[Reporter Reading Securities Report] Maxst Repays Debt with Rights Offering Amid CB Early Redemption Concerns

KRW 25 Billion Shareholder-Allocated Capital Increase... "KRW 16 Billion Debt Repayment"
"Early Redemption of 1st Series CB Issued in 2021"
"CEO Park Jaewan's Stake Decreases from 18.91% to 13.56% After Capital Increase"

Maxst is conducting a large-scale paid-in capital increase worth 25 billion KRW. This amount is nearly half of its market capitalization of 52.8 billion KRW. Through this capital increase, Maxst plans to repay the first tranche of convertible bonds (CB) that are expected to be called for early redemption.

According to the financial investment industry on the 27th, Maxst is proceeding with a paid-in capital increase of 25 billion KRW through a rights offering followed by a public offering of forfeited shares to repay debt and raise operating funds. The planned issue price per new share is 2,340 KRW, and 10.7 million new shares will be issued.

Maxst was established in 2010. It independently developed augmented reality (AR) core technology and was the first in Korea to commercialize the AR development platform 'MAXSTAR SDK (Software Development Kit)'. Its main businesses include AR development platforms, industrial AR solutions, XR metaverse platforms, and book content platforms.

The primary reason Maxst is conducting this capital increase is to repay the first tranche of CBs. Of the funds raised, 16 billion KRW will be used to repay the CBs, and the remaining 8.5 billion KRW will be used for operating expenses.

In November 2022, Maxst issued CBs worth 21 billion KRW. The nominal and maturity interest rates are 0%. The conversion request period is from November 10, 2023, to November 10, 2027.

Although there is still time until maturity, Maxst’s reason for early repayment is interpreted as due to the significant difference between the conversion price and the current stock price. The minimum conversion price for the first tranche CB is 7,731 KRW, but the closing price on the 26th of this month was 2,700 KRW.

The biggest reason for Maxst’s stock price decline is its performance. On a consolidated basis, it recorded sales (operating revenue) of 18.886 billion KRW in the first half of this year, a 2,378.5% increase compared to the same period last year. This was due to the acquisition of IL4U and NeedsGames in the first quarter of this year, which were recognized on a consolidated basis. However, on a separate basis, sales were only 226 million KRW, down 66.8% compared to the same period last year.

Maxst was concerned about early redemption. The company explained in its securities registration statement, "The stock price on the day before the submission of the securities registration statement was 3,540 KRW, which is lower than the adjusted conversion price of the first tranche CB," and added, "There is a high possibility that investors of the first tranche CB will demand early redemption."

In particular, this capital increase is also interpreted as necessary to improve the financial structure. Maxst entered the KOSDAQ through a technology special listing. However, continuous losses have worsened its financial structure. The debt ratio, which was 19.5% in 2021, rose to 186.2% in the first half of this year. During the same period, reliance on borrowings increased from 9.6% to 55.9%. If this capital increase is successfully completed, the debt ratio and borrowing dependence are expected to improve to 32.5% and 16.0%, respectively.

At the same time, the possibility of being designated as a management item was increasing. Maxst’s pre-tax loss last year was 51.8% of its equity capital, exceeding 50%. If the loss rate exceeds 50%, the company is designated as a management item, but Maxst received a grace period from 2021 to 2023 due to its technology special listing. As of the first half of this year, when the grace period ended, the loss rate was 45.4%. This is why capital raising to expand equity capital was likely necessary.

Even if the financial structure improves through the capital increase, Maxst still faces many challenges. The biggest issue is increasing sales. Since 2021, Maxst has not exceeded 3 billion KRW in sales on a separate basis. This falls under the sales criteria (less than 3 billion KRW on a separate basis) for designation as a management item related to business performance and financial condition. Although this designation is deferred until 2025 due to the technology special listing, if sales do not exceed 3 billion KRW in 2026, it may be designated as a management item.

The company plans to launch three new services in the second half of the year to drive sales growth. Among the new services, 'Teullona' and 'Hati' are business-to-consumer (B2C) models rather than the existing business-to-business (B2B) model. The company expects this to enable diversification of sales.

Dilution of the largest shareholder’s stake is also a concern. Currently, Maxst’s largest shareholder is CEO Park Jae-wan, holding 18.91% of shares. CEO Park plans to participate in about 20% of the allocated shares in this capital increase. After the capital increase, his stake is expected to decrease to 13.56%.