[At a Crossroads] Dragonfly① Unstable Governance and Declining Performance... Eventually Even Capital Reduction

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Dragonfly, a KOSDAQ-listed company, is conducting a free capital reduction. This is interpreted as a desperate measure to escape capital erosion. Dragonfly has experienced unstable governance and poor performance due to frequent changes in major shareholders over the past few years.

According to the Financial Supervisory Service's electronic disclosure system on the 20th, Dragonfly decided on a 5-for-1 free capital reduction on the 13th. This reduction involves consolidating five common shares with a face value of 500 KRW each into one common share with the same face value. The capital reduction gains generated will be used to cover Dragonfly's deficit.

With the capital reduction, the capital stock will decrease from the existing 34.7 billion KRW to 6.9 billion KRW. The total number of issued shares will also drop by 80%, from 69,388,973 shares to 13,877,794 shares. This capital reduction is expected to temporarily resolve Dragonfly's capital erosion. As of the end of the first half of this year, Dragonfly's total equity stood at 18.9 billion KRW, with a capital erosion ratio reaching 45%.

A free capital reduction transfers capital stock to retained earnings (deficit) on the financial statements, so there is no outflow of company funds. Nevertheless, it is considered a management action that indicates financial instability, thus regarded as negative news in the stock market. In fact, Dragonfly's stock price hit the lower limit on the 13th.

Dragonfly was established in 1990 as Wego Global and reborn as the current company after merging with Dragonfly in 2009. Its main businesses include online and mobile games such as Special Force and Call of Chaos, as well as functional films and automotive soundproofing materials. As of the end of the first half of this year, game sales accounted for 90.29% of total revenue.

Since 2017, Dragonfly has recorded operating losses for seven consecutive years. The poor performance was largely due to its flagship game IP, Special Force, struggling against the popularity of other shooting games (FPS) like Battlegrounds. As of the end of last year, it reported sales of 16.6 billion KRW, an operating loss of 13.3 billion KRW, and a net loss of 28 billion KRW.

The deficit trend continued in the first half of this year as well. It recorded a cumulative operating loss of 4.8 billion KRW and a net loss of 8.1 billion KRW. Although sales increased by 264% year-on-year to 16.7 billion KRW, it was difficult to avoid losses. Due to long-term accumulated losses, Dragonfly's deficit reached 79.6 billion KRW as of the end of the first half of this year.

The main cause of the deficit is large-scale commission expenses. Dragonfly spent 11.5 billion KRW on commission fees in the first half alone, accounting for more than half of total operating expenses. This is a 525% increase compared to 1.8 billion KRW in the same period last year. Commission fees for game companies include app store distribution fees and royalty payments. In Dragonfly's case, it is estimated that significant costs were incurred from hosting Special Force game tournaments.

In particular, the instability of Dragonfly's parent company is also analyzed to have a negative impact on performance and stock price. BF Labs, which became Dragonfly's largest shareholder in March 2023, had its trading suspended earlier this year due to a disclaimer of opinion in its audit report. The previous major shareholders, PHC (now Pureun Sonamu) and Syswork, are also currently under trading suspension.

Meanwhile, Dragonfly will hold an extraordinary general meeting of shareholders on October 25 to approve the free capital reduction. The record date for the capital reduction is November 11, with the trading suspension period scheduled from November 8 to 28. The new shares are expected to be listed on November 29.

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