Acerus Announces Private Placement and Refinancing Transactions

TORONTO--(BUSINESS WIRE)-- Acerus Pharmaceuticals Corporation (“Acerus” or the “Company”) (TSX:ASP, OTCQB:ASPCF) today announced that it has entered into agreements with First Generation Capital, Inc. (“First Generation”) in respect of an equity financing and debt-to-equity conversion by First Generation and with SWK Funding LLC (“SWK”) in respect of an amendment to the Company’s existing credit facility (the “SWK Facility”) with SWK (the “Refinancing Transactions”). First Generation is currently the Company’s largest shareholder and a lender to the Company and an entity owned and controlled by Mr. Ian Ihnatowycz, Chairman of the board of directors (the “Board”) of the Company. The Refinancing Transactions have been negotiated on an arm’s-length basis, including under the supervision of and upon a recommendation by, a special committee of the Board (the “Special Committee”) comprised of entirely independent directors unrelated to the parties involved. The Company is of the view that the Refinancing Transactions will have the effect of substantially recapitalizing Acerus and will allow it to focus on executing upon its strategic plan for the benefit of all stakeholders.

The Refinancing Transactions consist of:

• a private placement to First Generation of 449,148,891 common shares of the Company (the “Common Shares”) at an offering price of C$0.053269 per Common Share, being a 25% discount to the five day volume weighted average price of the Common Shares on the Toronto Stock Exchange as at January 31, 2020, for aggregate gross proceeds to the Company of US$18 million (the “Private Placement”);
• the conversion of the Company’s outstanding US$11.5 million (plus accrued interest of US$526,021) owing to First Generation under the subordinated secured term loan facility with First Generation previously entered into on July 19, 2019 as amended and restated on December 18, 2019 (the “First Generation Loan”) into approximately 300,081,885 Common Shares at a conversion price of C$0.053269 per Common Share (the “Debt Conversion”); and
• an amendment to the SWK Facility (the “SWK Amendment”) which would, among other things, (i) set the minimum threshold for consolidated unencumbered liquid assets required to be maintained by the Company at US$1,500,000, (ii) reset the revenue and EBITDA covenants to better reflect the nature of the Company’s business as it exists today compared to the time the SWK Facility was entered into, (iii) delay the date on which the Company must begin repaying principal from Q1-2021 to Q2-2021; (iv) require pre-payment of US$750,000 of principal in three instalments during 2020 and a commensurate reduction in the amount used to calculate exits fees; and (v) provide flexibility to the Company to dispose of non-core assets and retain some of the proceeds of such dispositions for working capital.

As consideration for and in connection with the SWK Amendment, the Company is expected to pay SWK an amendment fee of US$80,000 and to amend the exercise price of the 6,693,107 outstanding common share purchase warrants of the Company owned by SWK, which expire on September 30, 2024, from C$0.11 to C$0.053269.

The Refinancing Transactions are expected to close on or about February 21, 2020, subject to final approval of the Toronto Stock Exchange (the “TSX”). The agreements with First Generation and SWK are cross-conditional such that they are expected to close substantially concurrently.

Assuming the Refinancing Transactions close, it is expected that the Company will ask shareholders to approve a share consolidation at the Company’s next annual meeting of shareholders.

Background of the Refinancing Transactions

The Company has previously disclosed that additional capital would be required in order for it to complete its planned commercialization and product development programs. In addition, in light of anticipated shortages of certain strengths of Estrace^® and the Natesto^® drug product composition change that resulted in Health Canada requiring the submission of a Supplemental New Drug Submission before the product can be re-introduced to the Canadian market, the Company has previously disclosed that additional capital would be required in order for it to maintain compliance with covenants under the SWK Facility (including in January 2020). Unfortunately, these and other conditions since at least early 2019 have made financing alternatives for the Company difficult to pursue notwithstanding meaningful investor relation activities and the engagement of, and discussions with, several investment banks during the course of 2019 and early into 2020.

In light of the near term challenges facing the Company, the Board formed the Special Committee on December 16, 2019 to consider alternatives available to the Company, which timeframe corresponded with the announcement of amendments to the SWK Facility, a waiver by SWK of certain Q4 financial covenants under the SWK Facility and the increase of the First Generation Loan by US$6.5 million (which capital injection was a pre-condition to the amendments and waivers under the SWK Facility). The Special Committee retained Echelon Wealth Partners Inc. (“Echelon”) as its financial advisor and Stikeman Elliott LLP acted as its legal advisor.

Since its formation, the Special Committee has met frequently including with management of the Company and its advisors and it considered alternatives available to the Company in light of the circumstances facing the Company. On February 12, 2020, after considering and reviewing all of the circumstances currently surrounding the Company and the Refinancing Transactions, including (i) the Company’s current financial difficulties, (ii) covenants under the SWK Facility, (iii) capital requirements for its business plan, (iv) the lack of alternate financing arrangements, (v) the fact that the Refinancing Transactions are the only viable financing and re-financing options available at the present time, (vi) the potential to preserve and increase long-term shareholder value and (vii) all other relevant factors available to the Special Committee and after receiving financial advice, the Special Committee has unanimously determined that the Refinancing Transactions are in the best interests of the Company and recommended to the Board that the Board approve the entering into of the Refinancing Transactions. Subsequent to this recommendation, the Board unanimously approved the entering into of the Refinancing Transactions (with Mr. Ihnatowycz not participating in these discussions, not being involved in the negotiations on behalf of the Company and abstaining from voting on these matters).

In addition, on February 12, 2020, Echelon provided the Special Committee with their opinion that: (i) the offering price in respect of the Private Placement; and (ii) the conversion price in respect of the Debt Conversion, are fair, from a financial point of view, to shareholders of the Company other than First Generation.

Regarding the Company’s financial situation, as of January 31, 2020, the Company had a cash balance of approximately US$4.6 million and it anticipates that, absent the Refinancing Transactions, its cash balance by the end of February 2020 will decline to approximately US$0.6 million and that it will subsequently have no cash remaining by early March 2020. In addition, absent the Refinancing Transactions, the Company anticipates that it will be in default of certain covenants under the SWK Facility in late February 2020 and in default of additional covenants under the SWK Facility at the end of March 2020.

Benefits of the Refinancing Transactions

Completion of the Refinancing Transactions is expected to, among other things:

• Provide US$18 million of immediate cash into the Company;
• Provide the Company with a solid financial footing on a go-forward basis to allow it to execute on its strategy to accelerate growth of NATESTO^® in the U.S;
• Eliminate the risk of imminent default on the SWK Facility resulting from the Company dropping below the existing minimum consolidated unencumbered liquid asset covenant of US$2 million and failing to meet revenue and EBITDA covenants;
• Improve liquidity by amending the SWK Facility to decrease the minimum consolidated unencumbered liquid asset covenant by US$500,000 to US$1.5 million;
• Unlever the balance sheet through the extinguishment of approximately US$12.5 million of debt and accrued interest and reduce expected interest expense by approximately US$750,000 over the next twelve months; and
• Allow existing shareholders to potentially preserve and increase long-term shareholder value.

Exemption from Shareholder Approval and MI 61-101

The Company currently has 261,225,290 Common Shares issued and outstanding. There are 749,230,776 Common Shares issuable in connection with the Private Placement and Debt Conversion (equal to approximately 287% of the currently issued and outstanding Common Shares) such that, assuming the Refinancing Transactions close, a total of 1,010,456,066 Common Shares would be issued and outstanding, on a non-diluted basis.

Following completion of the Private Placement and Debt Conversion, it is expected that Mr. Ihnatowycz, through the ownership of First Generation, which currently beneficially owns, directs or controls approximately 45.27% of the outstanding Common Shares, will beneficially own, direct or control approximately 85.82% of the outstanding Common Shares, determined on a non-diluted basis (but, in each case, including 625,000 stock options owned by Mr. Ihnatowycz). Other than in connection with the Private Placement and Debt Conversion no other Common Shares are issuable in connection with the Refinancing Transactions.

The table below indicates: (i) the number of Common Shares that First Generation beneficially owns, directs or controls as of the date hereof; (ii) the approximate percentage that such number of Common Shares represent as a percentage of the issued and outstanding Common Shares as of the date hereof; (iii) the number of Common Shares issuable to First Generation as part of the Refinancing Transactions; (iv) the number of Common Shares that First Generation will beneficially own, direct or control following closing the Private Placement and Debt Conversion; and (v) the approximate percentage that such number of Common Shares will represent as a percentage of the issued and outstanding Common Shares post-Private Placement and Debt Conversion, each on a non-diluted basis.

The Private Placement and Debt Conversion will constitute “related party transactions” within the meaning of Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (“MI 61-101”). However, in light of the fact that the Board and Special Committee have determined that the Company is in serious financial difficulty, the Company is relying on the exemption from the formal valuation and minority approval requirements of MI 61-101 contained in Section 5.5(g) and Section 5.7(1)(e) of MI 61-101, respectively, on the basis of the “financial hardship” exemption therein. The Company’s decision to rely on the financial hardship exemption was made upon the recommendation of the Special Committee, all of whose members are independent directors free from interest in the Private Placement and Debt Conversion and unrelated to the parties involved in those transactions. After considering and reviewing all of the factors set forth herein, the Special Committee and the Board (including all of the independent directors) have each determined, acting in good faith, that (i) the Company is in serious financial difficulty, (ii) the Refinancing Transactions are designed to improve the financial position of the Company, (iii) paragraph (f) of Section 5.5 of MI 61-101 is not applicable and (iv) the terms of the Refinancing Transactions are reasonable in the circumstances.

In addition, the Refinancing Transactions trigger the requirement for approval from the holders of a majority of the currently issued and outstanding Common Shares, excluding the votes attached to the Common Shares held by First Generation, under section 607(g) of the TSX Company Manual, unless an exemption is applicable, because the Private Placement and Debt Conversion represent transactions involving First Generation, a related party of the Company that (i) will result in the issuance of Common Shares to an insider of the Company that is greater than 10% of the number of Common Shares currently issued and outstanding and (ii) are for an aggregate number of Common Shares issuable greater than 25% of the number of Common Shares outstanding, on a non-diluted basis. In addition, the re-pricing of the warrants held by SWK at a discount to market would ordinarily require shareholder approval under section 608 of the TSX Company Manual.

The Company has applied to the TSX under the provisions of Section 604(e) of the TSX Company Manual for an exemption from the requirement for shareholder approval of the Refinancing Transactions on the basis that the Company is in serious financial difficulty (the “Application”). The Special Committee – comprised entirely of independent directors each of whom is free from any interest in the Refinancing Transactions and unrelated to the parties involved – considered the reasonableness and fairness of the Refinancing Transactions and unanimously recommended to the Company’s full Board that (i) the Refinancing Transactions be approved and (ii) that the Company make the Application. The Board subsequently approved the Refinancing Transactions (with Mr. Ian Ihnatowycz having declared his interest and abstaining from voting) and there was no contrary view or abstention by any independent director on the resolution approving the Refinancing Transactions.

Acerus expects that, as a consequence of its financial hardship application, the TSX will place the Company under remedial delisting review, which is customary practice when a listed issuer seeks to rely on this exemption. Although Acerus believes that it will be in compliance with all continued listing requirements of the TSX upon closing of the Refinancing Transactions, no assurance can be provided as to the outcome of such review or continued qualification for listing on the TSX.

About Acerus

Acerus Pharmaceuticals Corporation is a Canadian-based specialty pharmaceutical company focused on the commercialization and development of innovative prescription products that improve patient experience, with a primary focus in the field of men’s health. The Company commercializes its products via its own salesforce in the United States and Canada, and through a global network of licensed distributors in other territories.

Acerus’ shares trade on TSX under the symbol ASP and on OTCQB under the symbol ASPCF. For more information, visit www.aceruspharma.com and follow us on Twitter and LinkedIn.

About First Generation

First Generation is currently the Company’s largest shareholder and a lender to the Company and an entity owned and controlled by Mr. Ian Ihnatowycz, Chairman of the Board. First Generation’s address is: 40 King Street West, Suite 3515, Toronto, Ontario, M5H 3Y2. The Company has been informed that First Generation is acquiring the Common Shares described herein for investment purposes. The Company has been informed that First Generation and the persons or entities with which it may be considered to be a joint actor hold their securities for investment purposes and may, depending on market and other conditions and factors, increase or decrease their respective beneficial ownership and control or direction over Common Shares through market transactions, related financial instruments, private agreement purchases or sales, treasury issuances, convertible securities, incentive awards or otherwise.

Notice Regarding Forward-Looking Statements

This press release contains forward-looking information about the Company’s objectives, strategies, financial condition and businesses/products that involve risks and uncertainties. Information in this press release that is not current or historical factual information may constitute forward looking information within the meaning of securities laws. Implicit in this information are assumptions regarding our future financial condition and operational results. These assumptions, although considered reasonable by the Company at the time of preparation, may prove to be incorrect. Readers are cautioned that actual performance of the Company is subject to a number of risks and uncertainties, including (i) the possibility that the Refinancing Transactions may not be completed as contemplated, or at all, because the necessary regulatory approvals are not received or other conditions to the completion of the Refinancing Transactions are not satisfied, (ii) the possibility that the Company has to allocate proceeds to other uses or reallocate proceeds differently among the anticipated uses, (iii) with respect to the Company’s financial condition and its ability to raise additional capital or secure future financing and its ability to repay its indebtedness and meet its covenants thereunder, (iv) the commercial performance of NATESTO^® and the ability of the Company to execute upon its strategic plan, in particular with respect to NATESTO^® in the U.S., (v) general conditions in the pharmaceutical industry and in the industries in which the Company operates, (vi) uncertainties with respect to the Company’s intellectual property, (vii) the outcome of the TSX’s remedial delisting review and (viii) uncertainties related to regulatory processes and general changes in economic conditions, and in light of these risks and uncertainties actual results could differ materially from what is currently expected as set out above. For more exhaustive information on these risks and uncertainties you should refer to our annual information form dated March 4, 2019 and our other continuous disclosure documents which are available at www.sedar.com. Forward-looking information contained in this press release is based on our current estimates, expectations and projections, which we believe are reasonable as of the current date. You should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While we may elect to, we are under no obligation and do not undertake to update this information at any particular time, whether as a result of new information, future events or otherwise, except as required by applicable securities law.

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