[At a Crossroads for Listed Companies] ④ Four Consecutive Years of Losses Feared... SomeAge Says "We Need a Breakthrough"

Every year, March to April becomes a brutal period in the KOSDAQ market. This is the time when business reports and audit reports are released, and depending on the contents of these reports, listed companies may be delisted or designated as management stocks. Especially, companies that have recorded losses for several consecutive years struggle desperately to survive in the stock market by conducting large-scale fundraising or restructuring. Asia Economy aims to help investors by examining the present and past of companies with continuous losses and predicting future prospects.

[Asia Economy Reporter Yoo Hyun-seok] Game development company SomeAge has recorded cumulative losses up to the third quarter of last year, raising concerns about operating losses for the fourth consecutive year. In the case of SomeAge, which was listed on KOSDAQ through a SPAC merger, even if it recorded losses last year, it is not designated as a management stock. However, if losses continue through this year, the possibility of being designated as a management stock next year increases significantly. This is why it is essential to improve performance through upcoming new releases.

◆Continuous Losses Due to Consecutive New Game Failures

SomeAge is a game development company established in 2013. Its representative game is 'Hero for Kakao,' released in November 2014. This game surpassed 60 billion KRW in cumulative sales and 5 million downloads within a year of its release. Especially, thanks to the success of Hero, SomeAge entered the KOSDAQ market in 2016 through a merger with KB No.6 SPAC. Operating revenue based on consolidated financial statements was 2.56804 billion KRW in 2014 but increased to 9.5447 billion KRW in 2015, and operating profit rose from 841.94 million KRW to 5.14957 billion KRW.

However, after listing, the company did not release any significant new games, and its performance deteriorated. In the first year of listing, 2016, based on consolidated financial statements, operating revenue was 6.05226 billion KRW, and operating loss was 1.54337 billion KRW. SomeAge continued to incur losses in 2017 as well. This was due to ongoing investments in new game development and the aging of existing games. Operating revenue in 2017 was 3.5 billion KRW, a 41.26% decrease from the previous year, and operating loss widened to 8.9 billion KRW. The operating revenue from the main game Hero was 2.966 billion KRW, down 50.99% from the previous year, but the company invested 10.011 billion KRW solely in research and development (R&D). R&D expenses increased by 58.65% compared to 6.31 billion KRW the previous year.

After a quiet period in 2016 and 2017, SomeAge released new games consecutively in 2018 but suffered a massive failure in popularity, resulting in large-scale losses. In March 2018, SomeAge launched the mobile action role-playing game (RPG) 'DC Unchained' in 13 Asian countries, including South Korea. DC Unchained was co-developed by SomeAge and Warner Bros. Interactive Entertainment (WBIE). The game features DC Comics heroes such as Superman, Batman, Wonder Woman, as well as villains like Joker, Harley Quinn, and Lex Luthor. However, it failed to gain popularity in Asia. As of the 4th, DC Unchained did not even rank within the top 100 on the domestic Google Play store.

At that time, the securities industry had high expectations for the game's success because it was based on the globally recognized intellectual property (IP) of DC characters. A report from Yuanta Securities dated January 15, 2018, described it as "SomeAge's most anticipated title, a collectible RPG based on the globally famous IP 'DC Comics,'" and explained, "The game is based on the 'DC Comics' IP, familiar to users through comics and movies featuring 'Superman,' 'Batman,' 'Wonder Woman,' and 'Harley Quinn,' which is expected to attract user interest at launch."

Additionally, around the time of DC Unchained's release, SomeAge launched the sci-fi strategy simulation game 'Interplanet' in 155 countries and released the mobile AR game 'Ghostbusters World' in October of the same year, but both failed to gain popularity. Based on consolidated financial statements for 2018, SomeAge's operating revenue was 3.555 billion KRW, similar to the previous year. The sales of new games were particularly poor: DC Unchained generated 656 million KRW, Interplanet 252 million KRW, and Ghostbusters World 197 million KRW. Publishing games accounted for 1.317 billion KRW, and 'Hero for Kakao,' which had been released for over five years, recorded 1.133 billion KRW.

Moreover, advertising expenses related to game releases increased significantly, and R&D costs also grew, contributing to the expansion of losses. Based on consolidated financial statements for 2018, SomeAge's operating expenses totaled 30.038 billion KRW, a 140.48% increase from 2017. Marketing expenses alone surged by 983.99% to 8.737 billion KRW from 860 million KRW in 2017, and 12.343 billion KRW was invested in game development and other R&D costs. The failure of new games combined with large expenditures worsened SomeAge's financial health. The debt ratio, which was 24.13% in 2014, stabilized to 3.67% by 2017 but soared to 352.27% in 2018. Additionally, accumulated deficits reached 37 billion KRW.

◆Capital Increase and CB Issuance... Funds Secured but

In 2019, SomeAge raised a total of 33 billion KRW through two capital increases and one issuance of convertible bonds (CB). First, in April last year, SomeAge decided on a 20 billion KRW capital increase through a rights offering followed by a general public offering of unsubscribed shares. However, due to continuous stock price declines, the final amount raised through the capital increase was 14.47744 billion KRW. SomeAge announced that the funds secured through the capital increase would be used for operating expenses to stabilize the publishing division, game development costs to expand the game portfolio, contract payments for publishing games to secure new revenue bases, and funds for launching and marketing new games. Specifically, 4.09 billion KRW was planned for publishing division operations, 9.417 billion KRW for R&D, and 1.051 billion KRW for external game sourcing. The usage period was from the fourth quarter of last year to the fourth quarter of this year.

The fundraising did not end there. In September last year, SomeAge decided to issue 5.5 billion KRW worth of anonymous, interest-free, unsecured, and unguaranteed private placement CBs. This was the third issuance. The company stated that 1.5 billion KRW would be used for operating funds and 4 billion KRW for bond redemption. Orion Asset Management and Value System Asset Management invested in the CBs through NH Investment & Securities, Shinhan Investment Corp., and Korea Investment & Securities. Mirae Asset Daewoo, Hanyang Securities, and Mirae Equity-Value System New Technology Business Investment Association also contributed funds. The nominal and maturity interest rates are both 0%, and the conversion request period is from September 10, 2020, to September 10, 2022. The conversion price was adjusted once in December last year, changing from 644 KRW per share to 565 KRW, and the number of convertible shares increased from 8,540,370 to 9,734,507. Additionally, in December last year, SomeAge decided on a capital increase of approximately 13 billion KRW targeting its parent company, Nesy333Bun. Of this, 7.5 billion KRW will be used for operating funds, and the remaining 5.5 billion KRW for debt repayment.

The large-scale fundraising conducted last year was a necessary choice for SomeAge. This was because concerns about designation as a management stock increased after recording pre-tax business losses exceeding 50% of equity in 2018. According to KOSDAQ listing regulations, if a company incurs continuous pre-tax business losses exceeding 50% of equity in two out of the last three fiscal years, it is designated as a management stock.

By raising 33 billion KRW, SomeAge was able to breathe a sigh of relief. As of the third quarter of last year, based on consolidated financial statements, SomeAge's total equity was 26.9 billion KRW, total liabilities were 6.8 billion KRW, and the debt ratio was 25.46%. Also, pre-tax continuing business losses were 9.7 billion KRW, which was 36.17% of equity, below the 50% threshold. The pre-tax net loss as of the third quarter last year was 4.1 billion KRW.

Despite the large-scale fundraising, SomeAge's market capitalization and stock price plummeted. Market capitalization, which was 100.6 billion KRW on January 18 last year, dropped to around 81.9 billion KRW as of 11:35 AM on the 20th, and the stock price fell nearly by half from 1,320 KRW to 656 KRW during the same period.

◆New Game Success Essential to Avoid Management Stock Designation

Although funds have been raised, the success of new games has become equally urgent. Based on individual financial statements, SomeAge recorded a cumulative operating loss of 3.56956 billion KRW up to the third quarter of last year. Operating losses were 834.16 million KRW in 2016, 6.93821 billion KRW in 2017, and 20.58731 billion KRW in 2018. If losses continue this year, it will mark four consecutive years of operating losses.

However, even if cumulative losses continue through the fourth quarter of last year, SomeAge will not immediately be designated as a management stock this year. Generally, companies directly listed on KOSDAQ are designated as management stocks if they incur losses for four consecutive years. However, in the case of SPAC mergers, if operating losses continue for four consecutive years excluding the merger listing year, the company may be designated as a management stock. SomeAge's investment prospectus released last year states, "In the case of our company, which was listed on the KOSDAQ market through a merger with a special purpose acquisition company in 2016, if operating losses continue for four consecutive years excluding the merger listing year, there is a risk of being designated as a management stock according to the 'KOSDAQ Market Listing Regulations.'" In other words, the possibility of management stock designation this year is low. However, if the company fails to turn a profit this year, the likelihood of designation next year increases significantly.

Therefore, it is crucial for SomeAge to improve its performance this year, making the success of its new games under development vital. Currently, SomeAge is developing 'DekaronM,' a mobile version of the PC massively multiplayer online role-playing game (MMORPG) 'Dekaron,' and 'Royal Crow,' a PC-based first-person shooter (FPS) game. Among these, Royal Crow is considered a highly anticipated title. The company of the same name, established by SomeAge for Royal Crow's development, is led by former SomeAge CEO Baek Seung-hoon, who is known to be leading the development. Baek, a key figure in game development at GameHi (now Nexon GT), was instrumental in creating the online games 'Sudden Attack' and 'Dekaron.'