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On recommending shares in Collagen Solutions (COS) at the end of 2016 we noted that the company is understood to be investigating the possible use of debt financing, though this is a risk here. It has now announced a financing potentially to provide “sufficient working capital to fund the group until it achieves cash flow positive operations”.
This conditionally, including on General Meeting approval, comprises a gross £6.2 million placing and £1.8 million open offer at 5p per share as well as £4 million of senior secured private bonds.
Of the latter, £2 million with a 10% interest rate and term of 3½ years are issuable on closing of a more than £3.5 million equity fundraise (including the noted), and two further £1 million tranches with interest rates of the higher of 10% or 935 basis points above the 3 year GBP Swap Rate (fixed upon issuance) and respective terms of 3½ and 3 years are issuable on, respectively, achievement of “certain revenue targets” and further revenue targets in conjunction with a further up to £2 million of equity finance raised (including any proceeds in excess of £3.5 million from the noted placing and open offer). The bonds will also see up to £0.4 million of warrants (6,767,044 exercisable at 5.911p each) issued.
The noted terms compare with a prior 5.625p share price (and our 5.75p offer price recommendation). We don’t consider the equity discount too bad given the scale of the fundraise – and note the open offer with an excess application facility. We also particularly note participation of £0.825 million from Chairman David Evans.
With the new cash set for “development and commericalisation of high value device products, accelerate the launch of ChondroMimetic and aid expansion of the existing medical collagen supply business”, we continue to expect a positive news flow to drive a re-rating as the growth story here becomes clearer. The open offer looks worth taking up in full and the stance remains BUY.
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