Warnex Inc.

Warnex Inc.

August 10, 2006 16:33 ET

Warnex reports second quarter 2006 results

LAVAL, QC, Aug. 10 - Warnex Inc. (TSX: WNX) today announced
financial results of the second quarter ended June 30, 2006.

Selected Highlights



- Subsequent to quarter's end, entered into an agreement to purchase
MDS Pharma Services' pharmaceutics business in Blainville, Quebec,
which reported $6.7 million in annual revenue in its last fiscal year
- Granted Performance Tested(SM) status by the AOAC Research Institute
for Campylobacter test, making it the first AOAC-validated
quantitative real-time PCR test available to the food industry
- Finalized distribution agreement with FOSS U.K. to distribute and
market the Warnex™ Rapid Pathogen Detection System in the United
Kingdom and Ireland
- Completed acquisition of all of the issued and outstanding shares of
PRO DNA Diagnostics, a laboratory offering genetic testing services


Consolidated revenue for the three-month period ended June 30, 2006,
decreased by 7% to $4.0 million compared to $4.2 million over the same period
a year ago. This decrease was a result of lower than anticipated activity in
the Company's Bioanalytical Services division. On a six-month basis, revenue
grew 5% to $8.7 million from $8.3 million in the same period a year ago. The
net loss for the quarter increased by $1.8 million to $3.0 million or
$0.06 per share from a net loss of $1.2 million or $0.02 per share in the
corresponding quarter a year earlier. The net loss increase is a result of
staffing preparations for the anticipated higher level of activity in the
Bioanalytical division. For the six-month period, the net loss increased by
$2.3 million, from $2.3 million or $0.05 per share in 2005 to $4.6 million or
$0.09 per share in 2006.

"In the second quarter, we put new elements in place to support and
generate future growth. The acquisitions of PRO DNA and MDS Pharma Services'
pharmaceutics business are both strategically sound and in-line with our
long-term vision," said Mark Busgang, President and CEO of Warnex. "The
financial performance of this past quarter was below our expectations and was
compounded by the investments we made into fixed costs, negatively impacting
our profit margins in the near-term. We view these second quarter results as a
temporary slowdown and expect sales growth to return in the second half of
2006."

Additional Financial Review

For the quarter, gross margin was $367,498 compared with $1.3 million in
the same quarter of the previous year. The decrease of $908,796 in gross
margin is mainly explained by the reduction of $1.3 million of gross margin in
the Bioanalytical division. For the six-month period, gross margin decreased
to $1.6 million in 2006 from $2.5 million in 2005.

For the quarter, selling and administrative expenses were $2.5 million,
an increase from $1.6 million in the corresponding quarter in 2005. The
$875,575 increase is explained by a $291,679 expense to terminate the Agency
Contract with the U.S. Sales Agent in the Diagnostics division as the Company
now relies on its own sales force, an accrual of $243,220 regarding
contractual minimum purchase requirements potentially payable in the Medical
division, a $75,000 accrual for legal fees related to the OPMedic contract
litigation, an amount of $85,984 recovery of loan receivable in 2005 that is
not present in 2006, and $120,185 of additional salaries. As a percentage of
revenue, this expense category increased in the second quarter of 2006 to 63%
from 38% in the second quarter of 2005. For the first half of the year,
selling and administrative expenses were $4.5 million versus $3.3 million for
the corresponding period in 2005.

Research and development expenses remained stable at $0.6 million in the
second quarter ended June 30, 2006, compared to the corresponding period in
2005. For the six-month period ended June 30, 2006, R&D expenses were
$1.2 million compared to $1.1 million a year ago.

Earnings before interest, taxes and depreciation (EBITDA) without option
costs for the quarter amounted to $(2.0) million versus $(146,391) in the same
quarter of the previous year. For the six-month period ended June 30, 2006,
EBITDA was $(2.5) million, compared to $(352,133) a year ago.

As of June 30, 2006, the Company had working capital of $3.4 million,
$4.3 million in cash and cash equivalents, and $0.5 million of R&D tax
credits. In addition, Warnex has access to $1.0 million in unused banking
facilities.

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, August 11, 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
DNA-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 and 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, integration of acquisitions, manufacturing and
laboratory facilities, suppliers, key employees, key customers and business
partners, 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 second
quarter ended June 30, 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.

Financials statements to follow.



Warnex Inc.
Interim Consolidated Balance Sheets
(Unaudited)

June 30 December 31
2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents $ 4,284,089 $ 2,254,679
Marketable securities - 5,940,680
Accounts receivable 3,148,016 3,913,638
Work-in-progress 47,171 131,657
Inventories 985,899 879,461
Investment tax credits receivable 496,087 805,083
Prepaid expenses 359,351 267,889
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9,320,613 14,193,087

Long-term receivables 477,759 446,266
Property, plant and equipment 10,908,909 10,891,069
Intangible assets 1,831,609 2,098,333
Goodwill 9,224,947 8,407,083
-------------------------------------------------------------------------

$31,763,837 $36,035,838
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities
Current
Accounts payable $ 3,233,357 $ 2,721,849
Deferred revenue 722,128 576,095
Current portion of long-term debt 1,928,486 1,757,473
Current portion of convertible debentures 71,605 71,605
-------------------------------------------------------------------------
5,955,576 5,127,022

Long-term debt 3,073,428 3,689,605
Liability component of convertible debentures 8,933,674 8,969,476
-------------------------------------------------------------------------

17,962,678 17,786,103
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Shareholders' equity
Capital stock 38,705,849 38,705,849
Equity component of convertible debentures 982,932 982,932
Contributed surplus 940,136 746,153
Deficit (26,827,758) (22,185,199)
-------------------------------------------------------------------------
13,801,159 18,249,735
-------------------------------------------------------------------------
-------------------------------------------------------------------------

$31,763,837 $36,035,838
-------------------------------------------------------------------------
-------------------------------------------------------------------------



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

Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance, beginning of
period $ 843,665 $ 624,767 $ 746,153 $ 551,336
Transfer to capital
stock upon exercise
of options - - - -
Compensation cost for
stock options granted 96,471 105,378 193,983 178,809
-------------------------------------------------------------------------
Balance, end of
period $ 940,136 $ 730,145 $ 940,136 $ 730,145
-------------------------------------------------------------------------
-------------------------------------------------------------------------



Warnex Inc.
Interim Consolidated Statements of Deficit
(Unaudited)

Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance, beginning of
period $23,761,718 $18,831,481 $22,185,199 $17,632,317
Interest on equity
component of
convertible
debentures 20,337 21,536 40,705 42,952
Net loss 3,045,703 1,167,352 4,601,854 2,345,100
-------------------------------------------------------------------------
Balance, end of
period $26,827,758 $20,020,369 $26,827,758 $20,020,369
-------------------------------------------------------------------------
-------------------------------------------------------------------------



Warnex Inc.
Interim Consolidated Statements of Earnings
(Unaudited)

Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue $ 3,954,959 $ 4,245,295 $ 8,677,408 $ 8,294,305
Cost of goods sold 3,587,461 2,969,001 7,046,215 5,759,712
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin 367,498 1,276,294 1,631,193 2,534,593
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating expenses
Selling, general and
administrative 2,507,365 1,631,790 4,453,336 3,325,590
Finance charges 276,018 243,794 533,513 487,267
Research and
development, net
of tax credits 629,818 568,062 1,246,198 1,066,836
-------------------------------------------------------------------------
3,413,201 2,443,646 6,233,047 4,879,693
-------------------------------------------------------------------------
Net loss $ 3,045,703 $ 1,167,352 $ 4,601,854 $ 2,345,100
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and fully
diluted net loss
per share $ 0.06 $ 0.02 $ 0.09 $ 0.05
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average
number of shares
outstanding 51,973,875 48,676,658 51,973,875 48,685,698
-------------------------------------------------------------------------
-------------------------------------------------------------------------



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

Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operations
Net loss $(3,045,703) $(1,167,352) $(4,601,854) $(2,345,100)
Items not affecting
cash:
Amortization of
property, plant
and equipment 585,026 530,198 1,123,519 1,044,065
Amortization of
intangible assets 137,902 141,591 275,513 282,826
Loss (gain) on
disposal of
property, plant and
equipment - - (10,750) 9,553
Foreign currency
fluctuation 47,213 (16,474) 28,459 10,084
Compensation cost
for stock options 96,471 105,378 193,983 178,809
Interest on equity
component of
convertible
debentures (20,337) (21,536) (40,705) (42,952)
-------------------------------------------------------------------------
(2,199,434) (428,195) (3,031,835) (862,715)

Net change in
non-cash working
capital items 377,986 (541,015) 1,614,753 (837,157)
-------------------------------------------------------------------------
(1,821,448) (969,210) (1,417,082) (1,699,872)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Investing activities
Decrease in
marketable
securities 5,986,895 - 5,940,680 -
Decrease (Increase)
in long-term
receivables 20,249 (3,045) (31,493) (104,229)
Acquisition of
property, plant and
equipment (562,046) (548,217) (718,528) (950,346)
Proceeds on disposal
of property, plant
and equipment - - 10,750 47,866
Acquisition of
intangible assets (2,045) (17,323) (8,789) (31,805)
Acquisition of
goodwill (817,864) - (817,864) -
-------------------------------------------------------------------------

4,625,189 (568,585) 4,374,756 (1,038,514)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Financing activities
Bank loan - 760,000 - 760,000
Proceeds from
long-term debt 45,833 86,260 45,833 86,260
Repayment of long-term
debt (533,843) (223,200) (913,828) (444,829)
Liability component
of convertible
debentures (17,901) (17,901) (35,802) (35,803)

Issue of shares - 18,000 - 36,000
-------------------------------------------------------------------------
(505,911) 623,159 (903,797) 401,628
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Foreign exchange loss
on cash held in
foreign currencies (24,143) 4,207 (24,467) 3,816
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Increase (decrease) in
cash and cash
equivalents 2,273,687 (910,429) 2,029,410 (2,332,942)

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

Cash and cash
equivalents, end of
period $ 4,284,089 $ 5,455,562 $ 4,284,089 $ 5,455,562
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Contact Information