Lost Ark developer Smilegate faces $75 mn suit over CB issue

Smilegate RPG, a South Korean developer of a massively multiplayer online role-playing game (MMORPG) Lost Ark, faced a 100 billion won ($74.8 million) lawsuit from a local asset manager over a convertible bond contract.

Seoul-based Rhinos Asset Management Co. last month filed the damages suit to a court in the South Korean capital, claiming the game developer’s parent Smilegate Holdings Inc. did not meet obligations of the CB contract including its listing, according to legal sector sources on Friday.

A convertible bond is a fixed-income debt security that pays interest but can be converted into common stock or equity shares.

Rhinos invested a total of 26 billion won in CBs issued by Smilegate RPG in 2017 and 2018 before the company launched Lost Ark.

The MMORPG’s success ramped up the value of the bonds to 536 billion won once converted into shares as the developer’s corporate value surged to over 5 trillion won from the 200 billion won estimated around the time of the bond sale.

When the first CBs matured in November 2023, Smilegate RPG said it would redeem the bonds at an annual interest rate of 3.5%, however, prompting Rhinos to take legal action.

“The CB contract was settled by redemption at maturity as requirements for a listing in the contract were not met,” said a Smilegate RPG official. “It is not appropriate to list, given the stock market and economic conditions.”

The private company added a condition to seek an initial public offering (IPO) when the net profit tops 12 billion won.

MISSES LISTING REQUIREMENT?

Rhinos asked Smilegate RPG to go public in June 2022 as Lost Ark became a huge success. The game developer was audited by Grant Thornton Daejoo, the South Korean member firm of Grand Thornton International Ltd., the world’s seventh-largest accounting network.

Smilegate RPG’s operating profit rose 26.2% to 364.1 billion won in 2022 as sales jumped 50.5% to 737 billion, according to the audit report. The company logged a net loss of 142.7 billion won, turning from an unaudited net profit of 137.8 billion won in 2021.

The loss came as CBs with conversion price options were recognized as derivative losses of 536 billion won as unlisted companies in the country changed their accounting standards to the Korean version of International Financial Reporting Standards (K-IFRS) from the generally accepted accounting principles (GAAP).

Rhinos said the derivative valuation losses were not a reason for not seeking an initial public offering as they are only accounting losses. The valuation losses are eliminated once the CBs are converted into common stocks.

“Investments in CB are basically made on the premise of a listing,” said an official of the asset manager. “Its top shareholder did not fulfill their obligations such as a listing in the contract due to accounting losses.”

Smilegate claimed that it complied with the requirements for a listing, however.

ZERO SHARE

Smilegate’s first convertible bonds worth 14 billion won expired in November last year, while the second ones worth 4.2 billion won are scheduled to mature in April. Rhinos could not convert any of the bonds into stocks due to a clause to prevent the conversion before a listing.

The game developer declined to provide a timetable for a potential listing.

“It is a matter for the company to decide based on stock market conditions, apart from the lawsuit,” said another company official when asked about an IPO schedule.

Smilegate is unlikely to seek a listing as the company secured enough money thanks to the success of Lost Ark, industry sources said. Smilegate Holdings founder and Chief Visionary Officer (CVO) Kwon Hyuk-bin, a self-made billionaire, is extremely reluctant to raise funds from external investors.

The local venture capital industry is closely watching the legal battle as CBs and redeemable convertible preference shares are the sector’s favorite tools for investments in unlisted companies.

“Once the CB investor wins the lawsuit they are expected to put pressure on the founder, who is unwilling to dilute his stake, to go public,” said the head of a venture capital firm.

Write to Lan Heo at why@hankyung.com
 
Jongwoo Cheon edited this article.