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Hercules Capital: Loan Update

BDCs:
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A publicly listed portfolio company of Hercules Capital (HTGC) announced IIQ 2017 earnings. Given the BDC Reporter rarely gets to view the financial standing of most HTGC borrowers because they are private companies, we used the opportunity to look at Agile Pharmaceuticals and prospects for HTGC’s loan:


NEWS

The Company is a “women’s healthcare company”, which is developing a new contraceptive device called Twirla and seeking FDA approvals. Established in 1997, Agile raised debt in 2012, which was repaid in February 2015 when HTGC made a $25mn commitment to fund the Company and was also issued warrants. Of that $16.5mn was initially drawn, all but $1mn allocated to repaying the prior lender.

In January 2016, the Company went public, raising additional funds at $6.35 a share, above the strike price of HTGC’s options.

The Company has no income and no assets except cash and its intellectual assets in Twirla, which remains at least several months away from hitting an FDA mandated milestone.

The latest financial statements show that cash is dropping from $49mn at December 31 2016 to $33mn, and suggests the Company will require additional injections of capital.

The Company’s stock is trading at $4.80 in the pre-market on July 28, suggesting investor confidence remains good.


ANALYSIS

As of March 2017 – according to Advantage Data – HTGC was carrying its loan to the Company of $15.638mn at cost very close to par in terms of fair market value.

However, the equity warrants have been written down by -85%.

In an unusual amendment back in 2016, the Company and HTGC agreed that previously paid principal repayments would be returned, presumably to allow greater liquidity.

The loan has been amended twice by HTGC as the Company’s fortunes have shifted and the FDA approval that was sought is delayed.


 VIEWS

We are adding Agile to our credit Watch List, concerned about the delays in getting approvals; the lower valuations; the declining cash balance and the way in which the facility is being regularly amended and extended.

With $16.4mn in exposure at cost, this is a material investment for HTGC and a material source of income as the loan bears interest at 9.0% or above.

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