[Public Companies at a Crossroads] ①-Upper: 'J-Way' Faces Continued Poor Performance and Internal Conflicts

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 face delisting or be designated as management-listed companies. 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 forecasting their future prospects.

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[Asia Economy Reporter Yoo Hyun-seok] J-Way is a chronically loss-making company. It has avoided being designated as a management-listed company by successfully turning a profit every 3 or 4 years. This year, it must turn a profit unconditionally to avoid being designated as a management-listed company, but recently it has been noisy due to issues beyond its performance. The current management and the largest shareholder are in conflict over management rights.

◆ 'J-Way' on the brink of management-listed company designation

J-Way was established on August 9, 2000. It is a company mainly engaged in supplying digital cinema content, system maintenance, and VOD service business. It purchases content such as movies, TV reruns, and comics and provides them to consumer markets such as motels, DVD viewing rooms, and digital small theaters, charging service fees.

Since 2011, it has been suffering from chronic losses. On a consolidated basis, it recorded continuous losses from 2011 to 2014, then in 2015, it posted sales of 13.81578 billion KRW and operating profit of 537.35 million KRW, marking a brief turnaround to profit compared to the previous year. However, it recorded losses again from 2016 to 2018, and as of the third quarter of 2019, it recorded an operating loss of 461.81 million KRW, facing four consecutive years of losses.

On an individual basis, the loss scale is even larger. In 2016, it recorded sales of 8 billion KRW and an operating loss of 750 million KRW. In 2017, sales were 6.3 billion KRW with an operating loss of 2.2 billion KRW, and in 2018, sales were 4.7 billion KRW with an operating loss of 2 billion KRW. As of the cumulative third quarter of last year, sales were 3.5 billion KRW with an operating loss of 1 billion KRW. If there was no significant performance improvement in the fourth quarter of last year, it is highly likely to be designated as a management-listed company this year.

The biggest cause of poor performance is the weak profit structure. Since the service providers are small businesses such as lodging establishments and PC rooms, stable sales are hard to come by. According to J-Way's 2018 investment prospectus, "Most lodging establishments and PC rooms are operated by small individual business owners, and the closure rate is high," adding, "As a result, J-Way experiences frequent changes in its sales channels due to unforeseen reasons, which greatly affects the instability of J-Way's performance and can seriously impact its business viability."

According to the company's 2018 consolidated financial statements, sales were 13 billion KRW. However, the cost of sales was 10.9 billion KRW, resulting in a gross profit of only 2.1 billion KRW. The cost of sales ratio reached 83.52%. Sales in 2016 and 2017 were 7.4 billion KRW and 6.9 billion KRW, with cost of sales ratios of 84.55% and 88.78%, respectively. On an individual basis, the cost of sales ratios were 97.13% in 2018, 95.55% in 2017, and 82.89% in 2016. With a cost of sales of 9,713 KRW per 10,000 KRW product (based on 2018), adding selling and administrative expenses makes it inevitable to incur losses.

When the cost of sales ratio is this poor, the sales volume should at least be large, but the main customers are small-scale businesses such as motels and DVD viewing rooms. In fact, J-Way's selling and administrative expenses have exceeded 2 to 3 billion KRW annually, resulting in operating losses every year.

Due to the unprofitable business structure, the company's financial structure has also deteriorated. The deficit, which was 17.7 billion KRW in 2016, increased to 21.2 billion KRW in 2017 and 24.5 billion KRW in 2018. As of the third quarter of last year, it reached 25.3 billion KRW.

◆ Over 13 billion KRW poured in over three years, but performance remains unchanged

As poor performance continued and money drained out, the company raised funds through paid-in capital increases. J-Way raised over 13 billion KRW through paid-in capital increases from 2017 to 2019. However, the company's situation did not improve.

First, in September 2017, J-Way conducted a third-party allotment paid-in capital increase worth 989.62 million KRW targeting Park Chang-gyu, Choi Kang-hee, Choi Yeon-ju, and others, with all funds to be used for operating expenses. In the same month, to raise funds for acquiring securities of another company, it decided on a third-party allotment paid-in capital increase worth 3.9996 billion KRW targeting Pure Life and issued convertible bonds (CB) worth 6 billion KRW. The purpose was to acquire securities of another company. However, Pure Life declined the subscription, so the paid-in capital increase and CB issuance did not proceed.

Eventually, instead of third-party allotment, J-Way decided on a general public offering paid-in capital increase worth 7.02 billion KRW in January 2018. The company stated it planned to use 1.5 billion KRW for operating expenses and 5.5 billion KRW for acquiring securities of another company. However, due to a decrease in the issue price, the final raised amount was 6.3 billion KRW as of May 2018. The detailed usage was also changed. The company stated it would use 3.5 billion KRW to invest in new shares of Seongbo Industry and 2.6 billion KRW for operating expenses such as purchasing copyrights and software terminals.

At that time, J-Way acquired Seongbo Industry on February 28, 2018, for a total of 2.87518 billion KRW, holding 88.31% of the shares. However, due to delays in the paid-in capital increase, J-Way issued the second convertible bonds worth 2 billion KRW targeting Gemini Investment (now Leaders Technology Investment) to complete the acquisition of Seongbo Industry. The funds raised from the paid-in capital increase were used to acquire new shares of Seongbo Industry. As a result, the shareholding ratio in Seongbo Industry increased from 88.31% to 95.98%.

Seongbo Industry, acquired by J-Way, is a company engaged in the automobile parts business. However, the acquired company's performance has deteriorated. Before J-Way's acquisition, in 2017, it recorded sales of 9.879 billion KRW and net profit of 768 million KRW, and in 2016, sales of 12.883 billion KRW and net profit of 847 million KRW. However, in 2018, sales were 9.27724 billion KRW with a net loss of 138.4 million KRW, turning to a loss.

After acquiring Seongbo Industry, J-Way's paid-in capital increase spree continued. In December 2018, it conducted a general public offering paid-in capital increase worth 988.2 million KRW to raise operating funds. However, due to a stock price decline, the final amount was reduced to 927.45 million KRW. In the same month, it decided on a third-party allotment paid-in capital increase worth 3.4979 billion KRW, but the allotment target changed 2 to 3 times, delaying the schedule. Eventually, in February last year, the final allottee was changed to Gemini Investment (now Leaders Technology Investment).

In 2019, J-Way's paid-in capital increase announcements, which had been quiet, resumed in the fourth quarter. In October last year, it decided on a third-party allotment paid-in capital increase worth 2.49935 billion KRW targeting Steve Holdings. Like previous capital increases, it did not fully raise the initially announced amount. The allottee, Steve Holdings, paid 80.31% of the planned amount, 2.072 billion KRW, reducing the issuance amount. The company stated it planned to invest 1.072 billion KRW in acquiring securities of another company and 1 billion KRW in operating funds. Additionally, in December last year, it decided on a paid-in capital increase worth 6.985 billion KRW through a shareholder preferential public offering.

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