[Public Companies at a Crossroads] Action Square Welcomes New Owner, Only Performance Improvement Remains

Additional Reason for Designation as Management Item Instead of Substantial Review of Listing Eligibility Due to Spec Merger
Plan to Reverse Performance This Year with Overseas Release of Samguk Blade and More

[Asia Economy Reporter Yoo Hyun-seok] Action Square stands at a crossroads regarding its continued listing on the KOSDAQ. The company has incurred losses for four consecutive years, leading to additional reasons for being designated as a management item. Having secured funds by bringing in YJM Games as the new largest shareholder, this year represents Action Square's last chance.

◆A dazzling listing with the mobile game 'Blade'... but annual losses persist

Action Square is a mobile game developer established in 2012. Using the Unreal Engine 3, it released the mobile action role-playing game (RPG) 'Blade for Kakao' in 2014. After its launch, Blade gained phenomenal popularity, ranking 4th in global Google Play Store revenue, surpassing 130 billion KRW in cumulative revenue as a single game, and maintaining the top spot across all markets for over 70 consecutive days. It also received the Presidential Award at the Korea Game Awards.

Riding on the success of Blade, Action Square entered the KOSDAQ market in 2015 through a merger with KB SPAC No.4, a special purpose acquisition company. However, losses continued from the first year of listing. Operating revenue, which reached 16.1 billion KRW in 2014, dropped to 6.6 billion KRW in 2015, and the company recorded an operating loss of 2.4 billion KRW, turning to the red.

Losses persisted in 2016 due to delays in releasing new games such as Samguk Blade and Blade 2. Additionally, revenue from the existing game Blade declined. At that time, sales were 3.9 billion KRW, nearly half of the previous year, while development costs alone amounted to 12.7 billion KRW. This resulted in a massive loss of 11.4 billion KRW.

In January 2017, Action Square released its new title 'Samguk Blade.' The game recorded over 500,000 pre-registrations before launch. Especially in the early stages, it performed well, ranking within the top 10 in Google Play Store revenue. First-quarter results also showed a 325.0% increase compared to Q1 2016, reaching 4.1 billion KRW. Although it posted an operating loss of 1.1 billion KRW, the reduction in deficit indicated positive signs. In September 2017, the game was also launched in Southeast Asia. However, further performance improvements failed. According to separate financial statements that year, Action Square recorded sales of 9.4 billion KRW and an operating loss of 10.7 billion KRW. While sales increased by 137.54% year-on-year, operating losses remained at a similar level due to a rapid decline in Samguk Blade's ranking and sales. Additionally, development costs of 17.4 billion KRW also impacted results.

2018 marked a significant turning point for Action Square. Kakao Games invested a total of 20 billion KRW in the company, and Kim Jae-young, the founder and CEO, resigned. Moreover, the sequel to 'Blade,' which made Action Square what it is, 'Blade 2,' was released. However, Blade 2 also failed to revive Action Square. Released on June 28, 2018, Blade 2 briefly reached 7th place in Google Play's revenue rankings but could not maintain its position for long. The game's failure to succeed led to poor performance, with sales of 7.4 billion KRW and an operating loss of 10.6 billion KRW that year.

◆With new ownership, Action Square now has only 'games' left

Due to continued poor performance from repeated new game failures, Action Square was designated as a management item in 2019. This was because it incurred pre-tax continuing business losses exceeding 50% of equity in two of the last three fiscal years. The pre-tax continuing business loss rates were 92.7% in 2018 and 77.8% in 2017, respectively.

In addition, Kakao Games exited Action Square, which had been designated as a management item, in 2019. In February last year, Kakao Games sold 2,272,380 shares of Action Square on the market, reducing its stake from 10.43% to 1.79%. The total sale amount was 4.2 billion KRW. This meant a loss of approximately 12.4 billion KRW about a year after investing 20 billion KRW.

With no significant new releases until the first half of the year, Action Square simultaneously launched the mobile action shooting game 'Gigantic X' in July last year across 150 countries globally, excluding Korea and China. However, due to cost and other reasons, the service was suspended, continuing the string of setbacks. As a result, the company recorded sales of 7.2 billion KRW and an operating loss of 2.3 billion KRW based on individual financial statements last year.

Shaken by consecutive setbacks, Action Square breathed new life at the end of last year by successfully raising funds. In November, Action Square decided on a third-party paid-in capital increase worth 17 billion KRW targeting YJM Games, Jooyeon Tech, Inet Life, and Lyn Cornerstone. Due to this capital increase, the largest shareholder changed from the existing Prajna Global Holdings to YJM Games. Prajna Global Holdings is the personal company of Kwon Jun-mo, chairman of 4:33 Creative Lab. YJM Games became the largest shareholder with a 26.41% stake, while Prajna Global Holdings was diluted to 14.74%, becoming the second-largest shareholder.

At the time, YJM Games stated that the investment was made to expand synergies in the game business. Thanks to this investment, Action Square escaped concerns over pre-tax continuing business losses exceeding 50% of equity. The problem remains performance. According to KOSDAQ listing standards, companies that record losses for four consecutive years are designated as management items. If losses continue for five consecutive years, they are classified as subjects for 'substantial review of listing eligibility,' increasing the likelihood of delisting. In Action Square's case, the fiscal year of the SPAC merger is excluded from performance calculations. In other words, the company has until this year.

Action Square is currently preparing for the overseas release of Samguk Blade, targeting Japan and China as key markets. Regarding Gigantic X, the company explained that the service can be resumed at any time and that preparations for new titles are underway. A YJM Games official said, "Samguk Blade is scheduled to be released in Japan within the first half of this year, and China is also expected to launch this year depending on circumstances such as license issuance. Internally, plans for new titles are also being developed."