PeopleBio, a medical device corporations specializing in Alzheimer's diagnosis, will purchase real estate worth about 98.3 billion won in Daechi-dong, Gangnam-gu, Seoul. With continued losses putting it at risk of being designated for administrative issues, the aim is to improve its financial structure through the real estate purchase. On the 24th, when the news broke, PeopleBio's stock hit the upper limit.
Shareholders are relieved, saying the immediate fire has been put out, but in the market there is considerable concern about long-term risk because the escape from crisis relies on financial techniques rather than strengthening core business competitiveness.
PeopleBio decided to acquire land and a building in Daechi-dong, Gangnam-gu, Seoul from Human Data for 98.3 billion won. This is about 57 times the company's total equity (1.7 billion won) as of the third quarter of this year.
The transaction was structured with no cash outflow: it assumes an existing 60 billion won loan, and the remaining 35.6 billion won will be paid in kind by issuing the 8th tranche of convertible bonds (CB) to Human Data. It means the proceeds from the bond issuance and the funds for the real estate purchase were offset against each other.
The key to this transaction is that the CB to be issued has the nature of a "perpetual bond (hybrid capital security)." While ordinary CBs are recognized as a liability, perpetual bonds are classified as equity in accounting. Thanks to this, PeopleBio will obtain an accounting effect similar to capital expansion even without a real cash inflow.
PeopleBio, which listed on KOSDAQ in 2020 via a technology exception, has received a five-year grace period based on revenue and a three-year grace period based on loss before income taxes from continuing operations (LBIT), but the LBIT grace expired last year and the revenue grace expires this year. In particular, the rule of "LBIT exceeding 50% of equity capital" is a stumbling block. The ratio rose from 161% last year to 341% in the third quarter of this year. If it exceeds 50% again in this settlement of account, it will be immediately designated as an administrative issue, which could lead to a substantive delisting review.
The company drew a line that this transaction does not constitute a change in main business. Recently, the Financial Services Commission (FSC), through its "KOSDAQ market vitalization plan," said that if corporations listed via technology exception change their main business during the five-year delisting grace period to one unrelated to the technology reviewed at listing, it will be grounds for a delisting review.
Park Se-gwon, CEO of Human Data, the counterparty to the transaction, is the same person who headed Eastern Networks, which withdrew a paid-in capital increase in Nov. A previously aborted transaction has been concluded again with only the principal party changed.
According to the company, the transaction fell through when the asset securitization that Eastern Networks was pursuing to pay in the capital increase hit a snag, but after discussions, the transaction was restructured so that Human Data would acquire the CB. The CB to be issued in this process amounts to 32.72 million shares, equivalent to 60% of the existing number of shares issued, making severe equity dilution inevitable upon future conversion. It is also a structure in which Human Data could effectively become the largest shareholder.
In the market, some say that while this asset acquisition could act as a short-term positive by easing delisting risk, it could become a burden in the long term because it does not improve the financial structure by expanding core business competitiveness.
Interest on the CB and the interest burden from assuming 60 billion won in debt could also weigh on cash flow. The CB coupon rate and yield to maturity are each 2%, lower than average, but about 178 million won in interest must be paid every three months. PeopleBio's cash and cash equivalents currently stand at only about 500 million won.
An accountant well-versed in the capital market said, "It can be interpreted positively in the short term in that the risk of designation as an administrative issue and delisting has been averted for now," but added, "Because the real estate was acquired entirely with debt and CB, the interest expense burden is heavy, and if leasing or sale does not proceed as planned, financial risk could actually expand."
PeopleBio said, "We are cutting SG&A expenses, and the actual number of tests for the Alzheimer's diagnostic product "AlzOn" is increasing, and we are working to translate that into revenue," adding, "We are also reviewing a plan to sell the tangible asset acquired this time within next year, and we plan to secure cash liquidity and focus on our bio core business."