Warnex Inc.

Warnex Inc.

May 11, 2006 16:32 ET

Warnex reports first quarter 2006 results

LAVAL, QC, May 11 - Warnex Inc. (TSX:WNX) today announced
financial results for the first quarter ended March 31, 2006.

Consolidated revenue for the three-month period ended March 31, 2006,
increased by 17% to $4.7 million compared to $4.0 million during the same
period a year ago. The net loss for the quarter amounted to $1.6 million or
$0.03 per share versus $1.2 million or $0.02 per share for the same period a
year ago. For the three-month period ended March 31, 2006, earnings before
interests, taxes and depreciation and option costs (EBITDA) amounted to
$(525,034) versus $(205,742) for the same period a year ago.

"It was another solid quarter for Warnex with growth in all four business
units and four more rapid pathogen detection systems added to our growing
footprint," said Mark Busgang, President and CEO. "As well, subsequent to the
quarter, we announced the completion of a pending acquisition, which will be
immediately accretive, accelerating our path to profitability."

Operating Highlights



- Signed up two new DNA Detection Technology customers:
- AmeriSci Bio-Chem, a leading scientific service laboratory based
in Virginia, USA;
- JEM Analytical Laboratory Services, based in Georgia, USA.
- Sold two systems to a European distributor.
- Developed and launched the first PCR-based test available to the food
industry that quantifies the amount of Campylobacter present in a
sample.
- Received "Laboratory Procedure" status by Health Canada, for three
more tests: E. coli O157:H7 and two semi-quantitative tests for
generic E. coli and Staphylococcus aureus.
- Strengthened its senior management team with the addition of Erik
Yelle, Vice President, Sales and Marketing of Warnex Diagnostics. Mr.
Yelle has over 15 years of experience in sales development and
management obtained through his various roles within McCain Foods, a
multinational leader in the food industry.
- Reported in February 2006, that Bio-Rad Laboratories and MJ Research
reached a settlement agreement with Applied Biosystems, an Applera
Corporation business, which allowed them to resume the manufacturing,
selling and servicing of PCR thermal cyclers in the United States.


Subsequent to the quarter, Warnex concluded the acquisition of all of the
issued and outstanding shares of PRO-DNA Diagnostic, a Montreal-based
laboratory offering genetic testing services. The purchase price, including a
first working capital adjustment, is $1,907,821, of which $1,407,821 was paid
in cash and a maximum value of $500,000 will become payable either in common
shares of Warnex or in cash, at Warnex's option (the "Earn-Out"). The Earn-Out
is contingent on milestones that may be achieved in the 25 months following
the closing date of the transaction. This acquisition marks the Company's
entry into the field of human genetics testing and pharmacogenomics, which is
part of its long-term vision of becoming a service provider that offers state-
of-the-art technology not only in direct-to-patient healthcare but also to the
broader clinical trial industry.

Also subsequent to the quarter, Warnex re-launched its official website
www.warnex.ca. In addition to the new appearance and format, the updated
website provides customers and prospects with more information on Warnex's
pathogen detection products and laboratory services, as well as expanded
information for investors.

Additional Financial Review

Gross margins for the three-month period amounted to $1.3 million, or
26.8% of revenue, from $1.3 million, or 31.1% of revenue in the same period a
year ago. The decrease in percentage is mainly explained by the additional
support staff hired in the fall of 2005 in the Bioanalytical division to
support growth and the impact of a stronger Canadian dollar versus the US
dollar.

Selling and administrative expenses amounted to $1.9 million for the
three-month period ended March 31, 2006, versus $1.7 million in the same
period a year ago. The $252,172 increase is explained by additional
administrative and selling salaries and traveling expenses in order to
continue creating awareness for the pathogen detection technology and to
manage accelerated growth. These continued investments in selling, marketing
and promotion have allowed the Company to sign up two new customers in North
America. In proportion to revenue, administrative and selling expenses is
similar to last year at 41.2% (2005 - 41.8%).

Financial expenses increased by $14,022 mainly due to $45,905 of
additional interest on long-term debt, as the Company borrowed $3 million for
a five-year period in September 2005, less reduced interest on debentures and
capital leases as it repays them monthly.

Research and development expenses increased by 24% compared to last year
to $616,379 (2005 - $498,774) as Warnex continues to invest in research and
development activities to increase its portfolio of tests and to improve its
underlying detection platform. R&D efforts are ongoing to expand the Company's
pipeline of products, including kits for GMO detection and meat speciation in
food and feed products, as well as for additional pathogens, viruses, yeasts,
and moulds.

As at March 31, 2006, the Company had working capital of $7.4 million and
cash and unused banking facilities of $9.0 million.

Detailed financial statements and the MD&A are available at
www.warnex.ca.

Conference Call information

The Company will host a conference call on Friday, May 12, 2006, at
10:00 am EST. A live audio webcast of the conference call will be available
through www.warnex.ca. A replay of the webcast will be available for 90 days
at www.warnex.ca.

About Warnex

Warnex (www.warnex.ca) is a biotechnology company devoted to protecting
public health by providing advanced diagnostic products and science-based
services to the agri-food, pharmaceutical and healthcare sectors. Warnex's
genomics-based technology offers a versatile detection platform that produces
accurate results rapidly, using Real-Time PCR technology combined with unique
genetic markers and software. With a focus on pathogen detection in food, our
development pipeline also includes applications in GMO testing, meat
speciation, as well as in the detection of viruses, yeasts and moulds.
Warnex's analytical, bioanalytical, and medical laboratory service groups
offer a variety of quality control services, method development and
validation, contract R&D, bioavailability and bioequivalence studies for
clinical trials, and medical laboratory testing.

Warnex is a trademark of Warnex Inc., Laval, Quebec.

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. For
information identifying known risks and uncertainties, relating to the early
commercialization of Warnex products, intellectual property and licensing, R&D
of new Warnex products, manufacturing and laboratory facilities, suppliers,
key employees, key customers, financial resources and credit risk, government
regulations, foreign currency risk and volatility of share price, 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 the Management's Discussion and Analysis
for the first quarter ended March 31, 2006, which can be found at
www.sedar.com. Consequently, actual results may differ materially from the
anticipated results expressed in these forward-looking statements.

Financial statements to follow.



Warnex Inc.
Interim Consolidated Balance Sheets
(Unaudited)
March 31st December 31st
2006 2005
-------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents $2,010,402 $2,254,679
Marketable securities 5,986,895 5,940,680
Accounts receivable 2,556,602 3,913,638
Work-in-progress 164,203 131,657
Inventories 904,518 879,461
Investment tax credits receivable 426,321 805,083
Prepaid expenses 267,915 267,889
-------------------------------------------------------------------------
12,316,856 14,193,087

Long-term receivables 498,008 446,266
Property, plant and equipment 10,931,883 10,891,069
Intangible assets 1,967,466 2,098,333
Goodwill 8,407,083 8,407,083
-------------------------------------------------------------------------
$34,121,296 $36,035,838
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities
Current
Accounts payable $2,585,412 $2,721,849
Deferred revenue 252,052 576,095
Current portion of long-term debt 1,963,235 1,757,473
Current portion of convertible debentures 71,605 71,605
-------------------------------------------------------------------------
4,872,304 5,127,022

Long-term debt 3,526,689 3,689,605
Liability component of convertible debentures 8,951,575 8,969,476
-------------------------------------------------------------------------
17,350,568 17,786,103
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Shareholders' equity
Capital stock 38,705,849 38,705,849
Equity component of convertible debentures 982,932 982,932
Contributed surplus 843,665 746,153
Deficit (23,761,718) (22,185,199)
-------------------------------------------------------------------------
16,770,728 18,249,735
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$34,121,296 $36,035,838
-------------------------------------------------------------------------
-------------------------------------------------------------------------



Warnex Inc.
Interim Consolidated Statements of Contributed Surplus
(Unaudited)

Three months ended Three months ended
March 31st March 31st
2006 2005 2006 2005
-------------------------------------------------------------------------
Balance, beginning
of period $746,153 $551,336 $746,153 $551,336
Transfer to capital
stock upon exercise
of options - - - -
Compensation cost for
stock options granted 97,512 73,431 97,512 73,431
-------------------------------------------------------------------------
Balance, end of period $843,665 $624,767 $843,665 $624,767
-------------------------------------------------------------------------
-------------------------------------------------------------------------



Warnex Inc.
Interim Consolidated Statements of Deficit
(Unaudited)

Three months ended Three months ended
March 31st March 31st
2006 2005 2006 2005
-------------------------------------------------------------------------
Balance, beginning
of period $22,185,199 $17,632,317 $22,185,199 $17,632,317
Interest on equity
component of
convertible
debentures 20,368 21,416 20,368 21,416
Net loss 1,556,151 1,177,748 1,556,151 1,177,748
-------------------------------------------------------------------------
Balance, end of
period $23,761,718 $18,831,481 $23,761,718 $18,831,481
-------------------------------------------------------------------------
-------------------------------------------------------------------------



Warnex Inc.
Interim Consolidated Statements of Earnings
(Unaudited)

Three months ended Three months ended
March 31st March 31st
2006 2005 2006 2005
-------------------------------------------------------------------------
Revenue $4,722,449 $4,049,010 $4,722,449 $4,049,010
Cost of goods sold 3,458,754 2,790,711 3,458,754 2,790,711
-------------------------------------------------------------------------
Gross margin 1,263,695 1,258,299 1,263,695 1,258,299
-------------------------------------------------------------------------
Operating expenses
Selling, general
and administrative 1,945,972 1,693,800 1,945,972 1,693,800
Finance charges 257,495 243,473 257,495 243,473
Research and
development, net
of tax credits 616,379 498,774 616,379 498,774
-------------------------------------------------------------------------
2,819,846 2,436,047 2,819,846 2,436,047
-------------------------------------------------------------------------
Net loss $1,556,151 $1,177,748 $1,556,151 $1,177,748
-------------------------------------------------------------------------
Basic and fully
diluted net loss
per share $0.03 $0.02 $0.03 $0.02
-------------------------------------------------------------------------
Weighted average
number of shares
outstanding 51,973,875 48,654,900 51,973,875 48,654,900
-------------------------------------------------------------------------



Warnex Inc.
Interim Consolidated Statements of Cash Flows
(Unaudited)

Three months ended Three months ended
March 31st March 31st
2006 2005 2006 2005
-------------------------------------------------------------------------
Operations
Net loss $(1,556,151) $(1,177,748) $(1,556,151) $(1,177,748)
Items not affecting
cash:
Amortization of
property, plant
and equipment 538,499 513,867 538,499 513,867
Amortization of
intangible assets 137,611 141,235 137,611 141,235
Loss (gain) on
disposal of
property, plant
and equipment (10,750) 9,553 (10,750) 9,553
Foreign currency
fluctuation (18,754) 26,558 (18,754) 26,558
Compensation cost
for stock options 97,512 73,431 97,512 73,431
Interest on equity
component of
convertible
debentures (20,368) (21,416) (20,368) (21,416)
-------------------------------------------------------------------------
(832,401) (434,520) (832,401) (434,520)
-------------------------------------------------------------------------
Net change in
non-cash working
capital items 1,236,767 (296,142) 1,236,767 (296,142)
-------------------------------------------------------------------------
404,366 (730,662) 404,366 (730,662)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Investing activities
Increase in marketable
securities (46,215) - (46,215) -
Increase in long-
term receivables (51,742) (101,184) (51,742) (101,184)
Acquisition of
property, plant
and equipment (156,482) (402,129) (156,482) (402,129)
Proceeds on disposal
of property, plant
and equipment 10,750 47,866 10,750 47,866
Acquisition of
intangible assets (6,744) (14,482) (6,744) (14,482)
-------------------------------------------------------------------------
(250,433) (469,929) (250,433) (469,929)
-------------------------------------------------------------------------
Financing activities
Repayment of long-
term debt (379,985) (221,629) (379,985) (221,629)
Liability component
of convertible
debentures (17,901) (17,902) (17,901) (17,902)
Issue of shares - 18,000 - 18,000
-------------------------------------------------------------------------
(397,886) (221,531) (397,886) (221,531)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Foreign exchange loss
on cash held in
foreign currencies (324) (391) (324) (391)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Decrease in cash and
cash equivalents (244,277) (1,422,513) (244,277) (1,422,513)

Cash and cash
equivalents,
beginning of period 2,254,679 7,788,504 2,254,679 7,788,504
-------------------------------------------------------------------------
Cash and cash
equivalents,
end of period $2,010,402 $6,365,991 $2,010,402 $6,365,991
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Contact Information