MannKind Renegotiates Debt With Dilution - What Does This Mean To Investors?

| About: MannKind Corporation (MNKD)
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Summary

MannKind uses shares to pay $6 million worth of debt.

Deerfield becomes a 5% stakeholder.

Cash crunch is still very real.

For quite some time I have been saying that MannKind's (NASDAQ:MNKD) cash situation has it losing leverage on a daily basis. With an SEC filing today, and the subsequent market reaction, that fact should now be abundantly clear.

MannKind announced that the company renegotiated some of its debt with Deerfield. The company had a $5 million lump sum payable in May, and a $15 million lump sum payable in July. The terms of the deal are as follows:

  • Repay $4 million principal amount under the 8.75% Senior Convertible Notes due 2019 held by Deerfield (the "Tranche B Notes")
  • Exchange $1 million principal amount under the Tranche B Notes for 869,565 shares of the Company's common stock (the "Tranche B Exchange Shares"
  • Exchange $5 million principal amount under the Amended and Restated 9.75% Senior Convertible Notes due 2019 held by Deerfield (the "Tranche 1 Notes") for 4,347,826 shares of the Company's common stock (together with the "Tranche B Exchange Shares", the "Exchange Shares").
  • The exchange price for the Exchange Shares is $1.15 per share.

In simple terms, MannKind issued $5,217,391 shares of its stock to pay $6 million out of the $20 million that would be due in the months ahead. The company paid $4 million in cash as well, and will still owe $10 million in cash in mid July.

The move buys MannKind about 3 weeks of operational cash paid for by diluting the existing shareholders. There are many ways to look at this deal, but most every realistic viewpoint is not very positive.

MannKind is in dire need of cash. There was $20 million in debt payments due in the months ahead, but at the negotiating table the company was only able to get Deerfield to agree to taking $5 million of that total in shares. Even at that, the effective share price of $1.15 was about a 10% discount to the previous close.

With this news, it is once again prudent to assess the cash situation. A couple of weeks ago I outlined the cash situation and assessed at that time that renegotiating the Deerfield debt to put off cash payments was something that was possible. In the chart below I am assuming a $2 million per week cash burn rate, assigning estimated cash on hand, and counting the $30.1 million dollar credit line MannKind has. Investors need to bear in mind that Deerfield has a covenant that requires MannKind to have at least $25 million in cash at the end of any quarter. I estimate that as of April 7th, MannKind had $39,619,800 in cash.

  • April 14, 2017 - MannKind cash at $37.6 million - credit at $30.1 million
  • April 21, 2017 - MannKind cash at $31.6 million - credit at $30.1 million. MannKind pays Deerfield $4 million in cash and sees standard cash burn of $2 million.
  • April 28, 2017 - MannKind cash at $29.6 million - credit at $30.1 million
  • May 5, 2017 - MannKind cash at $27.6 million - credit at $30.1 million.
  • May 12, 2017 - MannKind cash at $25.6 million - credit at $30.1 million
  • May 19, 2017 - MannKind cash at $23.6 million - MannKind credit at $30.1 million
  • May 26, 2017 - MannKind has $21.6 million in cash - credit at $30.1 million
  • June 2, 2017 - MannKind has $19.6 million in cash - credit at $30.1 million
  • June 9, 2017 - MannKind has $17.6 million in cash - credit at $30.1 million
  • June 16, 2017 - MannKind has $15.6 million in cash - credit at $30.1 million
  • June 23, 2017 - MannKind has $13.6 million in cash - credit at $30.1 million
  • June 30, 2017 - Q2 ends - MannKind has $11.6 million in cash - credit at $30.1 million - Deerfield covenant is still covered.
  • July 7, 2017 - MannKind has $9.6 million in cash - credit at $30.1 million
  • July 14, 2017 - MannKind has $7.6 million in cash - credit at $30.1 million
  • July 21, 2017 - MannKind has $10 million debt payment due - MannKind cash at $0 - credit line use starts - credit line now at $27.7 million .
  • July 28, 2017 - MannKind has $0 in cash - credit line at $25.7 million.
  • August 4, 2017 - MannKind has $0 in cash - credit at $23.7 million - MannKind now has less than the $25 million that the Deerfield covenant requires at the end of a quarter, but has until the end of September to rectify.
  • August 11, 2017 - MannKind has $0 in cash - credit at $21.7 million
  • August 18, 2017 - MannKind has $0 in cash - credit at $19.7 million
  • August 25, 2017 - MannKind has $0 in cash - credit at $17.7 million
  • September 1, 2017 - MannKind has $0 in cash - credit line at $15.7 million
  • September 8, 2017 - MannKind has $0 in cash - credit at $13.7 million
  • September 15, 2017 - MannKind has $0 in cash - credit at $11.7 million
  • September 22, 2017 - MannKind has $0 in cash - credit at $9.7 million
  • September 29 - Q3 about to end - MannKind has $0 in cash - credit at $7.7 million - Company is one day away from being in violation of Deerfield covenant.
  • October 6, 2017 - MannKind is out of compliance with Deerfield, but has credit of $5.7 million
  • October 13, 2017 - MannKind is out of compliance with Deerfield but has $3.7 million in credit
  • October 20, 2017 - MannKind is out of compliance with Deerfield but has $1.7 million in credit
  • October 27, 2017 - MannKind is out of cash and out of credit.

As you can see, the deal with Deerfield did not really extend the cash runway by very much. From the moment I saw the deal announced I knew that the stock would move toward the $1.15 per share. The stock closed at $1.12 per share on the day that the news was released.

Compounding this bad news is the likely fact that the script count this week will be light due to holiday impacts. This could see the equity testing lower lows once again by the end of this week. In my opinion, if there is no positive news coming, this equity could find itself trading below the $1 level (and outside NASDAQ listing requirements) by the end of next week.

I understand that many readers are long on this stock and likely very frustrated. This is why I always recommend keeping emotion away from your investment portfolio. The vast majority of people invest to make money, not to make moral statements. Even if you believe in the concept that Afrezza can help people and that influenced your decision to invest, you need to understand that the average investor is looking out for the dollars, not saving lives.

The most realistic stance on this news is pretty simple. Deerfield knows that MannKind is in a cash crunch. If Deerfield wanted MannKind it could have already bought it, or used this mechanism to get even more shares. This deal got Deerfield $4 million in cash weeks ahead of schedule, and $6 million worth of stock with which they can sell immediately if they so desire. If MannKind is headed down a path of doom, Deerfield extracted some cash ahead of that situation, and is among the first in line as a creditor. If there is a company that may make a move on MannKind, Deerfield has some leverage in that negotiation as well.

Last week MannKind management got their proposed golden parachutes. This week existing shareholders got diluted by 5% for what was effectively extending the cash runway by three weeks that would already have MannKind outside of compliance with Deerfield covenents anyway.

MannKind enacted a reverse split a little over 1 month ago. Since that day the stock has gone down 55%! Investors have had a very bitter pill to swallow. In my opinion this equity is headed to new lows in the day ahead. It is called being realistic. Stay Tuned!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.