NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2018
(Unaudited)
During
the six months ended June 30, 2018 and the year ended December 31, 2017, management has addressed going concern remediation through
funding through the private placement and is continuing initiatives to raise capital to meet future working capital requirements.
However, additional capital is required to reduce the risk of going concern uncertainties for the Company beyond the next twelve
months as of the reporting date. There is no certainty that the Company will be able to arrange sufficient funding to continue
its operations.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the accounting principles
generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to
the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and
on the same basis as the Company prepares its annual audited consolidated financial statements. In the opinion of management,
the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation of such interim results.
The
results for the condensed consolidated statement of operations are not necessarily indicative of results to be expected for the
year ending December 31, 2018 or for any future interim period. The condensed consolidated balance sheet at June 30, 2018 has
been derived from unaudited financial statements; however, it does not include all of the information and notes required by U.S.
GAAP for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements for the year ended December 31, 2017, and notes thereto included in the Company’s
annual report on Form 10-K filed on April 17, 2018.
There
have been no material changes in the Company’s significant accounting policies to those previously disclosed in the Company’s
annual report on Form 10-K, which was filed with the Securities and Exchange Commission on April 17, 2018.
Earnings
(Loss) Per Share
Earnings
(loss) per share are calculated in accordance with Accounting Standards Codification (“ASC”) 260 “Earnings Per
Share,” which provides for the calculation of “basic” and “diluted” earnings (loss) per share. Basic
earnings (loss) per share includes no dilution and is computed by dividing net earnings by the weighted average number of common
shares outstanding for the period. Diluted earnings (loss) per share reflect, in periods in which they have a dilutive effect,
the effect of common shares issuable upon exercise of stock options. The following securities were not included in the diluted
net loss per share calculation because their effect was anti-dilutive for the years presented.
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
Common
stock warrants
|
|
|
12,916,688
|
|
|
|
-
|
|
Potential
dilutive shares
|
|
|
12,916,688
|
|
|
|
-
|
|
These
shares were excluded due to their antidilutive effect.
Recent
Accounting Pronouncements
In
February 2016, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-02, Leases (Topic 842). This ASU will increase transparency and comparability among organizations by recognizing lease assets
and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Certain qualitative and
quantitative disclosures are required, as well as a retrospective recognition and measurement of impacted leases. This ASU is
effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted.
The Company is currently evaluating this ASU to determine its impact on the Company’s operations, financial position, cash
flows and disclosures.
eMARINE
Global Inc.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2018
(Unaudited)
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is a comprehensive new revenue
recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an
amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, FASB issued
ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date
of ASU 2014-09 to reporting periods beginning after December 15, 2017, with early adoption permitted for reporting periods beginning
after December 15, 2016. Subsequently, FASB issued ASUs in 2016 containing implementation guidance related to ASU 2014-09, including:
ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross
versus Net) , which is intended to improve the operability and understandability of the implementation guidance on principal versus
agent considerations; ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and
Licensing , which is intended to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation
guidance; and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
, which contains certain provision and practical expedients in response to identified implementation issues. The Company has adopted
ASU 2014-09 and related ASUs on January 1, 2018. Companies may use either a full retrospective or a modified retrospective approach
to adopt these ASUs. On January 1, 2018, the Company adopted ASU 2014-09, using the full retrospective method, which requires
reporting entities to apply the standard as of the earliest period presented in their financial statements. The Company completed
its review of its material revenue streams and determined that the adoption of Topic 606 did not have a material impact on the
Company’s condensed consolidated statements of operations and condensed consolidated balance sheets.
In
January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
This ASU eliminates Step 2 along with amending other parts of the goodwill impairment test. Under ASU 2017-04, an entity should
perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount,
and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair
value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. This ASU is effective for annual
periods beginning after December 15, 2019, and interim periods therein with early adoption permitted for interim or annual goodwill
impairment tests performed after January 1, 2017. At adoption, this update will require a prospective approach. The Company is
currently evaluating this ASU to determine its impact on the Company’s operations, financial position, cash flows and disclosures.
Other
accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected
to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements
that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or
disclosures.
NOTE
4 — INVENTORIES
The
components of inventories are as follows (in thousands of Korean Won):
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Finished
goods
|
|
₩
|
-
|
|
|
₩
|
-
|
|
Raw
materials
|
|
|
87,422
|
|
|
|
6,200
|
|
|
|
|
87,422
|
|
|
|
6,200
|
|
Less:
Inventory reserve
|
|
|
-
|
|
|
|
-
|
|
Total,
net
|
|
₩
|
87,422
|
|
|
₩
|
6,200
|
|
eMARINE
Global Inc.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2018
(Unaudited)
NOTE
5 — PROPERTY AND EQUIPMENT
The
components of property and equipment are as follows (in thousands of Korean Won):
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Office
equipment
|
|
₩
|
219,980
|
|
|
₩
|
219,980
|
|
Fixtures
and furniture
|
|
|
48,520
|
|
|
|
48,520
|
|
Other
|
|
|
285,113
|
|
|
|
285,113
|
|
Total,
at cost
|
|
|
553,613
|
|
|
|
553,613
|
|
Less:
Accumulated depreciation
|
|
|
(501,687
|
)
|
|
|
(493,805
|
)
|
Total,
net
|
|
₩
|
51,926
|
|
|
₩
|
59,808
|
|
Depreciation
expense amounted to ₩7,882 thousand and ₩8,761 thousand for the six month period ended June 30, 2018 and 2017, respectively.
NOTE
6 – GOODWILL
In
2011, the Company acquired Intra-Ship Integrated Gateway business from Hyundai BS&C Co., Ltd. and recognized the goodwill
of ₩1,430,625 thousand along with the other identifiable assets and liabilities.
The
Company assessed relevant events and circumstances in evaluating whether it was more likely than not that its fair value of the
reporting unit was less than reporting unit’s carrying amount. The Company concluded that it is more likely than not that
the fair value of a reporting unit is not less than its carrying amount and did not perform the two–step impairment test.
NOTE
7 – INTANGIBLE ASSETS
The
components of intangible assets that are carried at cost less accumulated amortization are as follows (in thousands of Korean
Won):
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Description
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Industrial
Property Rights
|
|
₩
|
5,960
|
|
|
₩
|
(5,051
|
)
|
|
₩
|
909
|
|
|
₩
|
5,960
|
|
|
₩
|
(4,841
|
)
|
|
₩
|
1,119
|
|
Software
|
|
|
62,782
|
|
|
|
(62,782
|
)
|
|
|
-
|
|
|
|
62,782
|
|
|
|
(62,782
|
)
|
|
|
-
|
|
Customers
relationship
|
|
|
500,000
|
|
|
|
(150,000
|
)
|
|
|
350,000
|
|
|
|
500,000
|
|
|
|
(100,000
|
)
|
|
|
400,000
|
|
Other
|
|
|
22,021
|
|
|
|
(20,326
|
)
|
|
|
1,695
|
|
|
|
22,020
|
|
|
|
(20,086
|
)
|
|
|
1,934
|
|
Total
|
|
₩
|
590,763
|
|
|
₩
|
(238,159
|
)
|
|
₩
|
352,604
|
|
|
₩
|
590,762
|
|
|
₩
|
(187,709
|
)
|
|
₩
|
403,053
|
|
Amortization
expense for intangible assets was ₩50,450 thousand and ₩6,133 thousand for the periods ended June 30, 2018 and 2017,
respectively.
The
following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2018 (in thousands
of Korean Won):
Year
Ending December 31,
|
|
|
|
2018
|
|
₩
|
50,449
|
|
2019
|
|
|
100,899
|
|
2020
|
|
|
100,759
|
|
2021
|
|
|
100,479
|
|
2022
|
|
|
18
|
|
Total
|
|
₩
|
352,604
|
|
eMARINE
Global Inc.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2018
(Unaudited)
NOTE
8 — DEBT
Short-term
Borrowings
The
Company borrowed ₩260,000 thousand from Kookmin Bank at October 8, 2015 with the maturity of October 2, 2018. The borrowings
bear an interest at 4.70% per annum for 2018 and 2017. The Company paid ₩26,000 thousand and entered into a refinancing
agreement at September 29, 2017. At June 30, 2018 and December 31, 2017, the balance for the borrowings was ₩234,000 thousand
and ₩234,000 thousand, respectively. The borrowings are guaranteed by Korea Technology Finance Corporation, a government-funded
institution.
The
Company borrowed ₩260,000 thousand from Kookmin Bank at November 4, 2015 with the maturity of November 2, 2018. The borrowings
bear an interest at 5.05% per annum for 2018 and 2017. The Company paid ₩26,000 thousand and entered into a refinancing
agreement at November 3. 2017. At June 30, 2018 and December 31, 2017, the balance for the borrowings was ₩234,000 thousand
and ₩234,000 thousand, respectively. The borrowings are guaranteed by Korea Technology Finance Corporation, a government-funded
institution.
The
Company borrowed ₩1,000,000 thousand from Woori Bank at June 2, 2015 with the maturity of June 1, 2018. The borrowings
bear an interest at 4.27% per annum for 2018 and 2017. The Company paid ₩1,000,000 thousand and entered into an extension
agreement at May 25, 2018, through which the maturity was extended one more year. At June 30, 2018 and December 31, 2017,
the balance for the borrowings was ₩900,000 thousand and ₩1,000,000 thousand, respectively. The borrowings are guaranteed
by Korea Technology Finance Corporation, a government-funded institution.
The
Company had a bank overdraft from Woori Bank. The overdraft bears an interest at 14.00% per annum for 2018 and 2017. At June 30,
2018 and December 31, 2017, the balance for the bank overdraft was ₩61,492 thousand and ₩57,886 thousand, respectively.
The overdraft is collateralized by the savings account of ₩5,000 thousand and guaranteed by Ung Gyu Kim, President.
The
Company borrowed ₩500,000 thousand from Suhyup Bank at July 18, 2016 with the original maturity of July 18, 2018. The maturity
was extended 1 year, which is July 18, 2019. The borrowings bear an interest at 2.50 % per annum for 2018 and 2017. At June 30,
2018 and December 31, 2017, the balance for the borrowings was ₩464,000 thousand and ₩464,000 thousand, respectively.
The borrowings are collateralized by the savings account of ₩3,000 thousand and guaranteed by Hyundai BS&C Co., Ltd.,
a nonaffiliated company.
The
Company borrowed ₩300,000 thousand from Hana Bank at August 4, 2017 with the maturity of August 1, 2018. The borrowings
bear an interest at 2.56% per annum for 2018 and 2017. The borrowings were paid off at maturity. At June 30, 2018 and December
31, 2017, the balance for the borrowings was nil and ₩300,000 thousand, respectively. The borrowings are collateralized
by the savings account of ₩300,000 thousand.
The
Company borrowed ₩550,000 thousand from GMT Co., Ltd. at April 19, 2017 with the maturity of November 30, 2017. The borrowings
bear an interest at 6.00 % per annum for 2017. At June 30, 2018 and December 31, 2017, the balance for the borrowings was ₩200,000
thousand. The balance is currently in default. The Company is in negotiation with the lender to extend the maturity.
The
Company borrowed ₩300,000 thousand from GNC Co., Ltd. at April 18, 2017 with the maturity of November 30, 2017. The borrowings
bear an interest at 6.00 % per annum for 2017. At June 30, 2018 and December 31, 2017, the balance for the borrowings was ₩300,000
thousand. The balance is currently in default. The Company is in negotiation with the lender to extend the maturity.
eMARINE
Global Inc.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2018
(Unaudited)
As
of June 30, 2018 and December 31, 2017, the estimated fair value of the short-term borrowings approximate their carrying values.
Long-term
Debt
The
components of the long-term debt, including the current portion, are as follows (in thousands of Korean Won):
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Loans
from Small & medium Business Corporation borrowed at March 23, 2016 with the maturity of March 22, 2021 and at an interest
of 4.22% and 4.22% per annum for 2018 and 2017, respectively, guaranteed by Ung Gyu Kim, President
|
|
₩
|
458,040
|
|
|
₩
|
500,000
|
|
Loans
from Small & medium Business Corporation borrowed at February 28, 2017 with the maturity of February 28, 2022 and at an
interest of 2.65% per annum, guaranteed by Ung Gyu Kim, President
|
|
|
200,000
|
|
|
|
200,000
|
|
Loans
from Kwangju Bank borrowed at September 24, 2015 with the maturity of September 24, 2018 and at an interest of 6.06% and
6.08% per annum for 2018 and 2017, respectively, guaranteed by Ung Gyu Kim, President. The borrowings are secured by the
personal property owned by Ung Gyu Kim, President
|
|
|
170,000
|
|
|
|
230,000
|
|
Total
|
|
|
828,040
|
|
|
|
930,000
|
|
|
|
|
|
|
|
|
|
|
Less:
current portion
|
|
|
(358,960
|
)
|
|
|
(245,240
|
)
|
Total
long-term debt less current portion
|
|
₩
|
469,080
|
|
|
₩
|
684,760
|
|
As
of June 30, 2018 and December 31, 2017, the estimated fair value of the long-term debt, including the current portion, were ₩828,040
and ₩930,000, respectively.
Maturities
of the long-term debt for each of the next five years and thereafter are as follows (in thousands of Korean Won):
Year
Ending June 30,
|
|
|
|
2019
|
|
₩
|
358,960
|
|
2020
|
|
|
233,160
|
|
2021
|
|
|
191,520
|
|
2022
|
|
|
44,400
|
|
Total
|
|
₩
|
828,040
|
|
As
of June 30, 2018 and December 31, 2017, respectively, the Company was in compliance with the financial covenant in credit agreements
as defined in the credit agreements.
NOTE
9 – PENSION PLANS
The
Company has a defined benefit plans covering all full time employees who met certain requirements of age, length of service and
hours worked per year. Benefits paid to retirees are based upon age at retirement and years of credited service.
eMARINE
Global Inc.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2018
(Unaudited)
Information
with respect to changes in benefit obligation and the funded status of the plans is as follows (in thousands of Korean Won):
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Change
in projected benefit liability
|
|
|
|
|
|
|
|
|
Liability
at beginning of year
|
|
₩
|
930,098
|
|
|
₩
|
880,656
|
|
Service
cost
|
|
|
102,871
|
|
|
|
226,787
|
|
Interest
cost
|
|
|
5,587
|
|
|
|
10,991
|
|
Benefit
payments
|
|
|
(30,895
|
)
|
|
|
(146,892
|
)
|
Prior
service cost
|
|
|
-
|
|
|
|
-
|
|
Remeasurement
of defined benefit liabilities
|
|
|
9,981
|
|
|
|
(41,444
|
)
|
Liability
at end of year
|
|
|
1,017,642
|
|
|
|
930,098
|
|
|
|
|
|
|
|
|
|
|
Plan
assets at end of year
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Funded
status and net liability recognized
|
|
₩
|
(1,017,642)
|
|
|
₩
|
(930,098)
|
|
The
components of benefit expense are as follows (in thousands of Korean Won):
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Service
cost
|
|
₩
|
102,871
|
|
|
₩
|
226,787
|
|
Interest
cost
|
|
|
5,587
|
|
|
|
10,991
|
|
Prior
service cost
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
₩
|
108,458
|
|
|
₩
|
237,778
|
|
The
weighted-average assumptions used to determine projected benefit liability and benefit expense for pension plans are as follows:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Discount
rate
|
|
|
3.23
|
%
|
|
|
3.21
|
%
|
Expected
long-term rate of return on plan assets
|
|
|
N/A
|
|
|
|
N/A
|
|
Rate
of compensation increase
|
|
|
2.00
|
%
|
|
|
2.00
|
%
|
The
estimated future benefit payments are as follows (in thousands of Korean Won):
Year
Ending June 30,
|
|
|
|
2019
|
|
₩
|
46,552
|
|
2020
|
|
|
60,381
|
|
2021
|
|
|
54,697
|
|
2022
|
|
|
59,070
|
|
2023
|
|
|
62,514
|
|
Thereafter
|
|
|
2,265,061
|
|
Total
|
|
₩
|
2,548,275
|
|
eMARINE
Global Inc.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2018
(Unaudited)
NOTE
10 – REDEEMABLE CONVERTIBLE PREFERRED STOCK
On
May 17, 2016, the Company entered into a securities purchase agreement with an accredited investor to place 12,800 redeemable
convertible preferred shares (the “Preferred Stock”), par value ₩10,000 per share, in the aggregate principal
amount of ₩640,000 thousand (the “Transaction”). The proceeds from sales of the Preferred Stock, net of issuance
cost of ₩3,993 thousand were fully received at June 8, 2016.
On
May 30, 2017, all redeemable convertible preferred shares were converted into 12,800 shares of common stock of e-Marine Co. Ltd.
On July 25, 2017, as a result of the Share Exchange, the Company acquired all of the issued and outstanding equity interests of
e-Marine Co. Ltd., and e-Marine Co., Ltd. became the Company’s wholly-owned subsidiary.
NOTE
11 – STOCKHOLDERS’ DEFICIT
Authorized
and Outstanding Capital Stock
The
Company authorized 300,000,000 shares of common stock, par value $0.001, of which 22,927,992 are currently issued and outstanding.
The Company also has 10,000,000 shares of “blank check” preferred stock, par value $0.001 per share. There are currently
no shares of preferred stock outstanding.
Common
Stock
The
shareholders of common stock (the “Shareholders”) have equal ratable rights to dividends from funds legally available
therefore, when, as and if declared by the Board of Directors and are entitled to share ratably in all of the Company’s
assets available for distribution to the Shareholders upon the liquidation, dissolution or winding up of business. The Shareholders
do not have preemptive, subscription or conversion rights.
The
Shareholders are entitled to one vote per share on all matters which they are entitled to vote upon at all meetings of the Shareholders.
The Shareholders do not have cumulative voting rights, which would allow the Shareholders of more than 50% of outstanding voting
securities to elect all of directors.
The
payment of dividends, if any, in the future rests within the sole discretion of the Board of Directors and will depend, among
other things, upon earnings, capital requirements and financial condition, as well as other relevant factors. The Company has
not paid any dividends since its inception and do not intend to pay any cash dividends in the foreseeable future, but intend to
retain all earnings, if any, for use in its business.
Blank
Check Preferred Stock
The
Board of Directors will be authorized, subject to any limitations prescribed by law, without further vote or action by the Shareholders,
to issue from time to time preferred stock in one or more series. Each series of preferred stock will have the number of shares,
designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by
the Board of Directors, which may include, among other things, dividend rights, voting rights, liquidation preferences, conversion
rights and preemptive rights.
Warrants
As
of June 30, 2018, the Company has outstanding warrants to purchase up to an aggregate of 12,916,688 shares of common stock, par
value $0.001 per share, for a period of three years from the date of issuance, July 25, 2017, at an exercise price of $0.60 per
share, subject to adjustments as set forth in the warrant. The Company also has outstanding warrants to purchase up to an aggregate
of 1,100,000 shares of common stock, par value $0.001 per share, for a period of three years from the date of issuance, July 25,
2017, at an exercise price of $0.08 per share, subject to adjustments as set forth in the warrant.
The
Company may issue warrants to non-employees in capital raising transactions or for services. In accordance with ASC 718, “Compensation—Stock
Compensation”, the cost of warrants issued to non-employees is measured on the grant date based on the fair value. The fair
value is determined using the Black-Scholes option pricing model. The resulting amount is charged to expense on the straight-line
basis over the period in which the Company expects to receive the benefit, which is generally the vesting period. For the year
ended December 31, 2017, ₩620,994 thousand was charged to expense.
eMARINE
Global Inc.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2018
(Unaudited)
Private
Placement Offering
On
July 25, 2017, the Company entered into a subscription agreement with selected accredited investors. Pursuant to the terms of
the subscription agreement, the Company offered in a private placement $2,250,000 of units. Each unit has a purchase price of
$0.50 and consisted of (i) one (1) share of the Company’s common stock, par value $0.001 per share; and (ii) warrants to
purchase two and one-half (2.5) shares of the Company’s common stock. The warrants are exercisable for a period of three
(3) years from the date of issuance at an exercise price of $0.60 per share, subject to adjustment as provided in the agreement
evidencing the warrants.
The
offering closed on July 25, 2017. At the closing, the Company received subscriptions for the full offering of $2,250,000, with
gross proceeds of $1,765,000 (approximately ₩2,009,844 thousand) being received by the Company as of such date. The Company
issued a total of 3,530,000 shares and 8,825,000 warrants to purchase up to 8,825,000 shares of the Company’s common stock.
Since
the closing, the Company received gross proceeds in the amount of $165,000 (approximately ₩184,190 thousand), and issued
to the relevant investors an aggregate of 330,000 shares and warrants to purchase 825,000 shares.
On
March 23, 2018, the Company entered into a subscription agreement with selected accredited investors. Pursuant to the terms of
the Subscription Agreement, the Company sold in a private placement an aggregate of 866,675 units at a purchase price of $0.60
per unit. Each unit consists of (i) one (1) share of the Company’s common stock, par value $0.001 per share; and (ii) warrants
to purchase two and one-half (2.5) shares of the Company’s common stock. The warrants are exercisable for a period of three
(3) years from the date of issuance at an exercise price of $0.70 per share, subject to adjustment as provided in the agreement
evidencing the warrants.
At
closing, the Company issued an aggregate of 866,675 shares and 2,166,688 warrants for total gross proceeds of $520,005.
Consulting
Agreement
On
July 25, 2017, the Company entered into a consulting agreement (the “Consulting Agreement”) with Peach Management
LLC, a limited liability company organized under the laws of the Commonwealth of Puerto Rico (“Consultant”), for a
term of twenty four months, effective as of July 25, 2017 (the “Term”). Pursuant to the terms of the Consulting Agreement,
Consultant will assist the Company with introductions to investor relation firms located within and outside the United States
to develop and implement capital markets messaging reflected in press releases, shareholder letters, PowerPoint presentations,
social media and traditional media (the “Services”) during the Term. In consideration of the Services to be rendered
by Consultant, the Company shall issue to Consultant warrants to purchase up to 1,100,000 shares of the Company’s common
stock, par value $0.001 per share (the “Consultant Warrants”). The Consultant Warrants shall have a term of three
years and have an exercise price equal to $0.08 per share.
In
connection with the issuance of these warrants, the Company charged approximately ₩620,994 thousand of professional fees
to expense.
The
fair value of stock warrants was determined at the date of grant using the Black-Scholes option pricing model (the “Black-Scholes
model”) The Black-Scholes model requires management to make various estimates and assumptions, including expected term,
expected volatility, risk-free rate, and dividend yield. The expected term represents the period of time that stock-based compensation
awards granted are expected to be outstanding and is estimated based on considerations including the vesting period, contractual
term and anticipated employee exercise patterns. Expected volatility is based on the historical volatility of the Company’s
stock. The risk-free rate is based on the U.S. Treasury yield curve in relation to the contractual life of stock-based compensation
instrument. The dividend yield assumption is based on historical patterns and future expectations for the Company dividends.
eMARINE
Global Inc.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2018
(Unaudited)
The
following table includes the estimates and assumptions used in the Black-Scholes model:
Stock
price
|
|
$
|
0.57
|
|
Exercise price
|
|
$
|
0.08
|
|
Contractual
term (Years)
|
|
|
3
|
|
Volatility
|
|
|
70.22
|
%
|
Risk-free
rate
|
|
|
1.53
|
%
|
Expected
dividend rate
|
|
|
0.00
|
%
|
Other
Issuances
In
connection with the Exchange Agreement and Subscription Agreement, the Company issued to RedChip Companies, Inc. and Sichenzia
Ross Ference Kesner LLP an aggregate of 2,200,000 shares of the Company’s common stock, par value $0.001 per share. The
fair value of such shares issued is approximately ₩1,417,159 thousand and is recorded as additional paid in capital as
these shares were issued as the consideration for the capital raising.
NOTE
12 – INCOME TAXES
The
provision for income taxes consisted of the following (in thousands of Korean Won):
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
Current
|
|
₩
|
-
|
|
|
₩
|
-
|
|
Deferred
|
|
|
2,196
|
|
|
|
(27,879
|
)
|
Total
|
|
₩
|
2,196
|
|
|
₩
|
(27,879
|
)
|
The
table below summarizes the differences between the Company’s effective tax rate and the statutory federal rate as follows
for the six months ended June 30, 2018 and 2017:
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
Income
taxes at Federal statutory rate
|
|
|
21.00
|
%
|
|
|
34.00
|
%
|
Foreign
tax rate differential
|
|
|
1.00
|
%
|
|
|
(12.00
|
)%
|
Change
in valuation allowance
|
|
|
(22.00
|
)%
|
|
|
(22.00
|
)%
|
Other
|
|
|
-
|
%
|
|
|
-
|
%
|
Effective
tax rate
|
|
|
-
|
%
|
|
|
-
|
%
|
NOTE
13 – RELATED PARTY TRANSACTIONS
As of
June 30, 2018 and December 31, 2017, the Company loaned nil and ₩
290,812
thousand, respectively to the Company’s officers and employees.
The loans receivable bear an interest of 6.9% and 4.6% per annum for 2018 and 2017, respectively, and are redeemable on
demand.
The
Company borrowed ₩53,000 thousand from Min Sik Park, Senior Vice President, at December 31, 2015 with the maturity of December
30, 2018. The borrowings bear an interest at 9.50 % per annum. At June 30, 2018 and December 31, 2017, the balance for the borrowings
was ₩9,606 thousand and ₩18,895 thousand, respectively.
eMARINE
Global Inc.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2018
(Unaudited)
The
Company borrowed ₩141,216 thousand from Ung Gyu Kim, President, at February 26, 2018 with the maturity of February 25,
2019. The borrowings bear an interest at 4.60 % per annum. At June 30, 2018 and December 31, 2017, the balance for the borrowings
was ₩48,044 thousand and nil, respectively
NOTE
14 – COMMITMENTS AND CONTINGENCIES
Maintenance
Bond
In
connection with service agreements with certain customers, the Company is required to provide a maintenance bond to guarantee
the maintenance for a specified period of time following completion of service. The Company purchases maintenance bonds from third-party
guarantors and is not exposed to contingent liabilities.
Legal
Proceedings
From
time to time the Company may be named in claims arising in the ordinary course of business. Currently, no legal proceedings, government
actions, administrative actions, investigations or claims are pending against the Company or involve the Company that, in the
opinion of management, could reasonably be expected to have a material adverse effect on its business and financial condition
except for the lawsuit against Shinwoo E&D Co., Ltd. (“Shinwoo”). There was an unpaid amount due ₩84,095,000
from Shinwoo in dispute as of December 31, 2017. The Company filed a lawsuit and the ruling by the district court at January 18,
2018 was in favor of the Company. Shinwoo appealed against the court decision at February 1, 2018. The Company believes it is
probable that it will not suffer from an adverse outcome related to the case. The Company has not recorded any reserve related
to this dispute as of June 30, 2018.
NOTE
15 — CONCENTRATION OF CREDIT RISK
Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts
receivable. Credit risk with respect to trade accounts receivable was concentrated with five and three of the Company’s
customers in June 30, 2018 and December 31, 2017, respectively.
At
June 30, 2018, Research Institute of Medium & small Shipbuilding, Korea Hydrography and Research Association, Hanjin Heavy
Industries and Construction Co., Ltd., and Shinwoo E&D Co., Ltd. represented 32%, 23%, 15% and 11% of accounts receivable
outstanding.
At
December 31, 2017, Naval Logistics Command, Hyundai Heavy Industries Co., Ltd. and Shinwoo E&D Co., Ltd. represented 38%,
22% and 17% of accounts receivable outstanding.
The
Company performs ongoing credit evaluations of its customers’ financial condition to mitigate its credit risk. The deterioration
of the financial condition of its major customers could adversely impact the Company’s operations. From time to time where
the Company determines that circumstances warrant, the Company extends payment terms beyond its standard payment terms.
During
the period ended June 30, 2018, Naval Logistics Command and Research Institute of Medium & small Shipbuilding represented
25% and 10% of the Company’s net sales.
During
the period ended June 30, 2017, Naval Logistics Command, Hyundai Heavy Industries, Gaon IT Co., Ltd. and Research Institute of
Medium & small Shipbuilding represented 19%, 14%,12% and 10% of the Company’s net sales.
NOTE
16 — REVENUE RECOGNITION
Revenue
from the sale of products and services is recorded when the performance obligation is fulfilled, usually at the time of shipment
or when the service is provided, at the net sales price (transaction price). The Company elected to present revenue net of value
added tax and other similar taxes and account for shipping and handling activities as fulfillment costs rather than separate performance
obligations.
The
Company recognizes revenue in accordance with the following five-step model:
|
●
|
identify
arrangements with customers;
|
|
●
|
identify
performance obligations;
|
|
●
|
determine
transaction price;
|
|
●
|
allocate
transaction price to the separate performance obligations in the arrangement, if more than one exists; and
|
|
●
|
recognize
revenue as performance obligations are satisfied.
|
Disaggregation of Revenue
Selected financial information for the Company’s
operating revenue for disaggregated revenue purposes by revenue source are as follows (in thousands of Korean Won):
|
|
|
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
|
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
Products
|
|
|
e-Navigation
|
|
₩
|
709,737
|
|
|
₩
|
448,142
|
|
|
₩
|
953,243
|
|
|
₩
|
810,151
|
|
|
|
|
Smart
Ship
|
|
|
59,695
|
|
|
|
19,700
|
|
|
|
65,190
|
|
|
|
88,650
|
|
Projects
|
|
|
e-Navigation
|
|
|
144,510
|
|
|
|
430,153
|
|
|
|
745,245
|
|
|
|
904,491
|
|
|
|
|
Smart
Ship
|
|
|
135,260
|
|
|
|
105,476
|
|
|
|
595,007
|
|
|
|
166,831
|
|
Total
|
|
|
|
|
₩
|
1,049,202
|
|
|
₩
|
1,003,471
|
|
|
₩
|
2,358,685
|
|
|
₩
|
1,970,123
|
|
NOTE
17 — SUBSEQUENT EVENTS
The
Company has evaluated events that have occurred after the balance sheet date but before the consolidated financial statements
are issued and determined that there were no subsequent events or transactions that required recognition or disclosure in the
consolidated financial statements.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
The
following discussion should be read in conjunction with our unaudited financial statements and the notes thereto.
Forward-Looking
Statements
This
Management’s Discussion and Analysis and Results Operations includes a number of forward-looking statements that reflect
Management’s current views with respect to future events and financial performance. You can identify these statements by
forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,”
“estimate” and “continue,” or similar words. Those statements include statements regarding the intent,
belief or current expectations of us and members of our management team as well as the assumptions on which such statements are
based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and
involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking
statements.
Readers
are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with
the Securities and Exchange Commission. Important factors currently known to management could cause actual results to differ materially
from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect
changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that
our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made
that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors
that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing
for our products, and competition.
In
this quarterly report, the “eMarine,” “EMRN,” the “Company,” “we,” “us,”
and “our” and other similar designations refer to eMarine Global Inc. and its wholly-owned subsidiary, e-Marine Co,
Ltd. (“e-Marine”).
Company
Overview
eMarine
Global Inc. is a Nevada corporation (the “
Company
”) formed under the name “Web Views Corporation”
on November 2, 2001. On October 20, 2008, we changed our name to “Pollex, Inc.”
On
July 25, 2017, we entered into a share exchange agreement (the “
Exchange Agreement
”) with e-Marine Co., Ltd.,
a corporation organized under the laws of the Republic of Korea (“
e-Marine
”), and the shareholders of e-Marine
(the “e-
Marine Shareholders
”), pursuant to which the e-Marine Shareholders assigned, transferred and delivered,
free and clear of all liens, 100% of the issued and outstanding shares of common stock of e-Marine, representing 100% of the equity
interest in e-Marine (the “e-
Marine Shares
”) to us in exchange for 14,975,000 restricted shares of our Common
Stock (the “
Share Exchange
”). As a result of the Share Exchange, e-Marine became our wholly-owned subsidiary,
and the e-Marine Shareholders acquired a controlling interest in the Company.
At
the time of the Share Exchange, the Company was engaged in the online games business by acquiring gaming licenses in order to
make them commercially available abroad. As a result of the Share Exchange, we have now assumed e-Marine’s business operations
as our own. The acquisition of e-Marine is treated as a reverse acquisition, and the business of e-Marine became the business
of the Company.
e-Marine
Co., Ltd. was organized under the laws of the Republic of Korea on January 2, 2001, and is a maritime information and communications
technology provider based in South Korea. e-Marine seeks to achieve safety of life at sea through the use of various technologies,
such as e-Navigation, Maritime Internet-of-Things (otherwise known as “
I.o.T.
”) and marine big data technology
(collectively, “
Maritime ICT Convergence
”). e-Marine’s main products and services are divided into four
categories: (i) Electronic Chart Display & Information System (“
ECDIS
”); (ii) Smart Ship; (iii) Overseas
Solutions Distributions; and (iv) Aids to Navigation.
On
August 15, 2017, we entered into an agreement and plan of (the “
Merger Agreement
”), pursuant to which we merged
with and into our newly formed wholly-owned subsidiary (the “
Merger Sub
” and, the transaction, the “
Merger
”).
As
permitted by Chapter 92A.180 of Nevada Revised Statutes, the purpose of the Merger was to effect a change of the Company’s
name from “Pollex, Inc.” to “eMARINE Global Inc.” Upon the filing of articles of merger with the Secretary
of State of Nevada on August 15, 2017 in order to effect the Merger, the Company’s articles of incorporation were deemed
amended to reflect the change in the Company’s corporate name. Upon consummation of the Merger, the separate existence of
Merger Sub ceased.
Our
principal execute offices are located at 4th Floor, 15-14, Samsan-ro 308beon-gil, Nam-gu, Ulsan, 44715 South Korea.
Overview
of Business
We
are a leading provider of information and communications technology for the maritime industry. We provide solutions for the collection,
integration and display of maritime information abroad and ashore by electronic means to enhance berth-to-berth navigation and
related services. We believe that these solutions provide the most efficient means to secure the safety of life at sea and to
protect the marine environment. We offer all of our products and services through subscription, installation, updates and/or maintenance
contracts.
Our
Products & Solutions
We
offer onboard and onshore products and solutions to customers operating within the maritime and shipbuilding industries through
our two business divisions: (i) our maritime information and communications technology (“
Maritime ICT
”) division
and (ii) our shipbuilding information and communications (“
Shipbuilding ICT
”) division.
We
focus our business on four main hardware and software products: (i) Electronic Chart Display & Information System (“
ECDIS
”);
(ii) Smart Ship solutions; (iii) distribution of overseas solutions; and (iv) Aids to Navigation (“
AtoN
”) systems.
Electronic
Chart Display and Information Systems
We
offer e-Navigator, our branded electronic chart display and information system, or ECDIS, which is a computer-based navigation
system that complies with International Maritime Organization (“
IMO
”) regulations and can be used as an alternative
to paper navigation charters. Integrating a variety of real-time information, it is an automated decision aid capable of continuously
determining a vessel’s position in related to land, charted objects, navigation aids and unseen hazards, which is key in
helping operators monitor and plan routes. An ECDIS includes electronic navigation charts (“
ENC
”), which we
also offer, and integrates position information from the global positioning system (“
GPS
”) and other navigational
sensors, such as radar, fathometer and automatic identification systems. It can also provide additional navigation-related information,
such as sailing directions. Only the hardware is regulated by the IMO, while the software is subject to patents. We have obtained
ECDIS software and South Korean patents for ECDIS technology.
Smart
Ship Solutions
Our
Smart Ship technology is the result of our partnership with Hyundai Heavy Industries (“
HHI
”) and much of it
has been implemented on HHI’s newly-built ships. These systems use the marine I.o.T. and big data technologies to provide
solutions such as the Intra-Ship Integrated Gateway (“
ISIG
”), an intra-ship network that promotes greater communication
amongst a fleet while at sea; the Collision Avoidance and Optimal Voyage Systems, both dedicated to helping mariners determine
the best routes and avoid incidents at sea; and the Remote Maintenance and Engine Monitoring Systems, which similarly promote
crews’ safety by ensuring that vessels are kept in shipshape condition. Through the further development of our Smart Ship
solutions, we believe will make greater in-roads into the autonomous ship and unmanned ship markets.
Smart
Ship solutions are navigation oriented hardware and software that are developed by utilizing maritime I.o.T and big data technology.
We develop Smart Ship technology under the partnership with HHI. This partnership has resulted in the development of a number
of Smart Ship solutions that we supplied to HHI’s newly-built ships. By applying marine I.o.T. and big data technologies,
we believe we will continue to expand the development of Smart Ship solutions, by gradually entering the autonomous ship and unmanned
ship market.
Overseas
Solutions Distribution
We
have agreements with a number of maritime products manufacturers. We have an exclusive agreement with Teledyne Technologies International
Corp for the distribution of CARIS, maritime GIS software. We distribute digital charts from C-Map, The United Kingdom Hydrographic
Office and the Korea Hydrography and Research Association. In 2017, we began providing services related to a maritime-training
simulator for the Republic of Korea Navy in cooperation with ECA-Sindel. We also are the exclusive distributor of Hatteland’s
maritime-specialized hardware.
Aids
to Navigation
We
implement AtoN management systems for public maritime agencies. AtoN systems include sensors that are attached to navigational
aids at sea and management software installed at the ground control level for information collection, display and analysis. Our
AtoN System consists of the (i) Maritime Weather Signals Total Management System and the (ii) e-A2N device.
The
Maritime Weather Signals Total Management System is a technology that collects weather information that is then transmitted to
all major ports and maritime offices for public and civic use. It collects weather signals in various formats, including AIS,
CDMA and TRS, and then simultaneously displays such information as tidal height, wind directivity, wind speed and sea temperature.
We have implemented over a dozen maritime information systems in major port cities such as Busan, Incheon and Ulsan. In 2017,
we implemented our Total Management System, which compiles all maritime weather information and delivers it through one central
center, at the National Maritime Positioning, Navigation, and Timing Office. We believe that once the IMO begins its e-Navigation
initiative, the Total AtoN Management System will be a part of the Total Maritime Traffic System.
Our
e-A2N device detects technical malfunctions and sends real-time data such as battery status and weather conditions to ground control,
bringing attention to ship components in need of maintenance. We believe that our e-A2N device results in cost reduction and unnecessary
manpower while also benefiting users, such as crew members, passengers, pilots and seaferers, by providing access to weather information
via port dashboards and smart applications. To date, we have installed e-A2N devices in over 4,000 navigational aids throughout
Korea.
Key
Factors of Our Business Model
We
cover every aspect of the ENC technology within our e-Navigator from manufacturing, modification, personalization, distribution
and maintenance. We offer our customers our e-Navigator ECDIS and ENC separately or as a package, which we believe provides us
with a cost competitive edge, as well as seamless integration and on-going maintenance.
We
have developed our e-Navigator and our ECN products in an effort to offer our customers what we believe to be the best product
possible in the market. Currently, we hold approximately 90% of the market of private ships through our government contracts with
the Republic of Korea (“
R.O.K
”) Navy and Coast Guard, and we hold approximately 60% of the public sector market
share. The rest of the market is held by other domestic and foreign competitors, including Japan Radio Co., Ltd., Furuno Electric
Co., Ltd. and Martin Electric Co., Ltd. We have been the market leader of ECDIS in Korea, consistently supplying and operating
maintenance service for the Republic of Korea Navy, the Coast Guard and other public and commercial ships. We continuously provide
ECDIS maintenance services to an average of 200 navy vessels annually, with contracts renewed every one to two years
In
September 2017, we won a contract from the R.O.K. Navy to provide maintenance services to navy ships through fiscal year 2018.
This marks the 8
th
consecutive year in which we have won such contracts.
We
are a Smart Ship solutions development partner of Hyundai Heavy Industries. We supply ISIG, Optimal Navigation System and Engine
Status Monitoring System to Hyundai Heavy Industries and anticipate supplying subsequent Smart Ship products to Hyundai Heavy
Industries and other shipbuilders in South Korea such as Hanjin Heavy Industries and Samsung Heavy Industries.
Limited
Operating History
We
are in the early stages of development and have a limited operating history. We have a history of operating losses and may not
achieve or maintain profitability and positive cash flow. We may not successfully address these risks and uncertainties or successfully
implement our operating strategies. If we fail to do so, it could materially harm our business to the point of having to cease
operations and could impair the value of our common stock to the point investors may lose their entire investment. Even if we
accomplish these objectives, we may not generate positive cash flows or the profits we anticipate in the future. We cannot guarantee
we will be successful in our business operations.
The
following discussion and analysis should be read in conjunction with our audited financial statements for the fiscal year ended
December 31, 2017, and accompanying notes, in the our Annual Report on Form 10-K filed with the Securities and Exchange Commission
on April 17, 2018.
RESULTS
OF OPERATIONS
Three
Months Ended June 30, 2018 and 2017
The
following table summarizes the results of our operations during the three months ended June 30, 2018 and 2017, respectively, and
percentage increase or (decrease) from the current 3-month period to the prior 3-month period (in thousands of Korean Won):
Line
Item
|
|
6/30/2018
(unaudited)
|
|
|
6/30/2017
(unaudited)
|
|
|
Increase
|
|
|
Percentage
Increase
|
|
Revenue
|
|
₩
|
1,049,202
|
|
|
₩
|
1,003,471
|
|
|
₩
|
45,731
|
|
|
|
5
|
%
|
Operating
expense
|
|
₩
|
1,489,881
|
|
|
₩
|
1,151,150
|
|
|
₩
|
338,731
|
|
|
|
29
|
%
|
Net
loss
|
|
₩
|
445,805
|
|
|
₩
|
119,800
|
|
|
₩
|
326,007
|
|
|
|
272
|
%
|
Revenue
.
Total revenue for the three months ended June 30, 2018 and 2017 was ₩1,049,202 thousand and ₩1,003,471 thousand,
respectively. The increase of ₩45,731 thousand, or 5%, was primarily due to the increased Computer Aided Resource Information
System (“
CARIS
”) software sales.
Cost
of Revenue
. Total cost of revenue for the three months ended June 30, 2018 and 2017 was ₩690,973 thousand and ₩606,236
thousand, respectively. The increase of ₩84,737 thousand, or 14%, was primarily due to the increased cost of revenue on
CARIS software sales. The cost increase was higher than that of revenue due to the special sales promotions.
Selling,
General and Administrative Expenses
. Selling, general and administrative expenses for the three months ended June 30,
2018 and 2017 was ₩771,105 thousand and ₩475,570 thousand, respectively. The increase of ₩295,535 thousand,
or 62%, was primarily due to the heavy expenditures on the development of the algorithm for typhoon forecast monitoring technology.
Loss
from Operations.
Loss from operations for the three months ended June 30, 2018 and 2017 was ₩412,876 thousand and
₩78,335 thousand, respectively. The decrease of ₩334,541 thousand, or 427%, was due to the combination of the decrease
in gross margin and the increase in the selling, general and administrative expenses.
Other
Expense
. Other expense for the three months ended June 30, 2018 and 2017 was ₩27,803 thousand and ₩69,344
thousand, respectively. The decrease of ₩41,541 thousand, or 60%, was primarily due to the decrease in interest expense.
Net
Loss
. Net loss for the three months ended June 30, 2018 and 2017 was ₩445,805 thousand and ₩119,800
thousand, respectively. The increase of ₩326,007 thousand, or 272%, was due to the combination of the decrease in gross
margin and the increase in the selling, general and administrative expenses offset by the slight decrease in other expense.
Six
Months Ended June 30, 2018 and June 30, 2017
The
following table summarizes the results of our operations during the six months ended June 30, 2018 and 2017, respectively, and
percentage increase or (decrease) from the current 6-month period to the prior 6-month period (in thousands of Korean Won):
Line
Item
|
|
6/30/2018
(unaudited)
|
|
|
6/30/2017
(unaudited)
|
|
|
Increase
(Decrease)
|
|
|
Percentage
Increase
(Decrease)
|
|
Revenue
|
|
₩
|
2,358,685
|
|
|
₩
|
1,970,123
|
|
|
₩
|
388,562
|
|
|
|
20
|
%
|
Operating
expense
|
|
₩
|
2,815,031
|
|
|
₩
|
2,997,166
|
|
|
₩
|
(182,135
|
)
|
|
|
(6
|
)%
|
Net
loss
|
|
₩
|
456,346
|
|
|
₩
|
1,027,043
|
|
|
₩
|
(570,697
|
)
|
|
|
(56
|
)%
|
Revenue
.
Total revenue for the six months ended June 30, 2018 and 2017 was ₩2,358,685 thousand and ₩1,970,123 thousand, respectively.
The increase of ₩388,562 thousand, or 20%, was primarily due to the increased CARIS software sales and new service sales
to Research Institute of Medium & small Shipbuiliding.
Cost
of Revenue
. Total cost of revenue for the six months ended June 30, 2018 and 2017 was ₩1,545,988 thousand and ₩1,924,960
thousand, respectively. The decrease of ₩378,972 thousand, or 20%, was primarily due to the decrease in outsourcing costs
and the increase in government subsidy.
Selling,
General and Administrative Expenses
. Selling, general and administrative expenses for the six months ended June 30, 2018
and 2017 was ₩1,195,183 thousand and ₩987,123 thousand, respectively. The increase of ₩208,060 thousand,
or 21%, was primarily due to the heavy expenditures on the development of the algorithm for typhoon forecast monitoring technology.
Loss
from Operations.
Loss from operations for the six months ended June 30, 2018 and 2017 was ₩382,486 thousand and
₩941,960 thousand, respectively. The decrease of ₩559,474 thousand, or 59%, was due to the combination of the increase
in gross margin offset by the increase in the selling, general and administrative expenses.
Other
Expense
. Other expense for the six months ended June 30, 2018 and 2017 was ₩71,664 thousand and ₩112,962
thousand, respectively. The decrease of ₩41,298 thousand, or 37%, was primarily due to the decrease in interest expense.
Net
Loss
. Net loss for the six months ended June 30, 2018 and 2017 was ₩456,346 thousand and ₩1,027,043
thousand, respectively. The decrease of ₩570,697 thousand, or 56%, was due to the combination of the increase in gross
margin and the slight decrease in other expense offset by the increase in the selling, general and administrative expenses.
LIQUIDITY
AND CAPITAL RESOURCES
Sources
of Liquidity
As
of June 30, 2018, the Company had ₩166,228 thousand of cash on hand as compared to ₩109,316 thousand as of December
31, 2017. For the six months ended June 30, 2018, the Company reported loss from operations of ₩382,486 thousand and net
cash used in operating activities of ₩454,647 thousand. The Company continues to experience liquidity constraints due to
the continuing losses. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
During
2018, management addressed going concern remediation by conducting a private placement offering to fund operations, and is continuing
initiatives to raise capital to meet future working capital requirements. However, additional capital is required to reduce the
Company’s risk of going concern uncertainties beyond the next twelve months as of August 14, 2018. There is no certainty
that the Company will be able to arrange sufficient funding to continue its operations.
Operating
Cash Flows.
Net cash used in operating activities for the six months ended June 30, 2018 was ₩454,647 thousand,
which was due to the net loss of ₩456,346 thousand, the increase in operating assets of ₩356,128, and payments of
pension benefits of ₩30,895 offset by the adjustment of noncash items of ₩178,645 thousand to the net loss and increase
in operating liabilities of ₩210,077 thousand.
Investing
Cash Flows.
Net cash provided by investing activities for the six months ended June 30, 2018 was ₩424,456 thousand,
which was due to the net decrease in loans to related parties of ₩162,456 thousand and proceeds from disposals of short-term
financial instruments of ₩262,000 thousand.
Financing
Cash Flows.
Net cash provided by financing activities for the six months ended June 30, 2018 was ₩97,735 thousand,
which was due the proceeds from private placement of ₩557,336 thousand and the increase in loans from related parties of
₩38,754 thousand offset by the net decrease in short-term borrowings of ₩396,395, repayment of current portion of
long-term debt of ₩101,960 thousand.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
Contingencies
From
time to time the Company may be named in claims arising in the ordinary course of business. We record a provision for a liability
when we believe that it is both probable that a liability has been incurred, and that the amount can be reasonably estimated.
If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the possible loss
in the accompanying notes to the consolidated financial statements. Significant judgment is required to determine both probability
and the estimated amount of loss. Such matters are inherently unpredictable and subject to significant uncertainties, some of
which are beyond our control. Should any of these estimates and assumptions change or prove to be incorrect, it could have a material
impact on our results of operations, financial position, and cash flows.
See
Note 14 – Commitments and Contingencies in the notes to the consolidated financial statements included in Part I, Item I,
and “Legal Proceedings” contained in Part II, Item I of this Quarterly Report on Form 10-Q for additional information
regarding contingencies.
Recently
Issued Accounting Pronouncements
In
February 2016, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-02, Leases (Topic 842). This ASU will increase transparency and comparability among organizations by recognizing lease assets
and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Certain qualitative and
quantitative disclosures are required, as well as a retrospective recognition and measurement of impacted leases. This ASU is
effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted.
The Company is currently evaluating this ASU to determine its impact on the Company’s operations, financial position, cash
flows and disclosures.
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is a comprehensive new revenue
recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an
amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, FASB issued
ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date
of ASU 2014-09 to reporting periods beginning after December 15, 2017, with early adoption permitted for reporting periods beginning
after December 15, 2016. Subsequently, FASB issued ASUs in 2016 containing implementation guidance related to ASU 2014-09, including:
ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross
versus Net) , which is intended to improve the operability and understandability of the implementation guidance on principal versus
agent considerations; ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and
Licensing , which is intended to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation
guidance; and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,
which contains certain provision and practical expedients in response to identified implementation issues. The Company has adopted
ASU 2014-09 and related ASUs on January 1, 2018. Companies may use either a full retrospective or a modified retrospective approach
to adopt these ASUs. On January 1, 2018, the Company adopted ASU 2014-09, using the full retrospective method, which requires
reporting entities to apply the standard as of the earliest period presented in their financial statements. The Company completed
its review of its material revenue streams and determined that the adoption of Topic 606 did not have a material impact on the
Company’s condensed consolidated statements of operations and condensed consolidated balance sheets.
In
January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
This ASU eliminates Step 2 along with amending other parts of the goodwill impairment test. Under ASU 2017-04, an entity should
perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount,
and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair
value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. This ASU is effective for annual
periods beginning after December 15, 2019, and interim periods therein with early adoption permitted for interim or annual goodwill
impairment tests performed after January 1, 2017. At adoption, this update will require a prospective approach. The Company is
currently evaluating this ASU to determine its impact on the Company’s operations, financial position, cash flows and disclosures.
Other
accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected
to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements
that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or
disclosures.
Critical
Accounting Policies and Estimates
Our
condensed consolidated financial statements have been prepared in accordance with the accounting principles generally accepted
in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to
Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission and on the same basis as the Company prepares
its annual audited consolidated financial statements.
The preparation of these condensed
consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenue, costs and expenses, and related disclosures. These estimates form the basis for judgments we make about the carrying
values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on
historical experience and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis,
we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
In
the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation of such interim results.
The
results for the condensed consolidated statement of operations are not necessarily indicative of results to be expected for the
year ending December 31, 2018 or for any future interim period. The condensed consolidated balance sheet at June 30, 2018 has
been derived from unaudited financial statements; however, it does not include all of the information and notes required by U.S.
GAAP for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements for the year ended December 31, 2017, and notes thereto included in the Company’s
annual report on Form 10-K filed on April 17, 2018.
There
have been no material changes in the Company’s significant accounting policies to those previously disclosed in the Company’s
annual report on Form 10-K for the fiscal year ended December 31, 2017.