CodeNature Records 70% Loss on Accounts Receivable... Going Concern 'Uncertain'② [Companies at a Crossroads]

[Asia Economy Reporter Jang Hyowon] It has been revealed that CodeNature, a KOSDAQ-listed company, has classified over 70% of its accounts receivable as uncollectible while continuing to report poor performance. Consequently, the auditing firm pointed out uncertainties regarding CodeNature’s ability to continue as a going concern.

According to the Financial Supervisory Service’s electronic disclosure on the 23rd, CodeNature recorded cumulative sales of 1.5 billion KRW and an operating loss of 6.8 billion KRW on a separate basis for the first half of this year. Sales decreased by 74% compared to the same period last year, while operating losses expanded by 187.2%.

CodeNature operates in the renewable energy EPC (Engineering, Procurement, and Construction) business as well as distribution businesses including cosmetics and health functional foods sales. As of the first half of this year, the EPC division generated sales of 684 million KRW, and the distribution division generated sales of 828 million KRW.

Through its subsidiary CodeMobile, it also conducts mobile phone terminal leasing and sales business, but these are not reflected in CodeNature’s separate sales. CodeMobile is currently in a capital deficit state with total assets of 2.9 billion KRW and total liabilities of 10.5 billion KRW. It recorded sales of 9 billion KRW and a net loss of 92 million KRW in the first half of this year.

Despite poor sales, CodeNature maintained a cost of sales similar to that of the same period last year, resulting in a gross loss. In particular, although sales in the distribution business were in the 800 million KRW range, the cost of sales and selling and administrative expenses amounted to 3.5 billion KRW and 2.1 billion KRW respectively, widening the deficit.

Moreover, operating losses expanded in the second quarter due to the reflection of a large-scale bad debt write-off. CodeNature recorded a bad debt write-off of 2.8 billion KRW in the second quarter of this year. This bad debt write-off arose from financial assets.

As of the first half of this year, CodeNature has set aside approximately 3.9 billion KRW as allowance for doubtful accounts out of about 5.5 billion KRW in accounts receivable. It newly set aside 2.4 billion KRW in the first half and reversed 500 million KRW. Additionally, it reflected an allowance for doubtful accounts of 1.6 billion KRW in other financial assets, which include short-term loans, accounts receivable, and accrued income. These amounts are classified as uncollectible from credit sales or loans made by the company.

Accordingly, CodeNature’s auditing firm stated in its semiannual review report, “CodeNature has incurred operating losses and net losses for several years, and as of the end of the first half of this year, current liabilities exceed current assets by 1.6 billion KRW,” adding, “This situation indicates the existence of significant uncertainties that raise substantial doubt about CodeNature’s ability to continue as a going concern.”

The market is paying attention to whether the newly acquired companies by CodeNature can help improve its performance. Previously, CodeNature acquired Hunners ENG, a manufacturer of automotive bearing cages, with 300 million KRW in cash and 5.7 billion KRW in convertible bonds (CB). In June, it also acquired K-Wave, a meltblown (MB) filter manufacturer, through the issuance of 7 billion KRW in CB.

Hunners ENG has maintained sales of about 5 billion KRW over the past five years until last year. CodeNature estimated that sales of ball bearing cages, which Hunners ENG is not currently engaged in, will begin in 2024, projecting sales to exceed 10 billion KRW in 2025, and used this assumption to evaluate the company’s value.

K-Wave was newly established in December last year through a physical division of Sky E&M. It operates in the manufacture of MB filters using biodegradable PLA raw materials. This company also evaluated its value based on the assumption that MB equipment sales, which it is not currently engaged in, will reach 9.1 billion KRW in 2023 and increase to 28.9 billion KRW by 2027.