[Governance] CTC Bio Absorbs 'Capital-Eroded Subsidiary' Through Merger... Who Bears the Loss?

[Asia Economy Reporter Jang Hyowon] CTC Bio, a KOSDAQ-listed company, will absorb and merge its capital-deficit subsidiary ‘CTC Science.’ CTC Bio previously held a 45% stake in CTC Science but recently acquired an additional 55% to facilitate the absorption merger.

In the process, CTC Bio paid the original shareholders approximately 1 billion KRW, the initial investment amount, as compensation for the 55% stake purchase. The original shareholders are known to consist of company insiders and some external parties. Despite CTC Science being in a state of complete capital erosion, these shareholders effectively recovered their full investment.

Capture of the CTC Bio homepage.

CTC Bio Likely to Post Deficit on a Separate Basis as Well

According to the Financial Supervisory Service’s electronic disclosure on the 12th, CTC Bio announced it will absorb and merge its subsidiary CTC Science. Since it is a wholly-owned subsidiary, the merger will proceed as a small-scale merger without issuing new shares.

CTC Science was established in March 2019 with a capital injection of 900 million KRW from CTC Bio, which announced it was embarking on the development of a targeted anticancer drug. At that time, CTC Bio stated that it had confirmed the effects based on basic research regarding the presence of gene mutations and mechanisms of action of the improved drug, and that CTC Science would take charge of conducting full-scale clinical trials.

However, no results have been disclosed for over two years. During this period, CTC Science recorded significant losses. As of the end of 2019, CTC Science reported sales of 3.1 billion KRW and a net loss of 2.1 billion KRW. Last year, sales were 800 million KRW with a net loss of 3.1 billion KRW. Including a 900 million KRW loss in the first half of this year, the cumulative net loss over two and a half years amounts to 6.1 billion KRW.

In this context of ongoing large-scale losses, CTC Bio is absorbing and merging CTC Science. Consequently, CTC Bio is also highly likely to turn to a deficit on a separate basis.

In fact, it was pointed out that the reason CTC Bio established CTC Science separately in 2019 was to avoid posting losses on a separate basis. KOSDAQ-listed companies are designated as management targets if they record operating losses on a separate basis for four consecutive years, and CTC Bio had already recorded losses for three consecutive years since 2016.

Now that it has avoided the management target designation criteria, it is interpreted as merging the companies again. In reality, until now, CTC Science has only been legally separated but has operated as one with CTC Bio. CTC Science conducted research and development with funds loaned by CTC Bio, and CTC Bio repurchased intangible assets related to development costs, thereby sustaining the company.

Acquisition of 1 Billion KRW Stake in Completely Capital-Deficit CTC Science

The problem lies in the shareholding structure of CTC Science. Established in 2019 with a capital of 900 million KRW, CTC Science increased its capital by an additional 900 million KRW at the end of that year. As a result, CTC Bio’s stake in CTC Science dropped to 50%. Subsequently, CTC Bio sold 5% more, holding a total of 45% of the shares until the end of the first half of this year.

The 55% stake in CTC Science was held by company insiders and external parties. At the time of establishment, the structure was designed so that the outcomes from CTC Science’s research and development could be shared between company insiders and external parties.

However, over two and a half years, CTC Science continued to incur losses and eventually depleted all its capital. As of the end of the first half of this year, CTC Science’s assets stood at 1.7 billion KRW, liabilities at 6.2 billion KRW, resulting in a state of complete capital erosion.

Nevertheless, CTC Bio recently purchased the 55% stake for about 1 billion KRW. It paid the original acquisition price for a company burdened only with debt. Ultimately, company insiders and external parties who invested in CTC Science were able to avoid losses, but CTC Bio ended up taking on a deficit company.

Regarding this, the company stated, “Although there is a possibility of recording a deficit on a separate basis due to the absorption merger of CTC Science, there is no significant issue since deficits have been recorded on a consolidated basis until now,” and added, “We do not know the reason why the company purchased the shares from the existing shareholders of CTC Science.”

Meanwhile, CTC Bio recently changed its largest shareholder to Lee Mingu, CEO of The Bridge.

This content was produced with the assistance of AI translation services.