MannKind (NASDAQ:MNKD) investors this past week saw the news that the company is doing a stock offering to raise a bit over $26 million in cash. The deal involves 14 million shares, which prices the stock at just $2.00 per share. Included with the offering are warrants to purchase another 14 million shares at a price of $2.38 per share during a narrow window of time between October 11th of this year and April 10th of 2019. H.C. Wainwright handled the offering.
What Investors Should Know
First things first. I have been speaking to the fact that an offering would need to happen for some time and outlined the clear reasons why. MannKind appeared to have finished Q1 with a bit more than $25 million in cash, and that was likely accomplished by using equity.
This capital raise is much needed, but it does very little to change the overhang related to the cash situation. $26.3 million in cash will buy MNKD a bit over one quarter's worth of operations, and the company will find itself in the same financial crunch just three months from now. Simply stated, another capital infusion is needed. That infusion can come from yet another offering, use of the ATM facility, or a deal that brings in upfront cash. In concept, if the warrants are exercised, another $33 million can be raised, but that is at least six months away, and MannKind needs cash in the next three months. Whether or not these warrants ever get exercised is at the discretion of the holder. The stock price within the window of opportunity will be a major factor in whether these warrants will be exercised or not.
MannKind has indicated that it has a term sheet for an international deal, and it anticipates it will be finalized in Q2. Should that come to fruition, it could supply some level of upfront cash. Investors must bear in mind that MannKind has very little leverage in any negotiation, and thus any upfront cash would likely require a better back end for the prospective partner.
As has been the case for almost the full time that MannKind took back control of Afrezza in mid-2016, this company is the corporate version of living paycheck to paycheck. This latest capital raise does nothing to change that dynamic. MannKind has never had the luxury of carrying at least a full year's worth of cash. It has never had the luxury of being able to fully attempt a sales and marketing campaign that might give Afrezza a chance. If you are invested in this company, you need to come to terms with the overall cash and debt situation. The company has been successful at buying time, but has not yet been able to capitalize on the time bought.
The infusion of $26.3 million now places MannKind at approximately $45.4 million. This assumes that the company is taking care of its interest obligations with cash and not shares. The company has arranged with Deerfield the ability to use some shares for these obligations, and that will preserve a few million, meaning cash could be slightly higher. It is also possible that there is more cash via the ATM facility. Either way, the issue of compliance with the Deerfield covenant is now an end of Q2 worry. By my estimation, the company will be cash strapped again in just three months with another three months still remaining before it is possible to raise the $33 million from the warrants.
The best possible situation is a deal for Afrezza or a pipeline drug that extends the runway yet again via upfront cash. Is it possible? Yes. Will it deliver six months' worth of cash? Not likely. Even the warrants that are tied to this deal cannot really assist until Q3 at the earliest.
The dilution that investors are seeing is real. After the reverse split, this company had under 100 million shares outstanding. The 14 million shares being issued this week will bring the outstanding share count close to 140 million. If the warrants get exercised, that count will climb again to over 150 million. Is dilution better than the alternative? Yes. That being said, each dilution means that your share of the pie is smaller.
The Bottom Line
The bottom line is simple. MannKind remains in a cash crunch. That cash crunch is a proverbial black cloud hanging over the head of this stock and company. Some readers who are uber-bulls have been critical of my assessment of the cash situation in the past. These days, those critics are actually beginning to acknowledge that what I have been outlining regarding the cash situation has been very accurate. This move now resets the bar on the equity even lower. It is also a signal that not everything is going smoothly. Six months ago, MannKind raised $57 million with 10,000,000 shares. This time it was able to raise just $26.3 million on 14 million shares. This company has limited options, and those limited options are getting more restrictive to the financial status of MannKind and the equity associated with it. In closing, warrants at $2.38 present a golden opportunity for the holder to short at any price above that level. It will take very compelling news to dig out of the hole that this equity finds itself in.
What we have is another temporary fix to an ongoing problem. These days the company is using added shares to do its fixing. That strategy can work, but there is hardly a guarantee that it will. With the offering in October of 2017, the sales pitch was that guidance would be met and the new label that would drive sales would be approved. Guidance was partially met via one-time accounting maneuvers, and the new label has not yet delivered a compelling shift on the sales front. I would venture to say that the sales pitch this time is the STAT study and the international deal term sheets that management has spoken of. Savvy investors know that current guidance is a reach, but it is still early in that game and thus possible to meet it. Clearly, the sales pitch this time had fewer look at it with excitement. It was enough to raise $26 million, but the sweetener in the deal was warrants that can, in and of themselves, be taken advantage of by savvy trader strategy.
If you are looking at an investment in MannKind, you really need to consider exactly how much dilution will be needed to simply keep the ship afloat, let alone give a chance to launch an offensive. Sometimes investors give management the benefit of the doubt, but there are only so many times that management can go to that well with those same people. 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.