Medical artificial intelligence (AI) corporations Lunit will carry out a paid-in capital increase worth 250 billion won. It comes 2 years and 3 months after it pursued a 200 billion won paid-in capital increase in 2023. With the redemption date for large-scale convertible bonds (CB) previously issued approaching and the possibility of conversion into shares declining due to a weak stock price, the company decided to proactively ease its financial burden through a paid-in capital increase.
Chief Executive Officer Seo Beom-seok of Lunit said at an online briefing held on the morning of the 2nd, "We have actively invested in growth and produced meaningful results such as collaborations with global pharmaceutical companies and research outcomes," but added, "Even so, we believe the reason the stock price was under pressure was that financial risks such as put option risk and the legal loss issue were significant."
◇ Put-option risk on CB eased… chose 250 billion won paid-in capital increase instead of CPS
Lunit said that, based on meetings with 33 CB holders, none had expressed an intention to exercise put options at this time. However, the company explained the background of the paid-in capital increase by noting, "Because the mere possibility of exercising CB put options is acting as a financial burden, this is to sort it out in advance."
Of the funds raised through this paid-in capital increase, 112.4 billion won will go to operating funds and 137.8 billion won will be used to repay convertible bond debt.
Previously, Lunit had pursued fundraising by issuing 80 billion won in third-party allotment convertible preferred shares (CPS). However, the market took issue with the fact that put-option risk remained in the CPS structure.
Chief Financial Officer Park Hyun-seong, who attended the briefing, said, "Fundraising via third-party allotment CPS was proceeding quite well, but the question was raised, 'How will you resolve the put option?'" and added, "We judged that, instead of CPS, it would be better to reduce put-option risk with a large amount of capital."
With this paid-in capital increase, Lunit will have raised a total of about 450 billion won through paid-in capital increases alone over the past three years. In Oct. 2023, about 1 year and 3 months after listing, Lunit also carried out a 200 billion won paid-in capital increase for research and development (R&D) and global business expansion.
The core of the current financial burden is the convertible bonds (CB). In May 2024, as it acquired the U.S. AI corporations Volpara, Lunit issued CB in two tranches. The first CB, worth 166.5 billion won, was used entirely for the acquisition price, and the second CB, worth 5 billion won, was injected as operating funds for overseas business expansion. The aggregates of the two CB issues total about 171.5 billion won.
At the time, with a favorable stock trend, the company expected conversion into shares, but the situation changed as the stock price fell afterward. Lunit's stock gradually declined from 71,400 won in early last year, dropping to the high-30,000 won range in August, and it has been trading around 40,000 won in January this year.
The current conversion price for the first CB is 52,846 won and for the second is 47,819 won, and despite refixing, the gap with the stock price remains large. If conversion does not occur, Lunit must repay principal and interest at maturity in Apr. 2029. Both CB tranches have a maturity-guaranteed annual compound yield of 8.0%, and the redemption amount at maturity is about 142% of principal. Translated into amounts, the total repayment burden comes to the 240 billion won range.
The current conversion price for the first CB is 52,846 won and for the second is 47,819 won, and although there was a conversion price adjustment (refixing), the gap with the stock price remains large.
If conversion does not occur, Lunit must repay principal and interest at maturity in Apr. 2029. Both CB tranches have a maturity-guaranteed annual compound yield of 8.0%, and the redemption amount at maturity is about 142% of principal. Translated into amounts, the total repayment burden comes to the 240 billion won range.
Regarding the possibility that the paid-in capital increase may fall short of the target, CFO Park said, "The goal is to reduce put-option risk to a considerable extent," adding, "Institutional investors have expressed intentions to make additional investments after the paid-in capital increase, so we judged it manageable."
◇ Volpara acquisition and worsening results alongside paid and bonus issues… concerns over shareholder dilution
The market points to the Volpara acquisition as the backdrop for the company's increased financial burden. On this, CEO Seo said, "We reviewed several corporations at the time, and Volpara was a company with verified profitability," adding, "In the short term, it may look like an excessive acquisition, but we are confident it was a good decision in the long term."
However, deteriorating results remain a burden. Last year, Lunit's annual sales rose 53.4% year over year to 83.1 billion won, but its operating loss also expanded 22.8% year over year to 83.1 billion won.
Lunit on the day emphasized its goal of turning to profit on an EBITDA basis. EBITDA refers to earnings before interest, taxes and depreciation. Lunit has adjusted the timing of turning to profit three times and had presented 2027 as the target.
On this, CFO Park Hyun-seong said, "Internally, the criterion for turning to profit was cash operating profit, not operating profit," and explained, "As a way to quell shareholder backlash, we believe an early EBITDA turnaround in 2026, one year ahead of the existing target, is possible."
With this paid-in capital increase accompanied by a bonus issue, shareholder views are divided. A bonus issue does not change corporate value itself, but an increase in the number of outstanding shares can heighten concerns about dilution of existing shareholders' equity. It is also a burden that this contrasts with the recent trend among many listed companies of reducing outstanding shares through treasury share cancellation in line with the government's Commercial Act amendment stance.
Attention is also on whether management will participate in the paid-in capital increase. During the 2023 paid-in capital increase, the top shareholder management participated by taking out high-interest loans.
However, regarding this paid-in capital increase, CFO Park said, "With the 30 billion won loan repayment at the time not yet completed, it is difficult to participate by taking out additional loans," adding, "However, we plan to subscribe to about 15% of the new share allotment."