Shiftless'  Instablog

Here are my impressions and possible answers to some of the questions being asked (based on perusing the Yahoo message board) about (GNBT)'s annual report released on October 14, 2009 at approximately 7pm EST.

First the layout of the report could definitely be smoother.

They have effectively duplicated most, if not all, of the financial notes before the consolidated financial statements.  Felt a little like deja vu towards the end. The length appears to be an attempt to be very very thorough regarding possible downside risk as well as explaining how new drugs are approved.  Seems a bit over kill in my opinion, but perhaps required by SEC laws for a development company.  They made mention of their small size several times and how it impacted reporting.

Second the issue of sales in India, or lack thereof seems to be a two part issue.

The primary issue seems to be that (GNBT) is being very conservative about recognizing revenue only when absolutely sure that it will not be taken away.  It is my understanding, based on the annual report, that there is a small amount of revenue coming out of India, but the company does not consider it large enough to count or is waiting to be paid for their drugs.  They mentioned an issue regarding payment by governments and private insurance companies, perhaps they have yet to release payments to (GNBT).  The second sales issue seems to be a lack of ability to mass produce the product. You have to read between the lines but the shipment was only partial filled by the Ecuadorian plant, this suggests that there is an issue at the plant--perhaps they are trying to renegotiate their production contract.  Whatever the case may be, but it appears (GNBT) is confident of resolving the issue but wants to play it safe and defer revenue recognition until 2010.  Incidentally 2010 seems to be when they expect results for the gum approval as well as a significant increase in sales from the otc products.  Keep in mind that (GNBT)'s next quarter ends 10/31/2009(about 2 weeks from now) with the following quarter and its results ending on 1/31/2010, thus the deferment to the 2010 calendar year.

Third issue: dilution.

I agree that this company has been playing dilution with us shareholders; however, according to the company they believe that they have enough cash to operate without additional financing over the next twelve months.  But as it plainly states in the annual report this is a drug development company and until the drugs get developed and sold they only way to finance operations is to sell securities.  (GNBT) got trounced on the notes that it borrowed in 2008 and that caused a significant amount of dilution, but it no longer has those notes to worry about.  The total debt on this company is currently less than its assets which means it may have room to use leverage rather sell more stock, but if it doesn't the stock holder still has claim to some asset value in the event of a forced liquidation, better than some banks I could mention. While (GNBT) is almost certainly going to sell more shares in the future(basically the company admits as much in the report), the company seems intelligent enough to do so only if the stock price is above the last sale price.  Common sense, don't burn your last investors if you can help it or you won't be able to sell new issues.

Fourth point; the de-listing issue.

(GNBT) is keenly aware of this and has taken precautions to prevent technical default on its debt should this occur.  However, it is also apparent that this company has no desire to be de-listed as it could significantly affect its ability to finance itself.  If you truly believe that management uses (GNBT) as a piggy bank and cares nothing for the common stock holder then you should realize that it is in management's best interest to get this stock back over $1.00 as soon as possible or no more stockholder's will fund management's lavish life style.  I personally do not believe this but it is a common deception posted on the Yahoo Finance Boards.   As to the issuance of shares to apparently random parties, this is how cash-poor companies preserve cash they prefer to give equity stakes if at all possible.  I believe most of the mentioned parties were in fact the bond holders that were demanding satisfaction in 2008/09.  Some of it was issued to parties for services rendered.

Fifth point, executive compensation.

While I'm not an expert on executive compensation for the bio-tech sector; I do find it noteworthy that there were no bonuses paid out in 2009 and total executive compensation was approximately half that of 2008's numbers.  This would suggest that management was acting in accord with their desire to preserve cash and still have a salary.  Total executive compensation was approximately $1 million for all 3 officers or significantly less than 10% of all of the proceeds from security sales.  Management owns a significant number of shares and outstanding warrants, these would be negatively impacted if (GNBT)'s price were to fall.

Sixth point: Cyclicality.

(GNBT) traded at these low numbers back in 2003,2004, and 2005; it rebounded to prices well over $5.00.  Granted that was on significantly fewer shares but the circumstances were similar: big market boom, company took on debt that it could not repay and had to massively dilute to get out of debt.  Point is that if they did it once years ago when they were years away from commercially viable products it should be much easier now when they can sell otc products and may begin to cover costs on Oral-lyn. (Covering costs may include R&D outlays, not sure about this, but if true could be a big boost in retained earnings.)

Sixth point part b: massive R&D losses.

This is actually a potentially good thing.  (GNBT) has approximately $80 million in tax loss carry forwards, this could make it a take-over target for a profitable firm.  That 80 million dollar in carry forwards is just as good as cash to a profitable firm, it allows them to shield 80 million in income.  What price would this be worth to the profitable firm?  No precise idea, but at least 80 million gets you the intellectual assets and real estate for free.

Seventh and final point: The consolidated financial statements for fiscal year ending 2009.

Specifically the revenue number posted at the end of the fiscal year.  Since (GNBT) did not bother to post quarter numbers one must pull out the EPS for the quarter.  Based on (GNBT) stating that yearly EPS was -0.32$ and Yahoo Finance has the estimate posted at -0.34$ for the same period it appears that $GNBT lost 0.02$ less than expected for the year.  That is about a 10% difference for the year and a 33% beat for the quarter (estimates for the quarter were -0.06$ vs. -0.04$, calculated by taking -0.32$ and adding/subtracting the losses from the other quarters this year.  Not too shabby!  But before we get ahead of ourselves it was still a loss not a gain.  This was not a profitable quarter and the company is currently uncertain when it will be profitable. The revenue estimate was in-line with the actual report so most of the savings came from cost cutting and the reductions of debt payments and reduced R&D expenses.

Effectively Generex Biotechnology appears to be on track with its stated goals, has a multitude of potentially big developments, and is nearing a point where it will stop bleeding cash at a fantastic rate.  Was this the grand event signaling a massive run up in price? Probably not.  Does it give the shorts reason to re-evaluate their positions?  Possibly.  Does it signify a turning point for this company's future? Time will ultimately tell.  But I see no reason to sell out of the stock tomorrow morning, unless the price gets high enough.

Disclosure: Long GNBT