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.
Anticipated Closing
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 Quebec 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).
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Conversion of Existing Debentures at January 31, 2012
(the "January 2012 Conversion")
----------------------------------------------------------------------------
Number of Common Shares Percentage
Assumed Common issuable to all Existing Dilution holding
Share market price Debentureholders factor of PCP
----------------------------------------------------------------------------
----------------------------------------------------------------------------
341,224,344
(108,449,315 of which
CDN$0.02 relate to PCP) 508.4% 29.6%
----------------------------------------------------------------------------
136,489,739
(43,379,726 of which
CDN$0.05 relate to PCP) 203.4% 27.3%
----------------------------------------------------------------------------
97,492,670
(30,985,519 of which
CDN$0.07 relate to PCP) 145.3% 26.3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Conversion of New Debenture and Exercise of Warrants at February 29, 2012
(together, the "February 2012 Conversion")
----------------------------------------------------------------------------
Number of additional Percentage
Assumed Common Common Shares issuable to Dilution holding
Share market price PCP factor(i) of PCP
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9.5%
58.1%
CDN$0.02 38,994,247 566.5% 35.7%
----------------------------------------------------------------------------
9.9%
29.9%
CDN$0.05 20,097,699 233.3% 33.8%
----------------------------------------------------------------------------
10.0%
24.6%
CDN$0.07 16,498,356 169.8% 33.0%
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(i) 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.
About Warnex
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.
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