LAVAL, QUEBEC--(Marketwire - Nov. 18, 2011) - Warnex Inc. (TSX:WNX)("Warnex" or the "Corporation") announced today that it has reached an agreement in principle with the holders (the "Existing Debentureholders") of all of its outstanding 12% convertible debentures (the "Existing Debentures"), that matured on November 8, 2011, to:
- extend the maturity date and modify certain other terms of the Existing Debentures;
- issue a new convertible debenture in the principal amount of CDN$600,000 (the "New Debenture") to Persistence Capital Partners LP ("PCP"), Warnex's largest shareholder and one of the Existing Debentureholders;
- issue warrants to PCP (the "Warrants") to acquire up to 7,500,000 common shares of the Corporation ("Common Shares"); and
- modify various terms, and waive certain provisions, of an existing credit support agreement (the "CSA") pursuant to which PCP is guaranteeing Warnex's obligations under its existing banking facilities.
Amendments to the Existing Debentures
The Existing Debentures are held by four Existing Debentureholders and, as of November 16, 2011, are in the aggregate principal amounts of approximately US$4,403,808 and CDN$2,094,027. Pursuant to the agreement in principle with each of the Existing Debentureholders, the key amendments to be made to the Existing Debentures are as follows:
- the maturity date for all Existing Debentures shall be extended from November 8, 2011 to January 31, 2012; and
- any interest owing shall accrue at a rate of 18% per annum beginning as of November 8, 2011.
Terms of the New Debenture and Warrants
The New Debenture shall be secured and rank pari passu with, and shall have substantially all of the same terms and conditions as, the Existing Debentures as amended as described above, with the exception that interest shall start accruing as of the Closing Date (as defined below), the maturity date of the New Debenture shall be February 29, 2012 and the conversion price of the principal and the interest thereunder (the "Stipulated Conversion Price") shall be equal to the lower of: (a) the volume weighted average price ("VWAP") of the Common Shares for the five trading days preceding November 11, 2011; (b) the VWAP of the Common Shares for the five trading days preceding the Closing Date; and (c) the VWAP of the Common Shares for the five trading days preceding the date on which the relevant conversion notice is delivered to the Corporation. The funds provided by the New Debenture shall be used by Warnex principally for the payment of existing accounts payable required to operate the business, as well as for specific disbursements to be agreed upon with PCP, up to a maximum of CDN$250,000. All further uses of such funds shall be subject to the approval of PCP.
The Warrants shall expire three years from the Closing Date and shall have an exercise price (the "Stipulated Exercise Price") equal to the lower of: (a) the VWAP of the Common Shares for the five trading days preceding November 11, 2011; (b) the VWAP of the Common Shares for the five trading days preceding the Closing Date; and (c) the VWAP of the Common Shares for the five trading days preceding the date on which the relevant notice of exercise is delivered to the Corporation.
In consideration for PCP extending this financing to the Corporation, Warnex shall pay PCP a set up fee of CDN$25,000 at the Closing Date, and an additional fee of CDN$15,000 per month following the Closing Date (all such fees, the "Financing Fees"). Any Financing Fees not paid when due shall be added to the principal amount of the New Debenture, in which case, such added amounts would be convertible into Common Shares if the New Debenture is converted as described above.
As described below in greater detail, Warnex shall seek the approval of its shareholders to the issuance of Common Shares upon conversion of the New Debenture at the Stipulated Conversion Price and the issuance of Common Shares upon the exercise of the Warrants at the Stipulated Exercise Price.
Amendment of Credit Support Agreement
With respect to the CSA (the full text of which is available at www.sedar.com under Warnex's profile), the Corporation and PCP have agreed in principle to the following principal amendments:
- the increase of the Operating Line Guarantee Fee (as such term is defined in the CSA) to a rate of 13% per annum beginning November 8, 2011, computed on the aggregate principal amount outstanding from time to time under Warnex's operating line of credit; and
- the waiver by PCP of all defaults in respect of the monthly financial ratio covenants under the CSA until the earlier of (a) the completion of certain strategic corporate milestones, or (b) January 31, 2012.
PCP shall also obtain all necessary waivers from the provider of the Corporation's operating line of credit, provided that Warnex shall promptly provide all requested information in connection therewith.
Closing of the transactions described above (the "Closing") is subject to a number of conditions, including the finalization of definitive agreements and the receipt of all requisite regulatory approvals. Considering that the maturity date of the Existing Debentures has already passed, the Corporation is unable to meet its obligations under the current terms of the Existing Debentures and the Corporation is in urgent need of additional financing to pay operating expenses, it is necessary that the Closing occur as soon as practicable. It is currently contemplated that the Closing will take place no later than November 21, 2011, except that such date shall be extended to November 25, 2011 to the extent that the approval of the Toronto Stock Exchange (the "TSX") is the only item which remains outstanding (the "Closing Date").
Ongoing Review of Strategic Alternatives
The Board of Directors (the "Board") of Warnex has established a committee of independent directors to oversee and make recommendations to the Board regarding the review of the Corporation's strategic alternatives with a view to recognizing the full value of the Corporation and/or its assets (the "Strategic Review"). There is no defined timeline for the Strategic Review and Warnex does not intend to disclose developments with respect to the Strategic Review process unless and until the Board has approved a definitive transaction or other course of action or otherwise deems that disclosure of developments is appropriate. There can be no assurance that any transaction will occur, or if a transaction is undertaken, as to its terms or timing.
PCP continues to assist Warnex in evaluating and considering strategic alternatives and their potential for enhancing shareholder value. In recognition of the assistance that PCP provides to Warnex as part of the Strategic Review, the Corporation shall pay PCP a fee of CDN$125,000 (the "Strategic Transaction Fee") at the earlier of (i) the successful completion of a transaction which originates from the assistance PCP provided as part of the Strategic Review, or (ii) January 31, 2012. In all cases, the obligation to pay such fee shall be secured together with the Corporation's obligations under the New Debenture.
Required Shareholder Approval and Consequences if not Obtained
PCP is the holder of an Existing Debenture with a current principal amount of approximately CDN$2,093,041, and it currently owns 12,238,750 Common Shares, representing approximately 18.2% of the issued and outstanding Common Shares. Accordingly, PCP is an insider of Warnex within the meaning of Canadian securities laws. Furthermore, the precise number of Common Shares that may be issued upon the conversion of the New Debenture cannot be determined at this time as the Stipulated Conversion Price may be based on the VWAP of the Common Shares at a future date and the amount of principal and interest owing on the New Debenture will change over time, including if any Financing Fees that are not paid when due are added to the principal as described above. In accordance with the policies of the TSX, shareholder approval is required in order to complete the transactions described above on the basis that (i) they may result in the issuance of Common Shares in excess of 25% of the number of currently outstanding Common Shares, (ii) they may, together with the Common Shares issuable upon the conversion of the Existing Debenture held by PCP, result in the issuance of additional Common Shares to PCP in excess of 10% of the number of currently outstanding Common Shares, (iii) they may have a material effect on the control of Warnex if, in accordance with the policies of the TSX, the issuance of Common Shares upon the conversion of the New Debenture or the exercise of the Warrants increases PCP's shareholdings to over 20% of the issued and outstanding Common Shares, and (iv) the applicable Stipulated Exercise Price of the Warrants upon exercise could result in Common Shares being issued at less than the market price of the Common Shares on the Closing Date and on the date on which the relevant notice of exercise is delivered to the Corporation. Accordingly, Warnex, at its next meeting of shareholders (the "Next Shareholder Meeting"), shall seek the approval of its shareholders to the issuance of Common Shares upon conversion of the New Debenture at the Stipulated Conversion Price and the issuance of Common Shares upon the exercise of the Warrants at the Stipulated Exercise Price (the "Shareholder Approval").
If, at the time the notice of conversion of the New Debenture or the notice of exercise of the Warrants (in each case, an "Exercise Notice") is received by the Corporation, Shareholder Approval has not been obtained and as a consequence thereof, any of the Common Shares issuable upon the conversion of the New Debenture or the exercise of the Warrants cannot be issued in accordance with the terms set out herein, the Corporation has agreed that it shall (a) if an Exercise Notice is received prior to the Next Shareholder Meeting, within 5 business days following the Next Shareholder Meeting (to the extent the Shareholder Approval is not obtained thereat) or (b) if an Exercise Notice is received after the Next Shareholder Meeting (to the extent the Shareholder Approval was not obtained thereat), within 5 business days of receiving such Exercise Notice, pay to the holder of the New Debenture or the Warrants, as the case may be, a cash amount calculated in accordance with an agreed to formula to compensate the holder with equivalent economic benefits for the non-issuance of Common Shares.
Further, if a transaction is completed by a third party for the acquisition of all of the outstanding Common Shares (a "Tender Offer"), either prior to the Next Shareholder Meeting or following the Next Shareholder Meeting (to the extent the Shareholder Approval was not obtained thereat), the Corporation shall compensate PCP, in cash, for any economic loss suffered by PCP as a result of Common Shares issuable upon the conversion of the New Debenture or the exercise of the Warrants not having being issued in accordance with their terms and tendered into the Tender Offer, by paying to PCP, upon the initial take-up and payment for Common Shares pursuant to the Tender Offer, an amount calculated in accordance with an agreed to formula (any such cash payment or any of the cash payments referred to in the immediately preceding paragraph are collectively referred to as the "Compensatory Payments").
Note that in accordance with the policies of the TSX, the aggregate value of the consideration to be paid by Warnex to PCP–which would include the value of all interest (but not the principal) on the New Debenture, the Financing Fees, the Strategic Transaction Fee and any Compensatory Payments with respect to the New Debenture (net of the principal amount) or the Warrants–pursuant to all transactions during any six-month period, but excluding the value of the consideration paid under any transactions approved by the Corporation's shareholders, may not exceed 10% of the market capitalization of Warnex. Accordingly, the payments contemplated to be paid to PCP by Warnex as described above may be subject to reduction.
Exemption from Formal Valuation and Minority Shareholder Approval
As a result of its level of shareholdings in Warnex, PCP is a related party to Warnex within the meaning of Multilateral Instrument 61-101 – Take-Over Bids and Special Transactions ("MI 61-101"), as adopted under the securities laws of the provinces of Québec and Ontario. Warnex intends to rely upon the financial hardship exemption in MI 61-101 from the requirement to obtain, as regards PCP, a formal valuation and minority shareholder approval of the transactions described above. In support of its reliance upon such exemption, the Board of Directors of Warnex has determined that (i) Warnex is in serious financial difficulty, (ii) such transactions will improve the Corporation's financial position and (iii) the terms of such transactions are reasonable to Warnex in the circumstances.
Possible Effect of the Transactions on Existing Shareholders
For illustration purposes only, set out below is a table setting forth different scenarios under which Common Shares could be issued to the Existing Debentureholders upon the conversion of the Existing Debentures, and to PCP upon the conversion of the New Debenture and the exercise of the Warrants, showing the resulting shareholdings of the Existing Debentureholders and the resulting potential dilution factor to the current shareholders of Warnex, as well as the resulting shareholdings and percentage holdings of PCP. The assumed market prices used in this table are for illustration purposes only and do not represent any particular expected scenario. The dilution factor represents the factor by which the current number of outstanding Common Shares, being 67,117,191 Common Shares, would be increased in each scenario. The figures in the table are based on the following assumptions:
- all of the Existing Debentures remain outstanding until January 31, 2012 and the New Debenture remains outstanding until February 29, 2012, at which time all accrued interest and principal are converted into Common Shares at the applicable conversion price;
- interest on the New Debenture begins to accrue on November 21, 2011;
- no Financing Fees are added to the principal amount of the New Debenture as described above;
- all of the Warrants are exercised on February 29, 2012 at the applicable exercise price; and
- US dollars are converted into Canadian dollars at an exchange rate of 1.0206 (being the November 16, 2011 US$ to CDN$ noon exchange rate as published by the Bank of Canada).
|Conversion of Existing Debentures at January 31, 2012
(the "January 2012 Conversion")
Share market price
|Number of Common Shares issuable to all Existing Debentureholders
(108,449,315 of which relate to PCP)
(43,379,726 of which relate to PCP)
(30,985,519 of which relate to PCP)
|Conversion of New Debenture and Exercise of Warrants at February 29, 2012
(together, the "February 2012 Conversion")
Share market price
|Number of additional Common Shares issuable to PCP
|* First percentage is the dilution factor of the February 2012 Conversion on the current outstanding Common Shares plus the Common Shares issued upon the January 2012 Conversion.
|Second percentage is the dilution factor of the February 2012 Conversion on the current outstanding Common Shares only.
|Third percentage is the total dilution factor of the January 2012 Conversion and the February 2012 Conversion on the current outstanding Common Shares.
Warnex (www.warnex.ca) is a life sciences Corporation devoted to protecting public health by providing laboratory services to the pharmaceutical and healthcare sectors. Warnex Analytical Services provides pharmaceutical and biotechnology companies with a variety of quality control services, including chemistry, chromatography, microbiology, method development and validation, and stability studies. Warnex Bioanalytical Services specializes in bioequivalence and bioavailability studies for clinical trials. Warnex Medical Laboratories provides specialized testing for the healthcare industry as well as pharmaceutical and central laboratory services. Warnex PRO-DNA Services offers DNA identification tests for paternity, maternity and other family relationships, as well as for immigration and forensic testing purposes. Warnex has three facilities located in Laval and Blainville, Quebec, and Thunder Bay, Ontario.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this news release are forward-looking and are subject to numerous risks and uncertainties, known and unknown, including the risk that shareholders of Warnex will not approve the transactions to be presented to them for approval and the risk that the Strategic Review being conducted by Warnex will not result in any enhancement of value for the benefit of shareholders. For information identifying known risks and uncertainties, relating to financial resources, liquidity risk, key customers and business partners, credit risk, foreign currency risk, government regulations, laboratory facilities, volatility of share price, employees, suppliers, and other important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the heading Risks and Uncertainties in Warnex's most recent Management's Discussion and Analysis, which can be found at www.sedar.com. Consequently, actual results may differ materially from the anticipated results expressed in these forward-looking statements.