TELESTA THERAPEUTICS INC T.TST

Debt Discussion based on Management Info Circular

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This is for readers who are debt geeks.  Everyone else cover their eyes.

I reconciled the debt per the June 30, 2013 annual report to the dept per Schedule C in the Management Information Circular for the proposed Animal Health Business sale.  I discovered four points which are not clearly discussed in the text of the Circular:

1. Bioniche is repaying $5m of the $10m MEDT Loan (MEDT = Ministry of Economic Development and Trade).  Although it was all used to build the VMC, it's collateral included the Animal Health Business in addition to the Belleville VMC assets and Econiche.  Other than this, Bioniche did not seem to repay any of the governement debt.  I suppose it is good news that they did not have to repay all $10m, given that part of the collateral for the $10m was being sold.
2. The debt to the ITO of $7.6m relating to Econiche seems to have been written down to zero liability.  (ITO = Industry Technology Office)  This was the debt repayable with royalties on revenue from Econiche.  Royalty rate was 2.5%.  Perhaps this is a mistake in the pro-forma debt list in Schedule C, but it would be consistent with the accounting assumptions that the VMC and Econiche business is for sale.
3. Bioniche intends to roll the debt related to the VMC into the separate legal entity, Econiche Corp, a subsidiary of Bioniche, to sit with the VMC/Belleville/Econiche assets.  This debt totals $13m.  Conveniently, the VMC assets have been written down to about $13m per a recent independent appraisal.  I don't know if independent appraisals are consistent with expected market value, but I suspect the answer is yes.
4. The only remaining real debt in Bioniche relating to Human Health will be $3.3m to Industry Canada ("ITO capital portion") and remaining car leases of $0.4m.  I say that for two reasons.  First, the $0.3m mortgage in Scedule C is to be repaid on April 1 2014 when the Pointe Claire property is sold (sale agreement already signed).  Second, the $7.8m debt to Industry Canada ("ITO potential future royalties") is repayable by royalties on Urocidin revenue.  Until Urocidin is successful in generating revenue, there is nothing to repay, if ever.  To me, this is not really debt.  It is like big commercial bank's Contingent Convertible Debt that converts to equity if they run into trouble on their liquidity ratios under Basel III.  It's not really debt, its more like equity.  In the case of Bioniche, it is even better than equity.  On wind-up, ITO would not get repaid.

So to summarize the debt after the deal closes on April 15, we will have $13m of debt in a separate legal entity called Econiche Corp and $3.7m in the Human Health Business.  This is a far better story than "still left with 25m of debt".