[At a Crossroads] ToBeSoft① Will Haitron Also Build a 'CB Factory'?

Conditional Acquisition Contract with HiteTron via Stalking Horse Method
ToBeSoft Survives Six Years of Losses by Issuing CB

KOSDAQ-listed company ToBeSoft has signed a conditional investment agreement to acquire Haitron Systems, which is currently undergoing rehabilitation proceedings. However, since ToBeSoft has also been operating at a loss for six consecutive years and has been sustaining itself through convertible bond (CB) issuances, there is growing interest in whether the acquisition can be completed.

According to the Financial Supervisory Service's electronic disclosure on the 14th, ToBeSoft announced that it signed a conditional investment agreement for the acquisition of Haitron Systems the day before.

This contract is a stalking-horse agreement, where after Haitron conducts a public bidding process, if there are no bidders expressing interest or no bidders offering more favorable acquisition terms than ToBeSoft, ToBeSoft will be selected as the final prospective acquirer.

The Haitron sales lead manager will accept due diligence and acquisition proposals until the 17th and plans to decide the final prospective acquirer on the 24th. The final prospective acquirer must prepare and submit a rehabilitation plan to the court by the 30th.

Previously, Haitron Systems had its trading suspended after receiving a disclaimer of opinion in its 2021 audit report. The audit firm stated that it could not verify the validity of cash inflows and outflows related to CBs issued by Haitron Systems, leading to the disclaimer. Ultimately, Haitron Systems failed to receive an appropriate opinion and filed for rehabilitation proceedings in January.

ToBeSoft is a company primarily engaged in developing enterprise software. Although it also operates in the bio-pharmaceutical and other sectors, most of its revenue comes from the enterprise UI·UX development platform segment.

ToBeSoft has recorded operating losses for six consecutive years since 2017. Its provisional consolidated results for last year showed sales of 43.2 billion KRW and an operating loss of 3.6 billion KRW. Notably, the net loss reached 11.1 billion KRW. ToBeSoft has recorded net losses of around 20 billion KRW annually since 2017.

One of the main causes of the large losses is CB interest expenses. As of the end of the third quarter last year, ToBeSoft's outstanding CBs amounted to 38 billion KRW. Along with interest expenses on other borrowings, it spent 3.2 billion KRW on interest through the third quarter. It is estimated that about 4 billion KRW was paid in interest for the entire year, which accounts for roughly 10% of total sales.

However, ToBeSoft cannot stop raising external funds through CB issuances. Due to prolonged losses, the company would face operational difficulties without funding. This creates a vicious cycle where issuing CBs to sustain the company leads to interest expenses that cause further losses.

In fact, the funds to acquire Haitron Systems are also expected to be raised by selling CBs. As of the end of the third quarter last year, ToBeSoft's separate basis cash equivalents amounted to only 1.8 billion KRW. Accordingly, ToBeSoft resold 14 billion KRW worth of the 13th series CBs it had previously redeemed back into the market.

Concerns have been raised that if ToBeSoft, which is sustained by CBs, acquires Haitron Systems, a KOSPI-listed company, another 'CB factory' could be created. There is currently no disclosed plan on how ToBeSoft will improve performance after acquiring Haitron Systems. A ToBeSoft official stated, “Since it is still a conditional acquisition agreement, no specific details have been decided yet. If we become the final prospective acquirer, we will disclose business plans if necessary.”