I have some time to kill and thought I would address some of the questions raised in the thread stimulated by Jeff1212p's January 4th post. If I don't cover all of the issues raised by the various participants, please feel to ask again. I'm doing this by memory.
The warrants can be exercised at any time and are not callable; I know of very few warrants that are callable. As for exercising, like options, there are very few reasons to exercise much before expiration because as long as there is some time left, there should be some time premium. Meaning it's better to simply sell the warrant than exercise. The one situation where the warrant (or option) holder might convert early would be if the stock were deeply in the money, there was no time premium, and the stock were going ex-dividend. (This won't be a factor with MNKD.)
The typical retail investor seldom converts their warrants, therefore one doesn't really need to worry too much about the capital necessary for the conversion. If desired, however, conversion is rapid, implemented by your broker.
As for the bid/ask spread, it's extraordinarily wide now, in percentage terms, so the holder might be contemplating conversion and then the sale of the stock. When the time comes where the issue of conversion is meaningful, it clearly isn't now, the bid/ask spread should be a non factor. The roughly $0.10 to $0.12 spread is significant when we're talking about a $0.70 warrant, but when MNKDW is trading around $7, the $7.00/$7.10 bid/ask spread will not be a consideration, as it is currently.
I like the simplicity and liquidity of the LEAPS but prefer the warrants. The latter are probably slightly cheaper and I find comfort in the additional time afforded me.
And for whatever it's worth, I think there's virtually no downside risk to the stock until at least pdufa day. As for the potential price, I think $5 is a no-brainer by that date and easily much higher if phase 3 results are as positive as I expect them to be. Keith Markey, of Griffin Securities, has a 12 month price target of $10, and I think that's definitely achievable.
The new mb format makes it difficult to proofread so my apologies in advance for errors, be they grammatical, punctuation, and/or organizational (structure).
2014 $ 4 option today = .74 = $740 for 1,000 shares + $4,000 exercise price = $4,740 = $4.74 share price once converted.
MNKDW = $1.11 today = 1,666 warrants (equals 1,000 shares @.60) x $1.11 = $1,850 + Conversion price into stock, 1,000 MNKD shares converted at $2.40 = $2,400 + $1,850 = $4,250 = $4.25 share price once exercised.
Once in the money, the warrants are essentially equivalent to equity or common stock in the issuing company. As such, the acquiring company would also have to buy all the warrants, taking into consideration both the takeout price and the conversion price. Ignoring for now the fact that the warrants are good for just .6 share of MNKD, if the takeover price were $10 a share, than the acquirer would have to pay $7.60 for each warrant. Obviously, when one factors in the 0.6 ratio, the payout falls to 60% of $7.60.
Thanks for posting that information. I emailed IR with some of those questions and got no response. I guess once the warrants are sold, they really don't care about them.
It seems I may never get my order filled. I managed to get only 1000 warrants in two weeks. Due to the illiquidiity of the market, it's impossible to know where the offer stands. I don't think there is any SEC regulations that apply to the "gray" market so the market maker has a lot of leeway and doesn't necessarily have to buy/sell at the best price. Another order executed a penny below my gtc order in the past couple weeks. I'm thinking of abandoning it soon and buying the stock instead.
It's actually possible to know what the bid/ask is but it takes some effort. You have to ask your broker to call the market maker. I also found schwab far more effective than other brokerage houses in getting the warrants for me. TD Ameritrade was the worst. The bid/ask spread is typically wide and if you try save a penny or two, you're not going to get many shares, if any. If you really want the warrants, you essentially have to pay the asking price.
Sentiment: Strong Buy
Thank you for your excellent article. I have one question regarding conversion vs. sale of warrants. By converting would you not put off a tax bill. Also what would happen to warrants if the company were sold? Thankls
Yes, you would put off the tax bill until you sell the shares received from the conversion. Having to pay taxes on profits is always a nice problem to have, however, and I'm looking forward to sending Uncle Sam a very large check within the next few years. The warrants are legal obligations of the issuing company and would transfer to the acquiring company if there were a change in corporate control. Another nice problem that I wouldn't mind having to contemplate in the the near future.
Sentiment: Strong Buy