[Reporter Reading Securities Registration] E8, Private Placement Less Than a Year After Listing... "To Redeem CB"

Raised 17.6 Billion Won... 7 Billion Won Used for 1st to 3rd Round CB Redemption
Significant Gap Between CB Conversion Price and Current Stock Price
CEO Kim Jin-hyun Participates 3% in Allocated Shares... Stake Down from 25% to 19% '↓'

E8 is conducting a paid-in capital increase worth 17.6 billion KRW in less than a year since its listing. Due to the large gap between the conversion price of the 1st to 3rd series convertible bonds (CBs) issued before the KOSDAQ listing and the current stock price, it is interpreted that the company is raising funds in preparation for early redemption requests. Although a return to profitability was expected this year, the continued poor performance has also led to the interpretation that the company's funds are drying up, which is another reason for the capital increase.

According to the Financial Supervisory Service's electronic disclosure system on the 18th, E8 plans to proceed with the paid-in capital increase through a rights offering followed by a general public offering of forfeited shares. 3.2 million shares will be issued at 5,530 KRW per share. Through this, the company plans to raise 17.6 billion KRW.

E8 is a company developing a digital twin platform based on simulation technology. Digital twin is a technology that replicates the real world exactly into a virtual space. The company was listed on KOSDAQ in February this year.

The company secured 22.6 billion KRW at the time of listing. Amid this, it is raising funds again.

Among the funds secured through the capital increase, 7 billion KRW will be used to repay borrowings. This includes both principal and interest costs. The target is the 1st to 3rd series CBs. E8 issued a total of three CBs from 2022 to 2023. The total amount was 5.9 billion KRW, with a conversion price of 19,000 KRW.

For reference, these CBs do not have a conversion price adjustment due to stock price decline. The securities registration statement at the time of listing explained, "The refixing condition linked to the confirmed public offering price was deleted through an agreement with the CB subscribers."

In particular, the gap has widened as E8's stock price has continued to decline after listing. The closing price at the time of listing on February 23 was 22,600 KRW. However, the closing price the day before was 6,090 KRW. The current stock price needs to rise by 211.99% to reach the conversion price. Although the conversion price of the CB will be lowered to 17,585 KRW after the capital increase, the difference remains significant.

Therefore, the possibility of early redemption requests has also increased. The securities registration statement stated, "Since E8's current stock price is significantly lower than the conversion price, CB investors are highly likely to request early redemption."

However, repaying the CBs is expected to improve the financial structure. As of the third quarter, the debt ratio and borrowing dependency were 235.1% and 51.0%, respectively, but after repayment, they will decrease to 56.8% and 22.3%.

The remaining funds will be used for research and development (R&D), outsourcing service fees, marketing, and so on. The largest portion will be spent on outsourcing service fees, which are expected to cost 5.7 billion KRW. The company explained, "Regarding development services, outsourcing fees occur for modeling and customer-oriented UI/UX development through partner companies. If internalized, additional fixed costs in the form of labor costs would be incurred, and since the technical difficulty is not high, it is judged not to be a competitive technology."

This fund raising seems necessary from the company's perspective. As of the third quarter this year, cash and cash equivalents amount to only 1.1 billion KRW, indicating a drying up of funds. The biggest reason is poor performance.

E8, which was listed through a technology special case, had presented estimated sales figures before listing. The expected sales and operating profit for this year were 16.4 billion KRW and 3.8 billion KRW, respectively. As of the cumulative third quarter this year, sales were 1.62357 billion KRW, and operating loss was 7.8667 billion KRW.

Sales decreased compared to the same period last year, and the operating loss widened. Although the fourth quarter has not yet passed, it seems difficult to achieve this year's forecast with the current performance.

Sohe Kim, a researcher at Hanwha Securities, explained, "Due to delayed sales recognition of the Sejong Smart City project, there was a sales gap of about 6 billion KRW this year, and the absence of significant new orders caused cumulative sales to contract in the third quarter."

However, next year, delayed sales are expected to occur, and the break-even point (BEP) is expected to be achieved in the second half. Researcher Sohe Kim said, "With the sequential sales realization of sizable projects, it is possible to achieve the operating profit BEP in the second half of next year based on the operating leverage effect."

However, the fact that the largest shareholder is not actively participating in this capital increase is likely to be a dissatisfaction from the investors' perspective. Currently, the largest shareholder, CEO Jin-Hyun Kim, plans to participate in about 3% of the shares allocated in the paid-in capital increase. As a result, Kim's stake, currently 25.73%, will decrease to 19.52% after the capital increase.

For reference, the company explained in the securities registration statement, "The largest shareholder plans to sell about 97% of the subscription warrants allocated for the paid-in capital increase to raise funds to participate in about 3% of the shares."