[At a Crossroads for Listed Companies]② Soribada, Both Core Business and Investments Sluggish... Financial Burden Only 'Increasing'

[Asia Economy Reporter Jang Hyowon] Soribada, a music streaming service provider, has fallen into the pit of deficits. Despite incurring losses every year, it ventured into acquiring other companies under the pretext of entering new businesses, but the results have been disappointing. Consequently, Soribada's net borrowings surged sharply, and its stock price declined.

◆Net Borrowings Increased 17-Fold Over 3 Years

According to the Financial Supervisory Service's electronic disclosure on the 14th, Soribada recorded an operating loss of 3 billion KRW on a separate basis in 2017, followed by a loss of 4.3 billion KRW in 2018, and 4.8 billion KRW last year, expanding its deficit over three years.

Soribada is a company that provides music streaming and download services as well as multimedia content. As of last year, content sales accounted for 80.3% of total revenue. The remainder comes from distribution business (9.7%) and management business (1.7%), among others.

The main cause of the deficit is the decline in content sales. Soribada's content sales have been on a downward trend from 26.9 billion KRW in 2016 to 19 billion KRW last year. Its market share in the music site sector was only 4.5% last year.

In particular, the contract with 'Samsung Music,' a major sales channel, expired, so the content sales slump is expected to continue. Soribada announced that the contract was terminated as of November last year due to the termination of the Samsung Music service. Related sales amounted to 11.4 billion KRW in 2018, accounting for 24.4% of total sales.

Despite continuous losses, operating cash flow remained negative, but Soribada consistently raised funds through debt, causing borrowings to balloon like a snowball. Soribada's net borrowings last year were 20.1 billion KRW, a 1744.6% increase compared to 1.1 billion KRW at the end of 2016.

Most of the debt increase came from convertible bonds (CB). Over the past three years, Soribada issued a total of five CBs, raising 24.5 billion KRW. As of the end of last year, 18 billion KRW worth of CBs remained, and about 13 billion KRW were converted into shares in February, releasing approximately 18 million shares into the market. This represents 19.4% of the total issued shares.

◆Subsidiaries Full of Deficits... Stock Price Also Declines

Using the funds raised this way, Soribada pursued acquisitions of other companies, but the results were not favorable. As of the end of last year, Soribada had 13 subsidiaries, four more than at the end of 2016. During the same period, affiliated companies invested in increased from five to ten.

None of the subsidiaries made a profit last year. Their total net loss amounted to 5.5 billion KRW. The affiliated companies accounted for under the equity method recorded a combined net profit of about 40 million KRW. Since companies with a stake between 30% and 50% are classified as affiliates, their actual impact on Soribada's profits is minimal.

Accordingly, Soribada conducted impairment tests on subsidiaries such as Will Investment, Will Entertainment, and German Automobile, which continuously incurred losses last year, recognizing impairment losses of 7.3 billion KRW. This means the book value of the subsidiaries was impaired due to ongoing deficits.

In particular, German Automobile GmbH (hereinafter German Automobile), an importer and seller of luxury foreign cars, was the first M&A pursued by Soribada Chairman Oh Jaemyung after acquiring Soribada in 2017, but it has been posting losses of several hundred million KRW annually.

Chairman Oh became the largest shareholder by investing 6 billion KRW in a third-party allotment capital increase of Soribada through a corporation called 'J.Mason,' where he is the CEO, in December 2016. J.Mason was a corporation with a capital of 10 million KRW at the time, and it borrowed the entire 6 billion KRW from Chairman Oh to acquire Soribada shares.

Subsequently, in January 2017, Soribada increased capital by 6 billion KRW in its subsidiary Will Investment, which used the funds to acquire an 80% stake in German Automobile. At the time of acquisition, German Automobile was a company generating 300 million KRW in profit, but it has not posted a single profit until last year.

Meanwhile, as both its core business and subsidiary investments have repeatedly shown poor performance, Soribada's stock price has also followed a downward trajectory. As of the previous day, Soribada's closing price was 674 KRW, down 56% over three years. During the same period, the KOSDAQ index fell by 5.7%.