[Listed Companies at a Crossroads] JW Biotech, Qualified Audit Opinion and Corporate Acquisition ①

[Asia Economy Reporter Jang Hyowon] KOSDAQ-listed company GW Vitec has acquired a TV manufacturer that received a "qualified" audit opinion last year. Despite recording losses last year and having a debt ratio exceeding 500%, the company was valued at 7 billion KRW and acquired by GW Vitec.

According to the Financial Supervisory Service's electronic disclosure on the 10th, GW Vitec announced that it will acquire 1,573,620 shares (70.45%) of JK Labs for 4.9 billion KRW. This corresponds to about 25% of GW Vitec's equity capital.

The shares GW Vitec is acquiring are not newly issued shares from a paid-in capital increase but shares previously held by JK Labs CEO Lee Jun-kyung. Until the end of last year, CEO Lee Jun-kyung held 100% of JK Labs' shares.

Founded in 2018, JK Labs primarily manufactures and sells LED TVs. The company has its own brands Sentio and MAI TV. Sales are conducted through B2B transactions, with major customers being retail stores and distributors in Yongsan Electronics Market.

The company was designated as an external audit entity for the first time last year and received a "qualified" audit opinion. The audit firm was unable to attend the physical inventory count, making it impossible to verify the beginning inventory quantity. Since beginning inventory affects financial performance and cash flow, the income statement may be subject to revision.

JK Labs recorded sales of 57.4 billion KRW and an operating loss of 900 million KRW last year, turning to a deficit. As of the end of last year, total assets were 27 billion KRW, total liabilities 22.9 billion KRW, and total equity 4.1 billion KRW, resulting in a debt ratio of approximately 558%. The sharp 140% increase in accounts payable last year was identified as a cause of the increased liabilities.

Accounts receivable also surged 429%, from 2.1 billion KRW to 11.3 billion KRW. The process of purchasing materials on credit to manufacture products and selling goods on credit caused a rapid increase in working capital burden. Meanwhile, cash flow from operating activities turned negative, and cash and cash equivalents dropped to about 42 million KRW by the end of last year.

GW Vitec valued the company at 7 billion KRW and invested 4.9 billion KRW in convertible bonds (CB) to acquire a 70% stake. The valuation of JK Labs was conducted using the discounted cash flow (DCF) method, which estimates future cash flows and converts them to present value.

According to the external valuation report, JK Labs' sales are assumed to grow to 70 billion KRW over the next five years, with operating profits ranging from 1.7 billion to 2.6 billion KRW annually. JK Labs has never exceeded 1.2 billion KRW in operating profit in the past three years and turned to a loss last year. It was also assumed that sales of smart TVs would occur in the future, although there have been no smart TV sales in the past three years.

Regarding this, a GW Vitec representative stated, "JK Labs received a qualified opinion because it was their first external audit last year and the beginning inventory valuation was impossible. Most companies do not receive an unqualified opinion in their first audit." He added, "JK Labs obtained smart TV radio certification in November last year and plans additional investments, so sales growth to the 70 billion KRW level is achievable."

Meanwhile, GW Vitec is engaged in bio-business focusing on manufacturing and selling research antibodies and antibody development, as well as supplying scientific instruments related to biotechnology. On a consolidated basis last year, it recorded sales of 52.6 billion KRW, an operating loss of 1.8 billion KRW, and a net loss of 5 billion KRW.