Choices are the hinges of destiny ~ Edwin Markham
On Friday, Generex (OTCPK:GNBT) Biotechnology announced that approval was given by shareholders to adjourn the Special Meeting until Monday to allow Generex to solicit additional proxies for a reverse stock split proposal. I have voted yes, and I would like to explain my reasoning as we enter the final hours to submit, or resubmit, our proxies. Let's start by showing the proposal being voted upon:
The proposal is seeking shareholder approval to amend Generex's Restated Certificate of Incorporation (i) to effect a reverse stock split of the common stock, at an exchange ratio of not less than 1-for-2 and not more than 1-for-10, and while reducing the number of authorized shares of common stock from 750,000,000 to 500,000,000 unless the Board of Directors utilizes a ratio of not more than 1-for-2, in which case, the number of authorized shares of common stock will be maintained at 750,000,000.
I believe the concerns about not reducing the authorized share total in exact ratio with any reverse split are overstated. Nasdaq has a 20% Rule, which prohibits the offering of shares to raise capital where the issuance of authorized stock is greater than 20% of the outstanding stock prior to the financing. The real concern we face is the high level of dilution that results from attempts to raise capital to support the pipeline while on the bulletin board. R&D firms need access to the capital markets to raise funds, and to extraordinary levels.
Generex's stock suffered greatly after raising capital through a PIPE loan in March 2008 when access to capital was near impossible. Warrant coverage was high, discounted pricing was offered, and a variable rate schedule resulted in strong pressure on the stock as shares were offered at ever lower prices on a monthly basis to repay the loan. Generex has regained elements of their financial footing, and has raised capital in cleaner fashion in 2009. A drop to the bulletin board is a return to the same problems faced in 2008, where discounts on price are much greater and warrant coverage needed to be given will be 4 to 5 times greater. Also, index funds that currently support the stock will have to sell off by or on Tuesday.
2002 Study on the Effect of Delisting
Let's look at a study of the changes in market quality for 1,098 securities in the six months around their delisting from Nasdaq. The securities that were delisted from the Nasdaq market (from the National Market or SmallCap Market) subsequently traded in the Bulletin Board or in the Pink Sheets or in both. All trading and quoting data were obtained from Nasaq, and the results illustrate the concerns regarding liquidity:
- Daily share volume (in shares) three months before delisting 385,788
- Daily share volume (in shares) three months after delisting 133,457 down 65.4%
- Daily dollar volume (in $000) three months before delisting 353.13
- Daily dollar volume (in $000) three months after delisting 45.03, down 87.3%
When Can a Company Become Listed on Nasdaq Again?
The following is from Nasdaq's website. "Nasdaq does not impose a waiting period to relist a company's securities: The company can file a new listing application at any time after it is delisted, and can be relisted, provided that it successfully completes the initial listing process and meets all the initial listing requirements for the respective market."
That means Generex's stock would have to meet the initial listing requirements to regain Capital Market relisting, and not the easier continued listing requirements, which the stock was already unable to do due to the high outstanding share total (no matter your opinions on management's responsibility on the matter). From Nasdaq: "Nasdaq's rules require that issuers meet a minimum bid price requirement of $4 per share for initial listing on The Nasdaq Stock Market. ... A company that qualifies for listing only under the market value of listed securities standard must also meet the bid price requirement for 90 consecutive trading days prior to applying for listing."
Market Cap and Oustanding Shares
I am not an expert on Nasdaq rules, so please correct me with sources if anyone disagrees. But as an example, if Generex issues a large amount of shares to raise capital, as they surely will do, the outstanding share total can quickly reach $500 million. A market cap of $2 billion would need to be held for 90 days to meet a minimum bid requirement of $4. Someone remarked to me that they thought a $1 minimum bid would apply for one year. I have searched and I cannot find anything to support the opinion.
Regardless, the outstanding share total will quickly grow. Generex currently has a market cap of just over $100 million. At the current outstanding share total, a market cap of $266 million would be needed to meet any $1 minimum bid. That will quickly swell to a minimum market cap needed of $400 million and then $500 million as cash is raised to fuel even a slower pace of development. Relisiting would be no easy short term goal, and I feel that a reverse split attempt while on the bulletin board would be less attractive than the alternative before us today.
In my previous article, I detailed why I thought a recent agreement by Generex to make an acquisition into the direct to diabetes consumer market strengthened their plans around a reverse stock split to support both the pipeline and the health of the stock. The company has stated it plans to initiate a rights offering of common stock and warrants to its existing stockholders in the event that the stockholders approve a reverse stock. This benefits existing shareholders who can participate, as well as those who cannot, such as me, by adding strength under the stock. We will be diluted no matter what, and we always know that is coming with an R&D biotech, but I think that plan offers an unique helping hand to consider.
Generex's pipeline is rich for such a small biotech, and my main concern is in seeing it properly funded. Can they survive while on the bulletin board? I certainly think so, but we need and want them to thrive. At some point, it would be beneficial to see Generex trade on Nasdaq at $5 per share. That is more likely to occur only after a reverse stock split, so the market cap doesn't continue to drown in the depth of outstanding shares.
There are various reasons to debate regarding why the stock faces such a critical juncture, but the final hours are here to decide how to vote on GNBT's immediate future. The choice involves Nasdaq or the bulletin board, and my own choice is clear. Shareholders as a group will decide and there is no more room for the company to ask for extensions. No matter the choice each shareholder wishes to make, he or she should participate to have their voice heard.
We Are Not Choosing Roses
Submission of proxies in respect of the adjourned meeting via Internet and telephone will resume Saturday morning, October 16, and will be available until 11:59 p.m. EDT on Sunday, October 17, 2010. Until 4 p.m. EDT on Monday, October 18, stockholders may also send or scan completed proxy forms for the reconvened special meeting (with the control number(s) and both sides of the proxy form) to Generex by facsimile at 1-416-364-9363 or by email at email@example.com.
At the very least, we should all vote in this important matter and consider the end result. We have one and a half days to resubmit our votes, or in other cases to vote for the first time. A thirsty pipeline of promising metabolic and oncology related drugs and vaccines hang in the balance. The deicsion is hard, and not made with a happy heart. However, I feel it is vital to allow the company to stay listed on Nasdaq, even if we find them to hold some of the blame for their predicament. We need for them to be in a better position to succeed, so the potentail held in the pipeline can more quickly come to fruition.
Disclosure: The author is long GNBT.