Seo Beomseok, CEO of Lunit: "Paid-In Capital Increase Is a Choice for Fundamental Recovery"

Medical artificial intelligence (AI) company Lunit has announced plans to resolve financial uncertainty through a paid-in capital increase, as it anticipates that the risk of convertible bond (CB) put option redemptions may persist for the next three years. The company aims to achieve a turnaround in EBITDA (earnings before interest, taxes, depreciation, and amortization) this year by simultaneously improving cost efficiency and expanding revenue, leveraging growth in the medical AI market.

Seo Beomseok, CEO of Lunit, stated at a press conference held on February 2 at Lunit headquarters in Gangnam-gu, Seoul, "We have been considering a two-track approach to fundraising: small-scale capital raising through convertible preferred shares (CPS) and a paid-in capital increase allocated to existing shareholders. As the timing for exercising CB put options approaches, we have felt the risk increasing." The 'put option risk' arising from convertible bonds issued by the company refers to a financial crisis that occurs when borrowed funds must be repaid earlier than expected due to the exercise of early redemption rights.

Seo Beomseok, CEO of Lunit, is speaking at a press conference held on the 2nd at Lunit headquarters in Gangnam-gu, Seoul. Photo by Lee Sungmin

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CEO Seo added, "The risk of put option redemptions will first arise in May, but it could continue for the next three years. Even if the company grows, the lack of a fundamental solution to address the put option risk has been a burden. I believe that only by resolving this through a large-scale paid-in capital increase allocated to shareholders can the stock price truly reflect the company's fundamentals."

On January 30, Lunit's board of directors approved a paid-in capital increase of 250 billion won. The company will issue 7,906,816 common shares at 31,650 won per share, allocating 0.27 shares per existing share to current shareholders, with any forfeited shares to be offered through a public offering. Alongside the paid-in capital increase, a 1-for-1 bonus issue will also be conducted.

This paid-in capital increase is a response to the approaching point at which the put option on 171.5 billion won worth of CBs, issued during the 2024 acquisition of New Zealand-based breast cancer AI platform company Volpara (now Lunit International), can be exercised.

Park Hyunsung, Chief Financial Officer (CFO) and Executive Director of Lunit, said, "The amount that could be subject to redemption through the put option is about 197 billion won. After meeting with 32 bondholders, it did not appear that there was a strong intention to exercise the put option, but we determined that it was prudent to proactively address the financial risk." He added, "This paid-in capital increase is expected to largely mitigate the risk of put option exercises."

While acknowledging concerns that the amount raised could be less than expected given the current share price, CFO Park explained, "Even if we cannot eliminate the put option risk entirely, it is still meaningful to significantly reduce it." Regarding management's participation, he noted, "A large loan taken out to participate in the 2023 shareholder-allocated capital increase has not yet been repaid, making additional borrowing for participation difficult."

Addressing concerns about shareholder value dilution due to the capital increase, the company stated, "Short-term share price volatility is inevitable, but improving the financial structure is the key." Lunit expects that this capital increase will not only address the CB put option risk but also alleviate concerns about being designated as an issue for management due to pre-tax losses.

The company has set a goal of turning EBITDA positive this year, using the elimination of financial uncertainty as a catalyst. CEO Seo said, "We have moved up our target for achieving positive EBITDA by one year, from 2027 to this year. The market's view of AI companies is changing rapidly, and we expect to see visible changes starting from the first quarter of this year."

By business segment, the cancer screening division is expected to grow revenue by 20-30% year-on-year in 2024. As of the end of last year, the number of new integrated breast cancer screening and full-cycle AI solution contracts with Volpara surpassed 380. The oncology division, which posted sales of about 10 billion won last year, is expected to grow by more than two to three times this year.

Regarding future technology investment, the company is emphasizing a strategy centered on national research and development (R&D) projects. CEO Seo explained, "Projects that would cost several tens of billions of won if pursued independently are being carried out through national projects. We intend to continue investing in innovation for the future, but in a way that increases cost efficiency."

Meanwhile, since last year, Lunit has been undergoing restructuring and cost optimization, reducing its total workforce by about 15%. Through these efforts, the company plans to cut operating expenses by 20% year-on-year in 2024. CEO Seo said, "We will achieve both revenue growth and cost reduction targets, and by the end of the year, we will turn EBITDA positive."

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