While Waiting for Q10, Tmon Focused on Promotions... Financial Supervisory Service Neglected Supervision

Quarterly Management Improvement Report to Financial Supervisory Service
Failed to Achieve Financial Ratio Improvement Targets Including Equity Capital
Performance Deterioration Attributed to Qoo10 Support Delay and Promotion Costs
Excuses Presented
Commission Raised for Tenant Stores to Improve Profits
"Financial Supervisory Service Received Quarterly Report but Neglected Supervision"

Timon and Wemakeprice (Tymep), which caused the delay in settlement of sales proceeds, were found to have merely waited for support from the Qoo10 Group that acquired them while aggressively focusing only on promotional activities after the acquisition, during the process of implementing the management improvement agreement made with the Financial Supervisory Service (FSS).

According to the "Timon and Wemakeprice Management Improvement Plan Implementation Performance Report" submitted by the FSS to the National Assembly's Political Affairs Committee on the 12th, both companies reported the implementation performance of their management improvement plans to the FSS quarterly from the second quarter of 2022 to the first quarter of this year. This reporting was a measure following the management improvement agreement made between the FSS and Tymep to improve the management guidance ratio. The first agreement, made in June 2022, aimed to comply with the management guidance ratio by the end of last year by establishing and implementing quarterly management improvement plans. When this goal was not properly achieved by December last year, a second agreement was made to extend the compliance period until the end of 2026.

Tymep reported to the FSS the management improvement plans and major financial ratio achievements of the previous quarter as presented in the agreement every quarter. During the submission of eight reports, Tymep failed to meet the promised financial ratio improvement targets. Timon set targets in June 2022 of negative 470 billion KRW in equity capital, a negative 1,480,540% equity capital ratio against outstanding balance, and a liquidity ratio of 35%, but the actual figures were negative 543.9 billion KRW, negative 2,068,530%, and 22%, respectively. At the end of last year, the targets were to exceed zero in equity capital, maintain an equity capital ratio of over 20% against outstanding balance, and a liquidity ratio above 50%, but the actual results were negative 778.8 billion KRW, negative 280,692%, and 8%, showing deterioration even after one and a half years. Even after the second agreement, equity capital recorded negative 891.3 billion KRW at the end of March this year, exceeding the agreement's standard of negative 830 billion KRW.

The same applies to Wemakeprice. It set a target of negative 117.4 billion KRW in equity capital at the end of June 2022, but the actual figure was negative 117.9 billion KRW. It failed to meet the targets every quarter thereafter and recorded negative 245.6 billion KRW in equity capital at the end of last year, failing to achieve the target of exceeding zero. In March this year, it recorded negative 296.1 billion KRW in equity capital, exceeding the target of negative 243 billion KRW.

Tymep offered excuses close to justifications for the deterioration in management performance. Timon stated in September 2022 that the reason for failing to meet the implementation plan was "the delay in transactions between Qoo10 and existing shareholders postponed the investment deposit to the fourth quarter, with plans to raise 35 billion KRW in investment during the fourth quarter." Regarding future plans, it seemed to rely solely on its parent company, Qoo10. Timon said that once Qoo10's investment funds are deposited in the fourth quarter, the equity capital situation would improve, adding, "Qooikseupreseu's U.S. Nasdaq listing is scheduled for the first half of 2023, and after the IPO, an additional investment of 50 to 100 billion KRW is expected from Qoo10 during the first half." However, the fourth quarter 2022 report projected financial stability from the first quarter of 2023, and the first quarter 2023 report projected it from the second quarter. Subsequent reports omitted Qoo10's financial support such as investment attraction from the future plans.

In Wemakeprice's case, despite recording negative 168.9 billion KRW in equity capital at the end of 2022, failing to meet the target equity capital ratio of negative 106.8 billion KRW, it reported, "Although there is a difference of about 34.6 billion KRW from the originally agreed amount, it is not significantly outside the predicted range, and the difference is still considered not large relative to Wemakeprice's equity capital or business scale."

After the acquisition process by the Qoo10 Group was completed, Tymep argued that management improvement was difficult due to large expenses incurred from various promotions and marketing activities to win against competitors. Timon reported in the third quarter implementation report last year that "aggressive promotional operations were conducted according to the company's operational policy, resulting in increased costs due to active marketing and promotions." Wemakeprice stated in the March report this year that "to respond to the ultra-low price policy of C-commerce (Ali and Temu), the company had no choice but to spend a certain scale of sales promotion costs," adding, "although transaction volume increased, it had somewhat negative effects on the accompanying financial indicators."

Additionally, Tymep reported plans to improve profits by raising sales commissions for tenant companies and server usage fees. Wemakeprice said, "The sales commission policy, which was among the lowest in the industry, will be partially raised to the industry average level starting from the third quarter of 2023, and profitability is expected to improve to some extent," adding, "server usage fees will also be partially increased from August 2023, which is expected to have a positive impact on compliance with management guidance standards."

The FSS may face criticism for effectively having taken a hands-off approach toward Tymep. The quarterly reports clearly showed that Tymep was on a worsening path rather than improving. Lee Jung-moon, a member of the National Assembly's Political Affairs Committee from the Democratic Party, said, "The FSS has been consistently criticized for arbitrary interpretation and abuse of supervisory authority," adding, "claiming there is no legal authority to sanction Tymep is merely an excuse to evade responsibility." He further stated, "The National Assembly will hold the FSS clearly accountable for exacerbating the situation and demand an effective reform of the financial supervision system."