MannKind Corporation Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2012; filed August 9, 2012. MannKind remained a development-stage biopharmaceutical company focused primarily on AFREZZA inhaled insulin and its Technosphere platform. AFREZZA had not received regulatory approval and the company had generated no product revenue.
Financial condition and operating results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $50,000 |
| Research and development expense | $26.6 million | $30.3 million | $50.8 million | $56.6 million |
| General and administrative expense | $17.4 million | $8.9 million | $27.2 million | $20.7 million |
| Operating loss | $44.1 million | $39.2 million | $78.0 million | $77.2 million |
| Net loss | $36.6 million | $44.5 million | $74.8 million | $86.0 million |
| Net loss per share | $0.23 | $0.37 | $0.49 | $0.71 |
| Operating cash flow used | Not separately provided | Not separately provided | $57.5 million | $67.4 million |
Gross and operating margins are not meaningful because the company had no current-period revenue. Cumulative net loss since inception was approximately $2.0 billion, including a historical $151.4 million goodwill impairment charge, and cumulative operating cash flow used was approximately $1.5 billion.
- Cash and cash equivalents were $31.6 million at June 30, 2012, compared with $2.7 million at December 31, 2011. Including available-for-sale securities and the certificate of deposit, liquidity was approximately $32.0 million.
- Financing activities generated $86.8 million during the first half of 2012, primarily from the February equity and warrant offering and $6.3 million of related-party borrowings.
- Current assets were $50.3 million versus current liabilities of $55.4 million. Total liabilities were $484.8 million, compared with a stockholders’ deficit of $244.4 million.
- Senior convertible notes had a carrying value of $211.2 million, consisting of $115.0 million due in 2013 and $100.0 million due in 2015, before unamortized issuance costs.
- The related-party note payable was $218.1 million at June 30, 2012, with $26.9 million of additional borrowing capacity. The facility’s maturity was extended to July 1, 2013, while borrowing availability was extended through December 31, 2012.
Material changes from the prior comparable periods
- Second-quarter research and development expense declined 12%, primarily because 2011 included $11.9 million related to termination of the Organon supply agreement and receipt of insulin. Clinical-trial spending increased by $7.2 million, while manufacturing expense decreased by $11.2 million.
- First-half research and development expense declined 10%, despite $13.9 million of additional clinical-trial costs for studies 171 and 175.
- General and administrative expense increased 96% in the quarter and 32% year to date, primarily because of a $7.7 million litigation settlement charge, higher legal and consulting costs, and increased stock-based compensation.
- Net loss improved versus 2011 because of lower operating expenses and $13.3 million of other income, including a $12.0 million fair-value gain on a forward purchase contract and a $2.7 million warrant-liability gain. These gains were largely non-cash and do not represent operating revenue.
- In February 2012, MannKind sold 35.9 million units for net proceeds of approximately $80.6 million, excluding warrant exercises. The units included common stock and warrants to purchase up to approximately 21.6 million shares.
- In June 2012, 31.25 million restricted shares were issued to The Mann Group in exchange for cancellation of $77.2 million of related-party debt. Accrued interest of approximately $11.9 million was capitalized into additional related-party debt.
Guidance, outlook, risks and unusual items
- Management expected to complete screening for the two FDA-requested AFREZZA studies during the third quarter of 2012, complete treatment in the second quarter of 2013, and submit results as an NDA amendment during the third quarter of 2013. These timelines were subject to clinical, regulatory and funding risks.
- The FDA had issued a second Complete Response letter in January 2011 and required two additional studies using the Dreamboat inhaler, including a comparison with the MedTone inhaler. Approval remained uncertain, and additional studies could be required.
- Management stated that existing capital resources were expected to support planned operations only into the fourth quarter of 2012. The filing expressly states that substantial doubt exists regarding the company’s ability to continue as a going concern.
- MannKind expected continuing negative operating cash flow until regulatory approval and commercialization of AFREZZA. It was seeking additional equity or debt financing, strategic collaboration, licensing, asset sales, or increased related-party borrowing.
- Settlement agreements for securities and derivative litigation were reached after quarter-end but were accrued as probable at June 30. The securities settlement contemplated $16 million of insurer-funded cash payments, 2,777,778 shares, and potentially an additional one million shares if the stock price was below $1.00 at final judgment. The derivative settlement contemplated insurer-funded payments of $800,000 and 225,000 shares, subject to court approval.
- The company remained dependent on AFREZZA’s clinical success, FDA approval, manufacturing readiness, commercial collaboration, market acceptance, reimbursement, intellectual-property protection and access to capital.
- Internal disclosure controls were judged effective at the reasonable-assurance level, and management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether AFREZZA clinical studies met FDA requirements, achieved statistically significant results and supported an NDA amendment.
- The timing and terms of any additional financing or strategic commercialization partnership, given the stated fourth-quarter 2012 liquidity horizon.
- The maturity, repayment and prepayment terms of the $218.1 million related-party note and the $211.2 million of senior convertible notes.
- Final court approval and ultimate cash, share and governance obligations under the securities and derivative litigation settlements.
- The potential dilution from convertible notes, warrants, stock awards and settlement shares; 61.7 million potentially dilutive shares were excluded from diluted loss per share at June 30, 2012.
- Whether manufacturing scale-up, supplier qualification and FDA facility inspections will support potential commercialization of AFREZZA.