[After CB Issuance] GTG Wellness Investors in 'Mental Breakdown' Over Rejection of Semiannual Opinion

[Asia Economy Reporter Jang Hyowon] The stock price of GTG Wellness, a beauty device manufacturer, plummeted to the 2,000 won level after receiving a refusal of review opinion in the first half of the year. Not only individual investors but also convertible bond (CB) investors, who can profit from re-pricing (adjustment of conversion price) even if the stock price falls to some extent, are now under pressure.

According to the Financial Supervisory Service's electronic disclosure on the 26th, GTG Wellness received a refusal of review opinion from the audit firm for the first half of this year. A refusal of review opinion for the semiannual report is a reason for designation as a management item. If the cause of the refusal is not resolved by the end of the year, it will result in a refusal of audit opinion and become subject to a delisting substantive review.

The reason GTG Wellness received the refusal opinion is that it was unable to verify who the seller of the artwork was when purchasing the artwork. GTG Wellness is a company engaged in the manufacture and sale of medical devices, various cosmetics, and beauty devices. Although unrelated to artwork, it disclosed from the first half of this year that it provides delivery and exhibition services for artworks.

It is analyzed that the company included artworks as inventory assets. GTG Wellness purchased artworks worth 13.2 billion won in the first half of this year and recorded them as inventory assets. This amount exceeds 23% of total assets and 67% of net assets.

The audit firm stated, "We could not secure evidence to reasonably assess the cash flow related to the artwork purchase transactions and the net realizable value of the artworks," and therefore did not express a review opinion.

Following this news, GTG Wellness was designated as a management item, and its stock price hit the lower limit. The stock price of GTG Wellness, which had been moving around 4,000 won in the past month, plunged to the low 2,000 won range within two days.

As the stock price fell, anxiety grew not only among general investors but also among CB investors. GTG Wellness issued approximately 22 billion won worth of CBs in three rounds last year and this year (5th, 6th, and 7th rounds), with a conversion price of 3,419 won. The current stock price is below the CB conversion price.

The conversion price can be lowered to 2,393 won through future re-pricing. If the conversion price is lowered by re-pricing, the number of issued shares will increase, raising concerns about overhang.

The remaining CBs currently total 17.8 billion won. Among the 5th round CBs, 4.1 billion won have already been converted into shares, with 1.3 billion won remaining. The 6th round CBs worth 10 billion won can be converted starting September 15. The 7th round CBs worth 6.5 billion won can be converted into shares starting January 28 next year.

If the stock price remains below the conversion price after the conversion date, investors can request redemption. In this case, they will receive 2% annual interest. If all remaining CBs are redeemed, GTG Wellness would have to repay approximately 18.1 billion won.

However, it is uncertain whether GTG Wellness has the ability to repay. As of the end of the first half of this year, GTG Wellness's cash equivalents stood at about 38 million won. Total current assets are 28.8 billion won, of which inventory assets account for 18.8 billion won. The artworks worth 13.2 billion won, which the audit firm raised concerns about, are included in these inventory assets.

Looking at the first half performance, it is not easy to generate profits from the core business. GTG Wellness recorded cumulative consolidated sales of 7.9 billion won in the first half of this year, a 20% decrease compared to the same period last year. Operating loss also widened by 26.7% to 5.7 billion won during the same period.

GTG Wellness stated, "Although the original contract party is not disclosed due to the customary practice of artwork transactions, we purchased the artworks properly through K Hyundai Museum of Modern Art," and added, "Regarding the 10 billion won worth of 6th round CBs, 2 billion won has already been requested for redemption and is under review, and we are negotiating with investors to convert the remaining 8 billion won in the future."