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Message: Quantifying Dilution Risk

Let me start by saying that I have enjoyed reading the posts and have learned quite a bit about the science behind Afrezza.So, thank you for all your insightful posts.

I was hoping to post this last week but have been away on vacation.There was a thread on dilution where it was assumed that Mannkind would need $300 million to get them through Afrezza approval and into production.This caused a lot of controversy and some of the assumptions were not backed up or at least fully explained, so I thought I would take a shot at determining a worst case dilution scenario.

It was postulated in the "Is Dilution Priced In" thread that at $2 per share it would require 150 million shares to raise $300 million and that Al Mann would convert debt into another 150 million shares.

Here is what I was able to dig up from the latest 10-Q.

There are two tranches of senior convertible notes outstanding; $115 million principal due Dec. 15, 2013 at a conversion price of approximately $22.47 per share, and $100 million principal due Aug. 15, 2015 at a conversion price of approximately $6.80 per share.

If the conversion feature of the 2013 tranche is exercised, the $22.47 conversion price is high enough that it is not a concern, given the current share price of$2.78.However, if there is no partner or other source of funding by 12-15-2013, this could cause further dilution if the company is forced to sell shares to raise the funds to pay back principal.At $2 per share that is 57.5 million shares, but since this is so close to the PDUFA date I am hoping that the share price will be higher and dilution will be far less.

If the conversion feature of the 2015 tranche is exercised, the $6.80 conversion price is still high enough that it will not be that dilutive.At this price, the company would have to issue 14.7 million shares.Since the maturity date is 8-15-2015, retiring this tranche will be the least of our problems if the company does not have the funds to return the principal.

That brings us to the $283 million note payable to related party (The Mann Group).The maturity of this note has been extended several times from 12/31/11 to 12/31/12 to 3/31/13 to 7/1/13.As far as I can tell, there are no conversion features or covenants associated with this note.Worst case is that on 7/1/2013 the note comes due and The Mann Group does not extend the maturity.In this case, assuming there are no funds to retire the note and no other sources of funding except a share offering, there will be further dilution.At $2 per share that is 141.5 million shares, but since by this date the trials should be completed and the results submitted to the FDA, the share price should be higher and dilution may not be as painful.

All together that is 150 million + 57.5 million + 141.5 million = 349 million shares.Keep in mind that this is a very conservative estimate and I don't expect it to be that bad.

If the share price increases to $5 by the time the $115 million 2013 convertible and the $283 million note payable to related party come due, dilution will be 150 million + 23 million + 56.6 million = 229.6 million shares.

I am long MNKD and due believe in the company.These are what I consider to be worst case outcomes.

Bob

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