Esconec, the Reason for Pouring Money into the Bottomless Pit 'Arisel'

60 Billion Won Loan Converted to Equity and Comprehensive Support
Park Soon-kwan Holds Shares in Arisel and His Son Also Works There

[Asia Economy Reporter Jang Hyowon] Kosdaq-listed company Esconic has converted the money it lent to its subsidiary Arisel into equity. Arisel, which was launched in 2020, has not been able to escape large-scale losses and is in a state of complete capital erosion. So why does Esconic continue to support Arisel under these circumstances?

According to the Financial Supervisory Service’s electronic disclosure on the 4th, Esconic decided on the 6th of last month to convert the 6 billion KRW it had lent to its subsidiary Arisel into equity. The structure is such that when Arisel issues new shares through a third-party allotment paid-in capital increase, Esconic offsets this against the loan and acquires the shares.

Arisel is a lithium primary battery manufacturing company launched in May 2020 through the business transfer of Esconic’s battery division. The main market for lithium primary batteries is smart grids (intelligent power networks). Arisel’s lithium primary batteries are applied to smart meters for electricity, water, and other utilities.

Arisel has received full support from Esconic. After an initial investment of 5 billion KRW, Esconic provided operating funds by lending money annually. By the end of the third quarter last year, the total loans extended to Arisel amounted to approximately 15.5 billion KRW. Of this, 6 billion KRW was converted into equity this time. In addition to investments and loans, Esconic also provided payment guarantees.

Esconic also attracted investments for Arisel. It received 10 billion KRW from funds such as the SV Gap-Coverage Fund and the Nvestor Changhae Yuju Open Innovation Fund. A put option was also provided for the equity purchase. If Arisel’s performance falls short of expectations, Esconic has a contract to exchange Arisel’s shares for its own treasury stock.

However, Arisel’s performance has been poor. In the year it was established, 2020, it recorded sales of 500 million KRW and an operating loss of 4.1 billion KRW. In 2021, sales were 800 million KRW with an operating loss of 6.8 billion KRW. Additionally, due to heavy borrowing for facility investments, interest expenses increased, further enlarging the loss.

As of the end of the third quarter last year, Arisel’s total assets were 24.2 billion KRW, and total liabilities were 25.2 billion KRW, indicating a state of complete capital erosion. Although Esconic’s conversion of loans into equity is expected to resolve the capital erosion, additional working capital is still needed.

Esconic exchanged a significant portion of shares with the funds that invested in Arisel. Contract terms include exchanging 20% of the investment if Arisel’s 2020 sales fall short of 6 billion KRW, 50% if 2021 sales fall short of 12 billion KRW or operating profit falls short of 1 billion KRW, and 100% if operating profit from 2022 to 2024 falls short of 3 billion KRW.

By the third quarter of last year, Arisel recorded an operating loss of 5 billion KRW. According to the contract, 100% of the investment must be returned to Esconic in treasury stock. Consequently, Esconic’s stake in Arisel increased from 62.5% to 90.9%.

The reason Esconic supports the struggling Arisel both financially and otherwise is believed to be because of CEO Park Soon-kwan’s stake. CEO Park holds 6.25% of Arisel’s shares. He initially invested 1 billion KRW based on a par value of 500 KRW. Arisel is also planning an initial public offering (IPO), and if successful, CEO Park’s share value is expected to rise significantly.

Additionally, CEO Park’s son is working at Arisel. Park Jung-eon, an inside director of Arisel, is CEO Park’s son and is known to be leading Arisel’s overall business. Arisel thus plays an important role in Esconic’s succession plan.

Esconic operates a business manufacturing metal parts for mobile phones. On a consolidated basis, it recorded operating losses for three consecutive years from 2019 to 2021. Last year, it continued operating losses until the first half but posted an operating profit of 7.8 billion KRW in the third quarter. As of the end of the third quarter, its debt ratio stood at around 241%.