Question about the conference call

[tomtabb]

Steve Binder said: "When I joined the company about a year ago we had almost $60 million in debt due within the following 18 months, $10 was due within six months. And we had few paths available for raising money. We were overleveraged and our hands tied with stock warrants that a ratchet provision is preventing us from effectively raising capital."

I'm not clear on what the "ratchet provision" is that he's referring to. Also, how does that prevent raising capital? To what extent does it prevent raising capital?  Thanks.

[brotherm1]

I don’t know. Would this be applicable?

”What is 'Full Ratchet'
Full ratchet is an anti-dilution provision that, for any shares of common stock sold by a company after the issuing of an option (or convertible security), applies the lowest sale price as being the adjusted option price or conversion ratio for existing shareholders.
Full-ratchet anti-dilution protection allows an investor to have his percentage ownership remain the same as the initial investment...”

www.investopedia.com/terms/f/fullratchet.asp

[peppy]

Aug 10, 2018 19:16:05 GMT -5 tomtabb said:

Steve Binder said: "When I joined the company about a year ago we had almost $60 million in debt due within the following 18 months, $10 was due within six months. And we had few paths available for raising money. We were overleveraged and our hands tied with stock warrants that a ratchet provision is preventing us from effectively raising capital."

I'm not clear on what the "ratchet provision" is that he's referring to. Also, how does that prevent raising capital? To what extent does it prevent raising capital?  Thanks.

This is all I know. Jred took the pencil to the paper.

acility Financing (done with multiple Deerfield entities)

Notes - $20 million.
-$3 million due 8/31/18 (deferred from 7/18/18)
-$15 million due 7/2019
-$2 million due 12/2019

Tranche B - $5million
-$5 million due 12/2019


Total Facility (Notes and Tranche B) $25 million

To help tie into the 2nd quarter 10-Q (page 19) stated as of 6/30/2018
$39 million
less
$2 million due 7/1/2018 (expect that was paid)
$12 million principal reduction from deal on 7/12/2018 ( $7 million from notes due 7/18/18, $3 million from notes due 12/31/19, $2 million from TrancheB due 12/31/19) Only $3 million deferred
leaves
$25 million still due Deerfield

The $19.1 million of 2021 notes is listed there as well, but I was unaware that Deerfield owned these bonds. Do you have a reference to that? I thought Sabby Management was a significant holder of the issue.

[tomtabb]

Aug 10, 2018 22:59:45 GMT -5 brotherm1 said:

I don’t know. Would this be applicable?

”What is 'Full Ratchet'
Full ratchet is an anti-dilution provision that, for any shares of common stock sold by a company after the issuing of an option (or convertible security), applies the lowest sale price as being the adjusted option price or conversion ratio for existing shareholders.
Full-ratchet anti-dilution protection allows an investor to have his percentage ownership remain the same as the initial investment...”

www.investopedia.com/terms/f/fullratchet.asp

Thanks, I saw that but what I don't understand is how it applies to MNKD's warrants.

The quote also confused me because he's in the past tense initially -- "we had few paths available for raising money. We were overleveraged and our hands tied with stock warrants"  -- but then he switches to the present -- "a ratchet provision is preventing us from effectively raising capital."

So is the ratchet provision continuing to be a problem? Does it have a solution?

[tomtabb]

Aug 10, 2018 23:27:29 GMT -5 peppy said:

Aug 10, 2018 19:16:05 GMT -5 tomtabb said:

Steve Binder said: "When I joined the company about a year ago we had almost $60 million in debt due within the following 18 months, $10 was due within six months. And we had few paths available for raising money. We were overleveraged and our hands tied with stock warrants that a ratchet provision is preventing us from effectively raising capital."

I'm not clear on what the "ratchet provision" is that he's referring to. Also, how does that prevent raising capital? To what extent does it prevent raising capital?  Thanks.

This is all I know. Jred took the pencil to the paper.

acility Financing (done with multiple Deerfield entities)

Notes - $20 million.
-$3 million due 8/31/18 (deferred from 7/18/18)
-$15 million due 7/2019
-$2 million due 12/2019

Tranche B - $5million
-$5 million due 12/2019


Total Facility (Notes and Tranche B) $25 million

To help tie into the 2nd quarter 10-Q (page 19) stated as of 6/30/2018
$39 million
less
$2 million due 7/1/2018 (expect that was paid)
$12 million principal reduction from deal on 7/12/2018 ( $7 million from notes due 7/18/18, $3 million from notes due 12/31/19, $2 million from TrancheB due 12/31/19) Only $3 million deferred
leaves
$25 million still due Deerfield

The $19.1 million of 2021 notes is listed there as well, but I was unaware that Deerfield owned these bonds. Do you have a reference to that? I thought Sabby Management was a significant holder of the issue.

I'll see if I can figure that out later on, but right now it's the ratcheting warrants that have me perplexed.

[sportsrancho]

Thanks, Mike, and good afternoon. I'm so excited to discuss our second quarter and first-half 2018 results which showed triple-digit growth in Afrezza revenue, as well as continued progress in restructuring our balance sheet in recapitalizing the company. Let's start by reviewing the second quarter and first-half 2018 financial results. I'll be discussing select financial highlights, and urge you to read the condensed consolidated financial statements and MD&A continued in our 10-Q which was filed with the SEC this afternoon.

Let's start with the left side of the slide. The first quarter 2018 Afrezza gross revenue was $6.7 million, a 155% increase over Q2 2017, while Afrezza net revenue was $3.8 million, a 142% increase over 2017. The net revenue increase was favorably impacted by volume, cartridge mix, and price. Partially offsetting this favorability was the impact from discontinuing 2 SKUs as of April 1st, 2018, and the associated distribution channel flow-through impact. Plus product returns in Q2 mainly related to the discontinuation of these SKUs. As discussed on previous calls, please be aware that our revenue recognition has changed between 2018 and 2017 under the adoption of ASC 606.

Looking at the right side of the graph, the first-half 2018 Afrezza gross revenue was $11.9 million, a 179% increase over 2017, and Afrezza net revenue was $7.2 million, a 161% increase over the first-half 2017 reflecting the same favorable impacts of volume, cartridge mix, and price. At the bottom of the slide you will see our gross to net percentages by period presented. In the second quarter 2018, our gross to net percentage was 44% versus 41% in the second quarter of 2017. The second quarter 2018 gross to net was unfavorably impacted by the return of expired product mainly related to the discontinuation of SKUs at the beginning of the quarter of approximately $250,000. Without the negative impact of this return, our gross to nets would've been 40% of gross sales, which is line with our expectation.

The increase in gross to net for our second quarter 2018 versus 2017 is primarily driven by an increase in managed care, in government program rebates as a result of price increases, as well as the impact of accruing for product returns as there was no gross to net deduction for product returns in 2017 through our method of revenue recognition where we recorded sales when Afrezza was dispensed to patients, and there was no longer a right of return. The gross to net percentage for the first-half 2018 versus first-half 2017 was 40% versus 36% which effects the impacts just discussed for Q2, and the normalization of quarterly fluctuations due to the timing of charges and credits flowing through our gross to net.

To sum up, we have strong fundamentals supporting our revenue growth for both second quarter and the first-half 2018 demonstrated by volume growth, the favorable impact of price and product mix trends. We've been working hard to restructure our balance sheet. When I joined the company about a year ago we had almost $60 million in debt due within the following 18 months, $10 was due within six months. And we had few paths available for raising money. We were overleveraged and our hands tied with stock warrants that a ratchet provision is preventing us from effectively raising capital.

To turn the company around we needed some breathing room. We purchased the warrants back September of last year, and went to work on restructuring and paying down our debt. This slide details the debt principal changes from July 1, 2017 through July 2108; remarkable 13 months of activity that has significantly strengthened the company's balance sheet. Since July 1, 2017, we had substantially reduced our principal balance outstanding in the amount of $52 million, or a decrease of close to a third. This decrease is inclusive of the reduction in Deerfield debt of $14 million in the month of July, 2018, which is $12 million from a debt to equity conversion and $2 million paid in cash.

We have also restructured our debt to allow for the convergence to equity at different price levels, and have cleared out most near-term debt maturities with $90 million or close to 80% of the debt balance due in the second-half of 2021 or three years from now. To put it all in perspective, at July 1, 2017, our debt to market cap ratio was 1.14, meaning that we had higher balance of debt than no company's market cap. As of July 1, 2018, only 13 months later, this ratio stands at 4:9, reflecting both our average to reduce the principal balance outstanding and the increase in the company's market cap.

We remain extremely focused on tightly managing our cash. We ended the second quarter 2018 with $26.8 million of cash, cash equivalents, and restricted cash. Looking back over the last six months, we started the year with $48.4 million in cash, we raised $28 million in the registered direct equity sale in April, and for the first-half of 2018, we had net cash used in operating activities of $48.8 million, inclusive of the $2 million in cash we received from Cipla for our India licensing agreement. And looking at the sequential quarter-on-quarter, cash used -- looking at a sequential quarter-on-quarter cash used in operating activities, the increase from $21.7 million in Q1 2018 to $27.1 million in Q2 2018 was due to a delay in executing certain commercial programs from Q1 to Q2, as well as the payment of corporate bonuses occurring in Q2.

To adjust our reduced net revenue forecast for the year that Mike discussed earlier, we've identified areas of reduced spending in the second-half of 2018 that will offset the lower forecast, and we will continue to manage cash to ensure we stay within our guidance of $90 million to $100 million of net cash used in operating activities for 2018.

[tomtabb]

Thanks but I don't see any mention of warrants getting racheted. What I'm concerned about are the 14 million mentioned in the 10-Q:

"On April 5, 2018, the Company entered into securities purchase agreements with certain institutional investors. Pursuant to the terms of the purchase agreements, the Company sold to the purchasers in a registered offering an aggregate of 14,000,000 shares of its common stock and warrants to purchase up to an aggregate of 14,000,000 shares of its common stock at a combined purchase price of $2.00 per share and accompanying warrant."

They were exercisable at a price of $2.38; does the exercise price get racheted down as the stock price drops? How does it interfere with raising money?

[ryster505]

I think the key sentence here was "We WERE overleveraged and our hands tied with stock warrants that a ratchet provision is preventing us from effectively raising capital.

Notice the past-tence on that line. 

[tomtabb]

Aug 11, 2018 10:55:55 GMT -5 ryster505 said:

I think the key sentence here was "We WERE overleveraged and our hands tied with stock warrants that a ratchet provision is preventing us from effectively raising capital.

Notice the past-tence on that line. 

Yes, I noted that several posts ago, but in the same sentence he then switches to the present tense and says, "a ratchet provision is preventing us from effectively raising capital."

So is the ratchet provision still affecting them; if so, what's the solution?

[sportsrancho]

This is a SA transcript. I think there’s quite a few typos. It sounds like they had the warrants and then purchase them but then he goes on to talk about them in the next paragraph. So whether they were past tense or not is not clear.

[ryster505]

Perhaps at this point they are not as over leveraged..

[sportsrancho]

“Is” is the typo. This is a different transcript.

We've been working hard to restructure our balance sheet. When I joined the company about a year ago, we had almost $60 million in debt due within the following 18 months. $10 million was due within 6 months, and we had few paths available for raising money. We were over-leveraged and our hands tied with stock warrants that are ratchet provisions preventing us from effectively raising capital. To turn the company around, we needed some breathing room. We purchased the warrants back in September last year and went to work on restructuring and paying down our debt. This slide details the debt principal changes from July 1, 2017, through July 2018, a remarkable 13 months of activity that has significantly strengthened the company's balance sheet.

[sportsrancho]

I also liked reading what Mike said again...

Diabetes is one of the greatest health care challenges we face today. It's been a year since I became CEO, and we have assembled one of the best leadership teams I've ever had the pleasure to work in the past 20 years. I believe after today's call, you will see the tremendous progress we have made in our first year together.

Also, I want to say thank you to our shareholders who have been extremely patient with us as we reshape MannKind from a platform technology company to a fully integrated biopharmaceutical company. It was not an easy transition and we've had our share of growing pains, but I believe we are now in a strong position to drive continued growth for years to come.

I enjoyed the open communication with you all as well as meeting the loyal Mannitarians who came to our shareholder meeting in May where we packed our new offices.

Over the last year, we've met with potential future investors around the world, including our most recent New York City investor luncheon last month, where we had over 600 people listen in on the clinical update by Dr. Edelman and Dr. Kendall. Many of the analysts and people we have met with are excited to see MannKind return as a growth company, and I believe will start to buy into the future as we continue to build upon the progress we have made.

Our employee commitment has never been stronger as we have low rates of voluntary turnover, and over 65% of our employees are participating in our employee stock purchase plan, which is 3x the industry average.

During my first year, we've made incredible progress of transforming us into a commercial-stage growth company by driving impressive growth, increasing our pipeline with TreT, progressing our pediatric program and expanding our international focus. But unfortunately, the barometer that I measure shows we have failed to see any major appreciation in our stock price. I believe we are undervalued when I look at the sum of the parts. We have over 800 patents as well as hard assets such as our Danbury infrastructure that alone are worth close to $200 million. We have over $2 billion of nonoperating losses on our balance sheet, which will save us over $400 million in future taxes. Additionally, the market has put a valuation on an improved Treprostinil program when you look at the IPO last week of Liquidia via a single product immolation company at $175 million. And to top it off, we have an FDA-approved asset in Afrezza, which is shaping up to likely become the next standard of care for mealtime insulin.

Al Mann was a true visionary, and I believe the sum of the parts will start to reflect the true market value once we finish up the recapitalization, which I will provide some clarity on today.

You have to remember, we are changing 97 years of habit around using injectable mealtime insulin, and we continue to make progress every day on gaining new prescribers and helping patients start and stay on Afrezza.

Pat will share with you some more detail around our commercial performance later on our call.

Our goal is to become one of the premier customer-focused diabetes companies who are committed to growing to its cash flow breakeven even through growing our revenue -- by growing our revenue and more tightly managing our expenses. We have conducted listening sessions around the country with hundreds of doctors to ensure we're on the right path for growth and remain very confident in our future. We continue to see strong weekly wholesaler sales and consistent unit growth as we enter the second half of 2018, and this is before any clinical exchange of the new data, post-ADA. Now that we have announced positive results with our TreT program and Afrezza continues to grow, the interest in Technosphere technology as a platform is increasing.

Let me review some of the key highlights in Q2. I think this is one of the first quarters where we can see net revenue growth of 142% year-over-year, and then you see TRx growth of 71% year-over-year, which is -- you see the revenue growth be almost twice as much as the TRx growth. We're starting to see that compound effect of what we've been describing around growing our cartridges and cartridge mix, and the pricing and packaging decisions we've made are starting to play out when you look now year-over-year in terms of TRx growth and revenue growth. Additionally, first half 2018 gross revenue was $11.9 million, and net revenue was $7.2 million. When you look at this compared to 2017, we had annual revenue of $9 million, and you just take a look and see now $7.2 million in the first half, and we look forward to the second half as we go forward.

We released new clinical data at ADA demonstrating improved mealtime control, increased time-in-range and low rates of hypoglycemia. David Kendall will talk about this later in our call.

We successfully completed TreT Phase I single ascending-dose trial in June. Our REMS requirements were completed earlier than expected. We were able to announce our agreement for India with Cipla, and we have continued international expansion plans which I'll talk about at the end of the call. We continue to progress our pediatric development program, and we're almost complete on cohort 1. We are now looking at assessing a [5 10] cap pathway for BluHale as another business avenue, thinking about connected care as I look at Companion Medical and what they've done with the InPen technology.

Additionally, we reduced our principal debt since July 1 last year by $52 million. We also raised $20 million recently in April. I'm happy to see that we were added back to the Russell 2000 and 3000 Index.

Let me talk about our progression towards cash flow breakeven. We are providing updated net revenue guidance for the year of $22 million to $25 million. We are sticking to no change in net cash used in operating activities of $90 million to $100 million.

One of the major questions I get that is why should we be confident in our guidance. Since we gave guidance in May, a few items have brought clarity to where we see the second half finishing up. Our underlying demand assumptions in our models are holding true. When we look at the full year guidance previously given, we see about $4 million to $5 million impact due to the following 3 things. First, a onetime impact in removing old SKUs in the first half that was equal to about $1 million. Two, we have cartridge and payer mix where we saw slightly higher Medicaid prescriptions, causing our gross to net to increase to 40% from 34%. This impacts us to the tune of about $3 million on a full year basis. And third, we held the line on quickly filling sales vacancies in expansion territories, which likely cost us $1 million to $2 million in net revenue in 2018, but we would have burned $5 million in cash, which we believe was prudent to conserve the cash in order to stick to our cash burn guidance when combined with the cost of gaining additional capital.

That said, we continue to look for A players to join our sales team, and we'll happily hire them when we find them. As evidence, we have 10 new people starting in August alone. When we finish up the recapitalization, it will enable us to recruit some of the best talent in the market and drive additional growth as we go into 2019 and beyond.

Overall, prescription demand continues to grow. Our new prescribers are growing. And the longer our field force are in their territories, the more they will continue to drive growth.

Overall, we see Afrezza delivering $40 million to $44 million in gross revenue, which is almost 6x the first year of the original launch, which had a lot more resources than we had. This is our first year together, and while we all want faster growth, we remain optimistic that as people continue to adopt CGM and we gain additional countries beyond the U.S. as well as our pediatric program completion, Afrezza will continue to grow for years to come.

Our core focus now, as the balance sheet is in a better position, is on ramping up sales and manage our expenses so we can get to cash flow breakeven as soon as possible.

Let me talk about progressing to cash flow breakeven. Over the last year, we have raised almost $90 million at an average price of $3.67 a share. We've been able to reduce our debt by over $50 million while restructuring the remaining debt outstanding to give us the runway to cash flow breakeven. From what we know today, we expect the predominant way MannKind will get to cash flow breakeven will be through our business development activity listed on this slide, driving faster Afrezza trial and adoption as well as potential new debt opportunities, given our asset base. At this point, we look to finish up the recapitalization plan that Steve and I started over a year ago, and we believe this will put us on the pathway to cash flow breakeven.

As you look at the list on the slide, you can see we have many options to recapitalize the company, and I do not expect equity/continued dilution will be the predominant way we grow our cash flow breakeven.

Thank you all again for your support and patience, to shareholders and employees who are listening. I'll now turn it over to Steve.

[MnkdWASmyRtrmntPlan]

Thanks for posting that again, Sports. It was good reading it again. It also got me to read Mike's initial discussion, especially the part about finances. As a result, I am reinvigorated. I just don't know how this call got twisted by the downers. It is bright, positive and outlines their great plans. It highlights the path they have been taking to breakeven and projects that path forward. I see no reason to doubt that it will come to fruition.

[sayhey24]

What would get me reinvigorated is if Mike would close a deal. Come on man, give us a deal.