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Leonite Captal LLC Issues Open Letter to Debenture Holders of Diagnos Inc.

TORONTO , March 26, 2019 /CNW/ - Leonite Capital LLC, today issued the following letter to the holders of 10% Senior Convertible Secured Debentures (the "Debentures") of Diagnos Inc. (TSX Venture: ADK), (DGNOF) (the "Corporation" or "Diagnos") in connection with the proposed restructuring set forth in Diagnos' press release dated March 11, 2019 .

The full text of the letter is as follows:

Dear Fellow Debenture Holder

Leonite Capital LLC, as a holder of the 10% Senior Convertible Secured Debentures (the "Debentures") of Diagnos Inc. (the "Corporation") strongly opposes the proposed corporate reorganization announced by the Corporation on March 11, 2019 and recommends that holders of Debentures vote AGAINST such proposal at the upcoming meeting of holders of Debentures.

Restructuring Not in the Best Interests of the Holders of Debentures

The press release relating to the proposed reorganization states the following:

The Board of Directors acting in good faith and with a view of the Corporation's best interest, believes the proposed reorganization to be fair to all of its stakeholders as it will allow Diagnos to move forward with the development of the business. (Emphasis ours)

We believe this statement is misleading. While the proposed reorganization may indeed be in the best interest of certain of the Corporation's stakeholders it is most definitely not in the best interest of the holders of Debentures. Leonite and other holders of Debentures invested in the Debentures based on the understanding that in the event of a bankruptcy, insolvency or other reorganization, the Debentures would rank senior to other debt holders as well as the Corporation's equity holders.


As the Debentures are currently in default, the holders of the Debentures have a right to be re-paid and are entitled to enforce the security provided to them.

Proposed Restructuring

The Corporation's proposal involves two alternatives, neither of which recognize that the holders of the Debentures have a priority position. 

The first alternative requests the holders of the Debentures to allow the Corporation to redeem the Debentures through the issuance of common shares at a deemed issue price of $0.035 per share, which is a price that is only a small discount to the trading price prior to the March 11, 2019 restructuring announcement and is in fact a premium to the closing price of such shares during a significant portion of February 2019. 

The second alternative seeks approval to amend the terms of the Debentures to allow the Corporation to make interest payments and re-pay the principal amount of the Debentures in common shares at a price equal to the volume weighted average price of such shares for the 5 days preceding the interest payment date or the maturity date, as applicable.  This alternative again replaces the senior secured position of the holders of Debentures and converts them to equity holders at the then market price.

Neither of the alternatives properly recognizes the value associated with the senior secured position that the holders of the Debentures currently occupy.  In a typical reorganization of this nature, where the holders of the senior secured debt are being asked to forego certain of their rights, they are provided with compensation that recognizes their senior position.

The Board Recommendation Does Not Provide any Justification to Support the Reorganization

The Corporation's press release further states:

"The Board recommends that the Debenture holders vote in favour of the Debenture Redemption and that the Shareholders vote in favour of the Consolidation, for the following reasons:

Reduced risk. The Corporation has missed interest payments on the Debentures. It does not have nor does it anticipate having, the financial capacity to redeem the Series 1 – Debentures, due July 29, 2019 , in cash, or that it could do so without severely impacting its commercialization efforts. The Debenture Redemption would significantly reduce the risks of default by the Corporation, ensure its continuity and provide Debenture holders with a Redemption Price that is aligned with the market value of the Shares, all the while preserving the opportunity to generate capital appreciation and participate in the growth of the Corporation's business.

Facilitate capital raises; Favorable capital structure: The Corporation will require additional working capital to move forward with the growth of the business. By removing $6.6M of debt from its balance sheet, and in so doing eliminating the threat to the Corporation's continuity and use of its assets and, by presenting an attractive capital structure; 40.2M Shares outstanding at a higher Share price, the Corporation expects this will facilitate the injection of new capital and generate interest on a broader level from a variety of investors, including institutional investors.

Removes important barriers to business development. Adding new users is key to building a strong client base for the Corporation's AI tools in the medical field. It is a lengthy process requiring sustained efforts and support, namely during the trial process, and uncertainties as to the long-term viability of the Corporation is an important barrier to business development. By presenting a stronger financial position, potential customers and business partners, both in the private and public sectors, will be less hesitant to invest resources, time and money, in the product adoption process.

Favorable Redemption Price. The proposed Redemption Price is highly favorable as conversion prices are currently at $0.10 for the Series 1 and 3 Debentures, $0.15 for the Series 2 Debentures and $0.16 for the Notes and, following the Consolidation, the conversion prices would be adjusted to, respectively, $1.00 , $1.50 and $1.60 . Moreover, the TSXV policies do not permit reductions in the conversion price of convertible securities, to a price that would be below the common share price at the time of issuance of the convertible security, other than in the context of a debt reorganization."

It is our view that none of the foregoing reasons would justify a Debenture holder giving up its rights in the manner contemplated in the proposed reorganization.  Holders of Debentures have senior security and as a result of the default under the Debentures are entitled to realize upon their security immediately.  If the holders of Debentures proceed in this manner none of the foregoing reasons identified by the Board would be relevant to a holder of Debentures.

Leonite Recommendation

We recommend that the Debenture holders vote AGAINST the Debenture restructuring for the following reasons:

  1. The Corporation is in default on its obligations under the Debenture and is essentially insolvent meaning that the value of the common shares which holders are being asked to accept in exchange for the Debentures is far less than the proposed deemed issue price.
  2. The Corporation's revenue has declined precipitously and there can be no assurance that this trend will reverse.
  3. The Debenture redemption would have the holders of Debentures forego significant and material rights without fair consideration.
  4. The unsecured Note holders get the same conversion price despite holding a security which ranks below the Debentures in terms of repayment in the event of default.
  5. If approved, the creditors will hold less than 50% of the fully diluted common shares. In a reorganization such as that which is being proposed the current equity holders should suffer far greater dilution.

If any Debenture holders would like to discuss the proposed reorganization or our views with respect to the proposed reorganization, please reach out to Siegfried Eggert at 1.845.327.1153 or email siegfried@leonitecap.com.

Information Concerning Diagnos Inc.

Except as otherwise expressly indicated herein, the information concerning Diagnos contained in this news release has been taken from and is based solely upon Diagnos' public disclosure on file with the relevant securities regulatory authorities. Diagnos has not reviewed this document or confirmed the accuracy and completeness of the information in respect of Diagnos contained in this news release. Although Leonite does not have any knowledge that would indicate that any information or statements contained in this news release concerning Diagnos taken from, or based upon, such public disclosure contain any untrue statement of a material fact or omit to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it was made, none of Leonite or any of its directors or officers has verified, nor do they assume any responsibility for, the accuracy or completeness of such information or statements or for any failure by Diagnos to disclose events or facts which may have occurred or which may affect the significance or accuracy of any such information or statements but which are unknown to Leonite. Leonite has no means of verifying the accuracy or completeness of any of the information contained herein that is derived from Diagnos' publicly available documents or records or whether there has been any failure by Diagnos to disclose events that may have occurred or may affect the significance or accuracy of any information.

SOURCE Leonite Capital LLC

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