WEBTOON Entertainment Inc

Consolidated Statements of Operations and Comprehensive Loss

The following table sets forth our consolidated statement of operations for the three and six months ended June 30, 2024, and 2023, respectively. We have derived this data from our unaudited condensed consolidated statements of operations and comprehensive loss. The information for each of the periods presented has been prepared on the same basis as our audited annual consolidated financial statements and, in the opinion of management, reflects all adjustments of a normal, recurring nature that are necessary for the fair statement of the results of operations for the period. This data should be read in conjunction with our audited consolidated financial statements in the IPO Prospectus and unaudited condensed consolidated financial statements included in this Report. Historical results are not necessarily indicative of the results that may be expected in the future.

Comparison of the Three Months Ended June 30, 2024 and June 30, 2023

Revenue

Revenue increased by $0.3 million, or 0.1% for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023, as growth across the business was offset by the Company's significant exposure to weaker foreign currencies including the Korean won ("KRW") and Japanese yen ("JPY"), the latter of which reached historically low levels against the U.S. dollar. The increase in Paid Content revenue was driven by particularly strong growth in Japan. The decrease in IP Adaptations revenue was primarily attributable to the deconsolidation of LOCUS and its subsidiaries, which contributed $2.8 million of revenue during the three months ended June 30, 2023. See Note 14. Disposition in the accompanying notes to our unaudited condensed consolidated financial statements included in this Report for more information.

This translates to a double digit revenue growth of 11.1%, when removing the effects of deconsolidation, transfer of SERIES ON operations, and foreign currency rate fluctuations, with growth drivers across all revenue streams globally. See “—Non-GAAP Financial Measures – Use of Constant Currency.”

Our cost of revenue decreased by $1.6 million, or 0.7%, for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. The decrease was primarily due to a $3.5 million increase in cost of revenue related to paid content and a $5.3 million decrease in advertising costs, which was offset by an increase in IP costs of $0.2 million.

Marketing expenses decreased by $9.7 million, or 29.2%, for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. This decrease was attributable to improvement in overall marketing efficiency.

General and administrative expenses increased by $85.2 million, or 159.4%, for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. The increase in general and administrative expenses was largely driven by stock compensation expense of approximately $49.1 million, which was accelerated with the successful IPO and a one-time bonus of $30.0 million granted to the CEO for a successful IPO, and increased labor costs as the Company scaled up to become a publicly traded company.

Interest income increased by $1.0 million, or 100.7%, for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023.

Interest expense was similar for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023.

Income (Loss) on Equity Method Investment, Net

Income on equity method investment, net, decreased by $1.9 million, or 94.0%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. See Note 15. Equity Method Investmentsin the accompanying notes to our unaudited condensed consolidated financial statements included in this Report for more information on the Company's equity method investments.

Other income (loss), net, increased by $8.4 million, or 137.5%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. This difference was primarily attributable to the loss from disposal of subsidiaries on June 30, 2023, which resulted from deconsolidation of LOCUS and its subsidiaries. See Note 14. Disposition in the accompanying notes to our unaudited condensed consolidated financial statements included in this Report for more information on the disposition of LOCUS.

Income tax expense decreased by $9.3 million, or 83.0%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. The decrease is primarily attributable to a discrete tax expense of $7.3 million due to audit payments made by the Company's Korean subsidiary with respect to a tax audit assessment made by the Korean tax authority in 2023.

Comparison of the Six Months Ended June 30, 2024 and June 30, 2023

Revenue

Revenue increased by $16.8 million, or 2.7%, for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. The main drivers were increases in Paid Content of $13.7 million, or 2.7%, primarily related to particularly strong growth in Japan with LINE MANGA, which was partially offset by the impact of the continued strategic diversification of advertising partners and inventory away from the parent company, NAVER.

Advertising revenue increased by $5.0 million, or 6.9%, for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023, which was largely driven by growth in Japan, followed by ROW, which were largely offset by declines in Korea.

IP Adaptations revenue decreased by $1.9 million, or 4.3%, for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023, primarily attributable to the disposition of LOCUS and its subsidiaries.

Our cost of revenue decreased by $1.6 million, or 0.3%, for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023, due to overall decreases in advertising costs of $4.2 million, which was offset by increases in Paid Content costs. IP Adaptations revenue costs remained relatively flat.

Marketing expenses decreased by $19.5 million, or 31.2%, for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. The decreases in marketing expense were driven by improvement in overall marketing efficiency.

General and administrative expenses increased by $77.6 million, or 70.6%, for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. The increase in general and administrative expenses was largely driven by stock compensation expense of approximately $51.3 million, a one-time bonus of $30.0 million granted to the CEO for a successful IPO, and increased labor costs, as the Company geared up support for the IPO.

Interest income increased by $1.9 million, or 138.4%, for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. The increase was primarily driven by higher balances and higher interest rates.

Interest expense increased by $0.0 million, or 7.3%, for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. The increase in interest expense is immaterial.

(Loss) Income on Equity Method Investment, Net

(Loss) income on equity method investment, net, decreased by $2.4 million, or 162.8%, for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. The overall amount of losses increased across multiple equity method investee entities, including YLAB Corporation.

Other income (loss), net, increased by $2.9 million, or 141.2%, for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. This difference was primarily attributable to the loss from disposal of subsidiaries on June 30, 2023, which resulted from deconsolidation of LOCUS and its subsidiaries. See Note 14. Dispositionin the accompanying notes to our unaudited condensed consolidated financial statements included in this Report for more information on the disposition of LOCUS.

Income tax expense decreased by $5.0 million, or 36.8%, for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023, which was primarily attributable to a discrete tax expense of $7.3 million due to audit payments made by its Korean subsidiary with respect to a tax audit assessment made by the Korean tax authority in 2023.

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, our management and board of directors also consider EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin, revenue on a constant currency basis, and revenue growth on a constant currency basis, ARPPU on a constant currency basis and ARPPU growth on a constant currency basis. We believe that these non-GAAP financial measures provide investors with additional useful information in evaluating our performance. Our non-GAAP financial measures should not be considered in isolation, or as substitutes for, financial information prepared in accordance with GAAP. Non-GAAP measures have limitations as they do not reflect all the amounts associated with our results of operations as determined in accordance with GAAP, and should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures.

EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin

We define EBITDA as net income(loss) before interest expense, income tax expense and depreciation and amortization. We define Adjusted EBITDA as EBITDA with further adjustments to eliminate the effects of loss on equity method investments, effect of applying the valuation method of fair value through profit or loss (“FVPL”), impairment of goodwill, non-cash stock-based compensation and certain other non-recurring costs. We believe that EBITDA and Adjusted EBITDA provide useful information to investors regarding our performance, as it removes the impact of certain items that are not representative of our ongoing business, such as certain non-cash charges and variable charges. We define Adjusted EBITDA Margin as Adjusted EBITDA divided by revenue. EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures and are not intended to be substitutes for any GAAP financial measures. They should be considered in addition to, not as substitutes for, or in isolation from, measures prepared in accordance with GAAP, such as consolidated net income (loss) or consolidated net income (loss) margin.

Using EBITDA as a performance measure has material limitations as compared to consolidated net income (loss), or other financial measures as defined under GAAP, as it excludes certain recurring items, which may be meaningful to investors. EBITDA excludes interest expense; however, as we have borrowed money to finance transactions and operations and interest expense is an element of our cost structure and can affect our ability to generate revenue and returns for our stockholders. Further, EBITDA excludes depreciation and amortization; however, as we use capital and intangible assets to generate revenues, depreciation and amortization are necessary elements of our costs and ability to generate revenue. Finally, EBITDA excludes income taxes; however, as we are organized as a corporation, the payment of taxes is a necessary element of our operations. As a result of these exclusions from EBITDA, any measure that excludes interest expense, depreciation and amortization and income taxes has material limitations as compared to net income. When using EBITDA as a performance measure, management compensates for these limitations by comparing EBITDA to net loss in each period, to allow for the comparison of the performance of the underlying core operations with the overall performance of the company on a full-cost, after-tax basis.

You are also encouraged to evaluate our calculation of Adjusted EBITDA and Adjusted EBITDA Margin, and the reasons we consider these adjustments appropriate for supplemental analysis. In evaluating these measures, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in our presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA and Adjusted EBITDA Margin should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of these measures in the future, and any such modification may be material. Adjusted EBITDA and Adjusted EBITDA Margin have their limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations include:

•

Adjusted EBITDA does not include the interest expense and the cash requirements necessary to service interest or principal payments on our debt;

•

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash requirements for replacement of assets that are being depreciated or amortized;

•

Adjusted EBITDA excludes the impact of charges and receipts resulting from matters we do not find indicative of our ongoing operations; and

•

Other companies in our industry may calculate Adjusted EBITDA and Adjusted EBITDA Margin differently than we do.

The following table presents a reconciliation of net loss to EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin for each of the periods presented.

(1)

Represents our proportionate share of recognized losses associated with our investments accounted for using the equity method. See Note 15. Equity Method Investmentsin the accompanying notes to our unaudited condensed consolidated financial statements included in this Report.

(2)

Represents unrealized net loss of financial assets measured at FVPL, which include the Company's equity investments in entities including NAVER Z Co., Ltd., Contents First Inc. and Clova Games Inc.

(3)

Represents non-cash stock-based compensation expense related to WEBTOON’s equity incentive plan and stock-based compensation plans of NAVER, Munpia and LOCUS.

(4)

Represents non-recurring expenses that we do not consider representative of the operating performance of the business. For the three and six months ended June 30, 2024, these amounts include a $30.0 million one-time CEO bonus and legal and advisory fees related to the IPO.

(5)

Totals may not foot due to rounding.

Use of Constant Currency

We provide revenue, including period-over-period growth rates, adjusted to remove the impact of foreign currency rate fluctuations and the impact of deconsolidated and transferred operations, which we refer to as revenue on a constant currency basis. We calculate revenue on a constant currency basis in a given period by applying the average currency exchange rates in the comparable period of the prior year to the local currency revenue in the current period. We calculate revenue growth (as a percentage) on a constant currency basis by determining the increase in current period revenue over prior period revenue, where current period foreign currency revenue is translated using prior period average currency exchange rates. In addition to adjustments for foreign currency exchange fluctuations, we have also adjusted revenue to exclude the impact of deconsolidation of Jakga and LOCUS and its subsidiaries, and the transfer of SERIES ON, one of our offerings, from NAVER WEBTOON to NAVER to improve comparability between the two periods. We calculate revenue (including growth rates) on a constant currency basis in each of our revenue streams - Paid Content, Advertising and IP Adaptations - using the same method as laid out herein. See Note 14. Dispositionin the accompanying notes to our unaudited condensed consolidated financial statements included in this Report for more information.

We provide ARPPU, including period-over-period growth rates, on a constant currency basis for our Paid Content revenue streams as average Paid Content revenue on a constant currency basis in a given month divided by the number of MPU for such month, averaged over each month in the given period. As discussed above, we calculate revenue on a constant currency basis in a given period by applying the average currency exchange rates in the comparable period of the prior year to the local currency revenue in the current period and excluding deconsolidated and transferred operations. We calculate ARPPU growth rates (as a percentage) on a constant currency basis as the increase in current period ARPPU over prior period ARPPU, with current period foreign currency ARPPU translated using prior period average currency exchange rates and excluding deconsolidated and transferred operations.

We believe providing revenue, revenue growth rates, ARPPU and ARPPU growth rates on a constant currency basis helps our investors better understand our underlying performance because they exclude the effects of foreign currency volatility and impacts of deconsolidated and transferred operations that are not indicative of our actual results of operations. Adjusting revenue or ARPPU to remove the effects of foreign currency rate fluctuations, deconsolidation, and transfer of operations results in non-GAAP measures that management uses to help make informed decisions by removing the volatility caused by foreign currency rate fluctuations and the impact of deconsolidated and transferred operations, allowing us to assess whether the business is fundamentally healthy and growing. Additionally, these metrics support management in efficiently allocating resources and determining priorities by providing a basis for evaluating the competitiveness and growth potential of the business itself. It is for these reasons that management believes these non-GAAP metrics add value, but they have their limitations as analytical tools for not reflecting all the amounts associated with our results of operations as determined in accordance with GAAP, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP.

The following table presents a reconciliation of revenue to revenue on a constant currency basis, and ARPPU to ARPPU on a constant currency basis, respectively, for each of the periods presented.

Liquidity and Capital Resources

On June 28, 2024, we completed our initial public offering (“IPO”) in which we issued and sold 15,000,000 shares of common stock at a public offering price of $21.00 per share. We received net proceeds of approximately $281.7 million from the IPO, after deducting underwriting discounts and commissions and offering expenses payable by us.

Also, immediately subsequent to the closing of the IPO, we issued and sold 2,380,952 shares of common stock to NAVER U.Hub Inc., a wholly-owned subsidiary of NAVER, in a private placement at $21.00 per share and received $50 million in proceeds.

On July 26, 2024, the underwriters partially exercised the over-allotment option to purchase 1,371,549 shares of common stock at $21.00 per share, which was closed on July 30, 2024. We received net proceeds of approximately $26.8 million therefrom, after deducting underwriting discounts and commissions and offering expenses payable by us.

Historically, we have relied primarily upon cash generated from operations and cash provided by NAVER through capital contributions to finance our operations, repay or repurchase indebtedness, finance acquisitions and fund our capital expenditures. NAVER does not have any contractual obligation to provide additional capital to us and therefore there can be no assurance that NAVER will continue to provide additional capital in the form of debt or equity investment in the future to enable us to operate our business. As of June 30, 2024, we had $572.3 million of cash and cash equivalents, which were primarily invested in short-term, highly liquid investments with original maturities of three months or less from the date of purchase and are mainly comprised of bank deposits. We believe that our existing cash and cash equivalent balances will be sufficient to support our working capital requirements for at least the next 12 months based on our current operating plans. However, our future capital requirements will depend on many factors, including our growth rate, sales and marketing activities and other factors affecting our business, including those described in the section entitled “Risk Factors” in this Report. Our expected primary uses of our capital on short-and long-term bases are for repayment of debt, interest payments, working capital, capital expenditures, geographic expansion and other general corporate purposes.

We may, in the future, enter into arrangements to acquire or invest in complementary businesses, products and technologies, including intellectual property rights, which may require us to seek additional financing. To the extent additional funds are necessary to meet our liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of indebtedness, the issuance of additional equity or a combination of these potential sources of funds. Such financing, may however, not be available to us on favorable terms, or at all. In particular, rising inflation and interest rates have resulted, and may continue to result, in significant disruption of global financial markets, reducing our ability to access capital. If we are unable to raise additional funds on commercially reasonable terms or at all, our business, financial condition and results of operations could be adversely affected. See “Risk Factors—Risks Related to Our Business, Industry and Operations—We may require additional capital to support our business in the future, and this capital might not be available on reasonable terms, if at all.”

Consolidated Statements of Cash Flows

The following table summarizes our cash flows for the period presented:

Operating Activities

For the six months ended June 30, 2024, net cash provided by operating activities was $22.4 million, which primarily consisted of net loss of $70.3 million, adjusted for certain non-cash items of $68.8 million, and net cash inflow from changes in operating assets and liabilities of $23.9 million. The non-cash items primarily consisted of stock based compensation of $57.7 million and depreciation and amortization of approximately $18.0 million. The net cash inflow from changes in our operating assets and liabilities were primarily due to lower turnover of our accounts payable, contract liabilities, and accrued expenses, partially offset by lower collections, and prepaid assets.

For the six months ended June 30, 2023, net cash used in operating activities was $40.7 million, which primarily consisted of net loss of $38.0 million, adjusted for certain non-cash items of $34.4 million, and net cash outflow from changes in operating assets and liabilities of $37.0 million. The non-cash items primarily consisted of depreciation and amortization, operating lease expense, and loss on foreign currency, net. The net cash outflow from changes in our operating assets and liabilities were primarily due to lower collections of receivables, as well as a decrease in other liabilities, which was partially offset by lower turnover of our accounts payable.

Investing Activities

For the six months ended June 30, 2024, net cash used in investing activities was $7.3 million, consisting primarily of purchases of short term investments and equity method investments , partially offset by proceeds from maturities of short-term investments .

For the six months ended June 30, 2023, net cash used in investing activities was $25.5 million, consisting primarily of a payment on our loan receivable, as well as purchases of property, plant and equipment, partially offset by proceeds from short-term investments.

Financing Activities

For the six months ended June 30, 2024, net cash provided by financing activities was $336.1 million, consisting primarily of $293.0 million in proceeds from the IPO, net of underwriting discounts and commissions, and $50.0 million in proceeds from issuance of common stock related to private placement. Deferred initial public offering costs of $9.3 million will be paid in subsequent periods.

For the six months ended June 30, 2024 and June 30, 2023, net cash used in financing activities was $5.0 million and $8.7 million, respectively, consisting primarily of repayment of short-term borrowings and payment of contingent consideration related to a business acquisition.

Off-Balance Sheet Arrangements

As of December 31, 2023 and June 30, 2024, we did not have any off-balance sheet financing arrangements (as defined under the rules and regulations of the SEC) or any relationships with unconsolidated entities or financial partnerships, including structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other purposes.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements and the related notes thereto included in this Report are prepared in accordance with GAAP. The preparation of our condensed consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the amounts reported in those consolidated financial statements and the accompanying notes. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.

There have been no material changes to our critical accounting policies and estimates as described in the IPO Prospectus.

Recent Accounting Pronouncements

See Note 1. Description of Business and Summary of Significant Accounting Policiesin the accompanying notes to our unaudited condensed consolidated financial statements included in this Report for more information.