Execution of Variation to Facility Agreement with PURE Asset Management, Company to Seek a Sale Transaction

Hydration solutions company The Hydration Pharmaceuticals Company Limited (ASX: HPC) (Hydralyte North America or the Company) advises that today it has signed a variation to its facility agreement with boutique asset manager and existing substantial shareholder PURE Asset Management Pty Ltd as trustee for The Income and Growth Fund (PURE or PURE Asset Management) as previously announced to the market on 17 October 2022 (Original PURE Facility).

KEY HIGHLIGHTS

• Variation provides A$1.7m in new funding, subject to the requirement of a waiver of ASX Listing Rule 10.1 in order to amend the Original PURE Facility
  
• Variation includes the potential for two additional tranches valued at A$1.5m each, which can be accessed at the discretion of PURE Asset Management
• New funding will be used in order to seek to implement a sale of the Company or the Company’s business (‘Sale Transaction’) for the benefit of stakeholders
• Hydralyte to operate in the ordinary course of business as it progresses a Sale Transaction

The Company intends to use the funding available under the Amended PURE Facility to progress a Sale Transaction.

While the Company advances opportunities associated with a Sale Transaction, it will continue to operate in the ordinary course of business. Hydralyte has sufficient inventory on hand to satisfy retail demand and remains actively engaged with existing and potential new stockists. The Board and management are continuing to review additional cost reductions measures, which will allow the Company to prolong its existing cash balance, which at 26 March 2024 is US$1.2m.

A detailed summary of the terms of the Amended PURE Facility and the ‘Second Warrant Deed’ entered into between the Company and PURE is provided below.

Company to seek a Sale Transaction

The Company is not expected to be cashflow positive in the near-term and requires significant additional capital to execute on its market opportunity in North America and Canada.

Market conditions are presently very challenging for emerging companies that are yet to become cash flow positive. The Company’s leveraged balance sheet adds further complexity and difficulty in raising capital.

The Board engaged New York-based Two Roads Capital in 2H2023 in order to seek to procure a strategic equity investor, change of control transaction or asset divestment for the benefit of shareholders (refer Appendix 4E of 29 February 2024). The Company is currently in progressed discussions with certain potential acquirers, however no binding or non-binding offer has been received in writing and there is no guarantee that any Sale Transaction will eventuate. The Company will update the market as and when required in accordance with the Listing Rules.

The Company has assessed and sought to execute on a range of different funding options in order to capitalise the business. It has been unable to garner sufficient support from shareholders for an equity capital raising and has been unable to procure new equity investors.

The Board is of the view that the Company is unable to access the level of capital required to get the business to breakeven or better in a short period of time, resulting in the Board’s decision to seek a Sale Transaction to maximise shareholder returns.

PURE Asset Management, which holds 11.4% of the Company’s issued shares, has agreed to vary the Original PURE Facility in order to advance the Company an additional A$1.7m (for a total of A$8.2m of senior secured debt which would be owed to PURE), in order to fund the business while it seeks a Sale Transaction for the benefit of all stakeholders. The Amended PURE Facility requires a waiver of ASX Listing Rule 10.1 in order to take effect. If the Amended PURE Facility does not take effect then the Original PURE Facility will not be amended and the additional funding will not be available.

The Amended PURE Facility also includes two new additional tranches, valued at A$1.5m each, which can be accessed at the discretion of PURE Asset Management. The Amended PURE Facility also provides for a ‘Second Loan’ of $5.5m, which can be accessed at the discretion of PURE Asset Management until 31 December 2024. The Second Loan was provided for in the Original PURE Facility and the terms of the Second Loan were amended as announced on 3 August 2023.

Assuming drawdown of the $1.7m, this amount, plus net cash at bank is expected to be exhausted in July 2024.

In the event that the Company is unable to procure a Sale Transaction by July 2024, additional debt or equity capital would be required in order for the Company to continue operations as a going concern. While the Amended PURE Facility contemplates two additional tranches of a total of A$3.0m of debt available (in addition to the ‘Second Loan’ of $5.5m), the availability of those additional tranches (and the Second Loan) is at PURE’s discretion. If additional capital was required, there is no guarantee that the Company would be able to raise it.

The Company has chosen to obtain the debt from PURE (a ‘Listing Rule 10.1 party’ by virtue of its 11.4% shareholding in the Company) via the Amended PURE Facility because it is unable to raise any meaningful level of equity capital from existing shareholders or new investors in the time period required. After assessing a range of options, the Board considers that the debt being provided by PURE is the only funding available within the current time requirements.

Given the above comments including the lack of success with alternative funding, the Board considers that the terms of the Amended PURE Facility are fair and reasonable for shareholders.

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