or expired
                 246              15.80
Non-vested and outstanding balance at September 30, 2010
                 62,264             15.80
Changes during the period:

Shares granted
                 90,639             7.56
Shares vested and issued
                 22,435             17.20
Shares forfeited or expired
                 8,791             9.40
Non-vested and outstanding balance at September 30, 2011
                 121,677             9.40
Changes during the period:

Shares granted
                 274,189             2.36
Shares vested and issued
                 327,713             3.45
Non-vested and outstanding balance at September 30, 2012
                 68,153          $ 10.51

~~10.~~11.    Employee Benefit Plan
Effective January 1, 2006, the Company established a 401(k) plan covering substantially all employees. Employees may contribute up to 100% of their salary per year (subject to maximum limit prescribed by federal tax law). The Company may elect to make a discretionary contribution or match a discretionary percentage of employee contributions. ~~As of~~For the years ended September 30, ~~2009,~~2010, 2011 and 2012, the Company had not elected to make any contributions to the plan.
~~F-24~~
12.    Reverse Stock Splits
On June 11, 2012, the Company amended its certificate of incorporation in order to effect a one-for-four reverse split of its outstanding common stock and to fix on a post-split basis the number of authorized shares of its common stock at 25,000,000 (reduced from 100,000,000 authorized shares). As a result of the 2012 reverse stock split, each share of Company common stock outstanding at the effective time was automatically changed into one-quarter of a share of common stock. No fractional shares were issued in connection with the 2012 reverse stock split, and cash of $0.3 was paid in lieu of fractional shares. Also as a result of the 2012 reverse stock split, the number of shares of common stock subject to outstanding options, RSUs and warrants issued by the Company and the number of shares reserved for future issuance under the Company’s stock plans have been reduced by a factor of four. There was no alteration to the par value of the common stock or any modification of the voting rights or other terms thereof. All references in these financial statements and accompanying notes to units of common stock or per share amounts are reflective of the 2012 reverse stock split for all periods reported.
F-36

Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)
~~11. Reverse Split~~
On April 12, 2007, the Company completed a 0.7085 for one (0.7085:1) reverse stock split ~~(“Reverse Split”)~~ rounding all fractional shares down to the next full share. Stockholders received cash in lieu of fractional shares. After the ~~Reverse Split,~~2007 reverse split, there were ~~8,003,828~~2,000,957 shares of common stock outstanding. The ~~Reverse Split~~2007 reverse split did not reduce the number of authorized shares of common stock, alter the par value or modify the voting rights or other terms thereof. As a result of the ~~Reverse Split,~~2007 reverse split, the conversion prices and/or the numbers of shares issuable upon the exercise of any outstanding options and warrants to purchase common stock were proportionally adjusted pursuant to the respective anti-dilution terms of the 2004 Stock Incentive Plan and the respective warrant agreements. All references in these financial statements and accompanying notes to units of common stock or per share amounts are reflective of the ~~Reverse Split~~2007 reverse split for all periods reported.
~~12.~~13.    Summary Selected Quarterly Financial Data (Unaudited)
The following table sets forth certain unaudited ~~consolidated~~ quarterly statement of operations data for the eight quarters ended September 30, ~~2009.~~2012. This information is unaudited, but in the opinion of management, it has been prepared substantially on the same basis as the audited ~~consolidated~~ financial statements and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to state fairly the unaudited ~~consolidated~~ quarterly results of operations. The results of operations for any quarter are not necessarily indicative of the results of operations for any future period.
Quarter Ended
(in thousands, except share and per share amounts)
    December 31,
2011
    March 31,
2012
    June 30,
2012
    September 30,
2012
Revenue
              $ —           $ —           $ —           $ —
Net loss
              $ (4,501 )         $ (4,316 )         $ (6,051 )         $ (5,879 )
Basic and diluted net loss per common share⁽¹⁾
              $ (0.47 )         $ (0.45 )         $ (0.60 )         $ (0.42 )
Weighted average common shares basic and diluted
                 9,673,529             9,688,384             10,152,194             13,982,826

December 31, March 31, June 30, September 30,
2008 2009 2009 2009
Revenue $ — $ — $ — $ —

Net loss $ (10,024 ) $ (11,629 ) $ (11,148 ) $ (10,469 )

Basic and diluted net loss per common share $ (0.42 ) $ (0.49 ) $ (0.47 ) $ (0.44 )

Weighted average common shares basic and diluted 23,706,148 23,717,800 23,759,675 23,802,286

Quarter Ended
(in thousands, except share and per share amounts)
    December 31,
2010
    March 31,
2011
    June 30,
2011
    September 30,
2011
Revenue
              $ —           $ —           $ —           $ —
Net (loss) income
              $ (5,309 )         $ (5,442 )         $ (3,974 )         $ 4,133
Basic net (loss) income per common share
              $ (0.80 )         $ (0.82 )         $ (0.48 )         $ 0.43
Diluted net (loss) income per common share⁽¹⁾
              $ (0.80 )         $ (0.82 )         $ (0.48 )         $ 0.41
Weighted average common shares basic
                 6,604,726             6,617,422             8,254,413             9,657,795
Weighted average common shares diluted
                 6,604,726             6,617,422             8,254,413             10,111,336

December 31, March 31, June 30, September 30,
2007 2008 2008 2008
Revenue $ — $ — $ — $ —

Net loss $ (11,025 ) $ (9,557 ) $ (10,114 ) $ (12,665 )

Basic and diluted net loss per common share $ (0.55 ) $ (0.43 ) $ (0.43 ) $ (0.53 )

Weighted average common shares basic and diluted 20,198,829 22,045,400 23,653,956 23,674,362

(1)   Basic earnings (loss) per share calculation for the third and fourth quarter include the weighted average effect of stock issuances; therefore, the sum of the quarterly earnings per share will not equal full-year earnings per share amounts which reflect the weighted average effect on an annual basis.

F-37

~~13.~~Biodel Inc.
(A Development Stage Company)

Notes to Financial Statements — (Continued)
(In thousands, except share and per share amounts)

14. Subsequent Event

~~In November 2009,~~On December 20, 2012, the Company amended its ~~insulin supply agreement with N.V. Organon so that~~certificate of incorporation in order to effect an increase in the ~~term~~number of shares of the ~~agreement extends through December 2011. The remaining minimum quantities of insulin that the Company is obligated~~Company’s authorized common stock, par value $.01 per share, from 25,000,000 shares to ~~purchase have been reduced slightly and redistributed over the remaining term of the agreement.~~

~~F-25~~

62,500,000 shares.

F-38

Name		Age	Position
Dr. Errol B. De Souza
~~Name~~ 59	~~Age~~	~~Position~~
~~Dr. Solomon S. Steiner~~	72	~~Chairman,~~ President and Chief Executive Officer
Gerard Michel	46	49	Chief Financial Officer ~~Vice President, Corporate Development and Treasurer~~
~~Erik Steiner~~ Dr. Alan Krasner	43	~~Vice President, Operations~~
~~Dr. Alan Krasner~~ 49	46 Chief Medical Officer
Paul Bavier	~~Chief Medical Officer~~
~~Paul Bavier~~	37 40	General Counsel and Secretary
Erik Steiner		46	Vice President, Operations


Delaware	~~90-0136863~~
(State or Other Jurisdiction of	~~(I.R.S. Employer~~
Incorporation or Organization)	~~Identification No.)~~
		90-0136863 (I.R.S. Employer Identification No.)

100 Saw Mill Road
Danbury, CT	~~06810~~
(Address of Principal Executive Offices)			06810 (Zip Code)


			PART I
	~~Page~~
~~PART I~~
Item 1: ~~Business~~		2
~~Item 1A: Risk Factors~~ Business		153
Item ~~1B: Unresolved Staff Comments~~1A:		28
~~Item 2: Properties~~ Risk Factors		2816
Item ~~3: Legal Proceedings~~1B:		28
~~Item 4: Submission of Matters to Vote of Security Holders~~ Unresolved Staff Comments		2835
Item 2:			Properties	35
Item 3:			Legal Proceedings	35
Item 4:			Mine Safety Disclosure	35

			PART II
~~PART II~~
Item 5:			Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2936
Item 6: ~~Selected Financial Data~~		30	Selected Financial Data	38
Item 7:			Management’s Discussion and Analysis of Financial Condition and Results of Operations	3139
Item 7A:			Quantitative and Qualitative Disclosures About Market Risk	4153
Item 8:			Financial Statements and Supplementary Data	4153
Item 9:			Changes in and Disagreements With Accountants on Accounting and Financial ~~Disclosures~~Disclosure	4153
Item 9A: ~~Controls and Procedures~~		41
~~Item 9B: Other Information~~ Controls and Procedures		4454

			PART III
~~PART III~~
Item 10:			Directors, Executive Officers and Corporate Governance	4555
Item 11: ~~Executive Compensation~~		45	Executive Compensation	55
Item 12:			Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	4555
Item 13:			Certain Relationships and Related Transactions, and Director Independence	4555
Item 14:			Principal Accountant Fees and Services	4555

			PART IV
~~PART IV~~
Item 15: ~~Exhibits and Financial Statement Schedules~~		45	Exhibits, Financial Statement Schedules	55
~~EX-10.19~~ EX-3.5
~~EX-10.20~~ EX-10.19
~~EX-10.22~~ EX-10.20
EX-21.1
EX-23.1
EX-31.01
EX-31.02
EX-32.01


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2012


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to .

	Non-accelerated filero		Smaller reporting companyoþ
				~~(Do not check if a smaller reporting company)~~


	•		our ability to ~~file our planned New Drug Application,~~conduct pivotal clinical trials and other tests or ~~NDA, for VIAject~~^® ~~in December 2009 and, once filed, the length of time that will elapse before our NDA is fully reviewed~~analyses required by the ~~FDA;~~

	•		~~our ability~~FDA to secure approval ~~by the FDA for VIAject~~^® ~~without conducting additional pivotal clinical trials;~~to commercialize an ultra-rapid-acting insulin formulation or a liquid glucagon formulation;


	•		~~our ability to market, commercialize and achieve market acceptance for VIAject~~^®;

	•		~~the progress, timing or success of our product candidates, particularly VIAject~~^®~~, and that of our research, development and clinical programs, including any resulting data analyses;~~

	•		our ability to enter into collaboration arrangements for the commercialization of our product candidates and the success or failure of any such collaborations into which we enter, or our ability to commercialize our product candidates ourselves;


	•		our ability to enforce our ~~patent~~patents for ~~VIAject~~^®our product candidates and our ability to secure additional patents for ~~VIAject~~^® ~~and for~~ our ~~other~~ product candidates;


	•		our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;


	•		the degree of clinical utility of our ~~products;~~product candidates, particularly with regard to our ultra-rapid-acting insulin formulations, which have not yet been shown to be clinically superior to existing rapid-acting insulin analogs;

•
	the emergence of competing technologies and products and other adverse market developments, such as advancements in glucagon stabilization technologies that could enable a room-temperature rescue product in a portable, easy to use presentation;


	•		our commercialization, marketing and manufacturing capabilities and strategies; and


Large accelerated filero		Accelerated filerþo


	•		our ability to accurately estimate anticipated operating losses, future revenues, capital requirements and our needs for additional financing.

	•		~~Obtain Regulatory Approval for VIAject~~^®.~~Our current focus is to seek regulatory approval for VIAject~~^® ~~in the major world markets starting with the United States.~~

	•		~~Continue the Development of VIAject’s~~^® ~~commercial profile.~~~~We plan to conduct additional clinical trials of VIAject~~^®~~designed to enhance the product candidate’s potential commercial differentiation compared to other leading meal-time insulin products.~~

	•		~~Commercialize our Product Candidates Through Strategic Collaborations.~~We intend to fund our clinical trial programs through at least proof-of-concept by ourselves. However, because our product candidates target large primary care markets, we intend to maximize the commercial potential of our product candidates by selectively entering into strategic arrangements with leading pharmaceutical or biotechnology companies for the commercialization of our product candidates. Because we are focusing on therapeutic indications in large markets, we believe that these larger companies have the marketing, sales and financial resources to maximize the commercial potential of our products.

	•		~~Focus on the Section~~ ~~505(b)(2)~~ ~~Regulatory Approval Pathway.~~Using our VIAdel™ technology, we seek to reformulate existing drugs with ingredients that are generally regarded as safe by the FDA. We believe that this approach to drug development will allow us to use the abbreviated development pathway of Section 505(b)(2) of the FFDCA, which can result in substantially less time and cost in bringing a new drug to market. We intend to continue to focus our efforts on reformulating new product candidates for which we will be able to seek regulatory approval pursuant to Section 505(b)(2) NDAs.

	•		~~Pursue Additional Product Candidates.~~~~In addition to our pivotal Phase 3 clinical trials of VIAject~~^®~~, we have conducted a Phase 1 clinical trial of VIAtab™, our sublingual insulin product candidate. In 2010 we may allocate limited resources to developing our VIAtab™ formulation.~~

	•		~~In our Phase 1 clinical trial in volunteers without diabetes, and in our Phase 1/2 clinical trials in patients with Type 1 diabetes, VIAject~~^® ~~reached the blood and exerted blood glucose lowering activity more rapidly than the rapid-acting insulin analog, Humalog~~^®~~, and the regular human recombinant insulin, Humulin~~^® ~~R. Accordingly, we believe VIAject~~^® ~~more closely mimics the first-phase insulin release of healthy individuals at the beginning of a meal, which we believe reduces the risks of hyperglycemia and hypoglycemia.~~

	•		~~In our analysis of the data from of our pivotal Phase 3 clinical trial in patients with Type 1 diabetes, we found that patients receiving VIAject~~^®~~, when compared to those receiving Humulin~~^® ~~R, experienced fewer severe hypoglycemic events and did not gain weight, while those receiving Humulin~~^® ~~R did. In our analysis of the data from our pivotal Phase 3 clinical trial in patients with Type 2 diabetes, we found that patients receiving VIAject~~^®~~, when compared to those receiving Humulin~~^® ~~R, experienced fewer mild and moderate, or non-severe, hypoglycemic events and gained less weight. Accordingly, we believe VIAject~~^® ~~may be a safer form of mealtime insulin therapy than is currently available to patients with Type 1 or Type 2 diabetes.~~


	•		submission to the FDA of an investigational new drug application, or IND, which must become effective before human clinical trials may begin;


	•		submission to the FDA of an ~~NDA;~~NDA, and the acceptance for filing of the NDA by the FDA;


	•		satisfactory completion of an FDA preapproval inspection of the manufacturing facilities at which the product is produced to assess compliance with current Good Manufacturing Practice, or cGMP, regulations; and


	•		FDA review and approval of the NDA prior to any commercial marketing, sale or shipment of the drug.


	•		Phase 2 clinical trials are conducted in a limited patient population to gather evidence about the efficacy of the product candidate for specific, targeted ~~indications;~~indications, to determine dosage tolerance and optimal ~~dosage;~~dosage, and to identify possible adverse effects and safety risks.


	•		Phase 3 clinical trials are undertaken to evaluate clinical efficacy and to test for safety in an expanded patient population at geographically dispersed clinical trial sites. The size of Phase 3 clinical trials depends upon clinical and statistical considerations for the product candidate and ~~disease,~~proposed indications, but sometimes can include several thousand patients. Phase 3 clinical trials are intended to establish the overall risk-benefit ratio of the product candidate and provide an adequate basis for product labeling.


	•		providing the FDA with updated safety and efficacy information;


	•		complying with electronic record and signature requirements.

	•		~~one granted United States patent, one foreign patent, and several pending United States patent applications and corresponding foreign and international patent applications relating to our VIAject~~^® ~~and VIAtab™ technology;~~

	•		one foreign patent and pending foreign patent applications relating to our technology for enhancing delivery of drugs in a form for absorption through the skin into the blood, a process known as transdermal drug delivery;

	•		one foreign patent, two pending United States patent applications and corresponding foreign patent applications relating to sublingual and/or oral delivery devices that can be used to deliver the certain insulin based products; and

	•		~~several United States patent applications and a corresponding international patent applications relating to other early stage product candidates.~~

	•		~~submit our NDA for VIAject~~^® ~~in December 2009;~~

	•		~~continue our clinical trial extension program for the pivotal Phase 3~~conduct clinical trials to study formulations of ~~VIAject~~RHI- and insulin analog-based ultra-rapid-acting formulations that may be associated with less injection site discomfort than the Linjeta^®TM~~, which is designed to run through February 2010;~~ formulation;


	•		conduct additional formulation development work to improve the stability, pharmacokinetic, and pharmacodynamic properties of our ultra-rapid-acting insulin analog-based formulations and our liquid glucagon formulations, or purchase rights related to proprietary technologies that are compatible with our formulations;


	•		produce ~~required~~ validation batches of ~~VIAject~~^® ~~vials, cartridges, and disposable pens~~our product candidates to support ~~our NDA for VIAject~~^®;one or more NDAs;


	•		~~purchase recombinant human insulin and other materials to build commercial supply inventory for VIAject~~^®~~; and~~

	•		conduct additional work necessary to support an NDA for a liquid glucagon formulation, including conducting toxicology studies and human factor studies using the intended commercial presentation;


	•		our ability to ~~file our NDA for VIAject~~^® ~~in December 2009 as planned~~conduct pivotal clinical trials and ~~once filed, the length of time that will elapse before our NDA is fully reviewed~~other tests or analyses required by the ~~FDA;~~FDA to secure approval to commercialize an ultra-rapid-acting insulin formulation or a liquid glucagon formulation;


	•		~~the costs associated with preparing and submitting our Market Authorization Application, or MAA, for VIAject~~^® ~~to the European Medicines Agency, or EMEA;~~

	•		our ability to ~~market, commercialize and achieve market acceptance~~enter into collaboration arrangements for the commercialization of our product candidates ~~particularly VIAject~~^®;and the success or failure of any such collaborations into which we enter, or our ability to commercialize our product candidates ourselves;


	•		~~the FDA’s findings regarding data anomalies observed in India in our Phase 3 clinical trial of VIAject~~^® ~~for patients with Type 1 diabetes and the impact of those findings on the timing of a regulatory approval;~~

	•		~~the size, endpoints and duration of additional clinical trials of VIAject~~^® ~~in patients with Type 1 diabetes to support our commercialization efforts and, potentially, FDA approval;~~

	•		~~the cost to fully develop the 100 IU/cc liquid formulation of VIAject~~^®;

	•		our ability to ~~establish that~~protect our intellectual property and operate our business without infringing upon the ~~100 IU/cc liquid formulation~~intellectual property rights of ~~VIAject~~^® ~~is well-tolerated in chronic use;~~others;


	•		the ~~cost~~degree of clinical utility of our product candidates, particularly with regard to ~~develop an~~our ultra-rapid-acting insulin ~~pen program for use with VIAject~~^®;formulations, which have not yet been shown to be clinically superior to existing rapid-acting insulin analogs;

Title of Each Class

~~Title of Each Class~~

Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share

The NASDAQ ~~Global~~Capital Market