NOTE
2 – LIQUIDITY FINANCIAL CONDITION AND MANAGEMENT PLANS
These
consolidated financial statements have been prepared on the basis of a going concern which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
As
of June 30, 2019, the Company had cash of ₩84,339 thousand. Historically, the Company had net losses and negative cash
flows from operations. The Company continues to experience liquidity constraints due to the continuing losses. These factors contributed
to the Company’s substantial doubt of its ability to continue as a going concern.
During
the six months ended June 30, 2019 and the year ended December 31, 2018, 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 statements of operations are not necessarily indicative of results to be expected for the
year ending December 31, 2019 or for any future interim period. The condensed consolidated balance sheet at June 30, 2019 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, 2018, and notes thereto included in the Company’s
annual report on Form 10-K filed on April 15, 2019.
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 15, 2019.
eMARINE
Global Inc.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
(Unaudited)
Earnings
(Loss) Per Share
Earnings
(loss) per share are calculated in accordance with 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 periods presented.
|
|
June
30, 2019
|
|
|
June
30, 2018
|
|
Common
stock warrants
|
|
|
12,916,688
|
|
|
|
12,916,688
|
|
Potential dilutive shares
|
|
|
12,916,688
|
|
|
|
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), which requires lessees to recognize leases on-balance sheet and disclose key information about leasing
arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic
842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard
establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet
for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting
the pattern and classification of expense recognition in the income statement.
These
ASUs are effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption
permitted. On January 1, 2019, the Company adopted these ASUs, using modified retrospective transition approach.
A
modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial
application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period
presented in the financial statements as its date of initial application. The adopted the effective date as the date of initial
application. Consequently, financial information will not be updated and the disclosures required under the new standard will
not be provided for dates and periods before January 1, 2019.
On
adoption, the Company recognized additional operating liabilities of $₩109,138 thousand, with corresponding ROU
assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards
for existing operating leases.
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.
eMARINE
Global Inc.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
(Unaudited)
NOTE
4 — INVENTORIES
The
components of inventories are as follows (in thousands of Korean Won):
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
Finished goods
|
|
₩
|
-
|
|
|
₩
|
-
|
|
Raw
materials
|
|
|
143,295
|
|
|
|
7,217
|
|
|
|
|
143,295
|
|
|
|
7,217
|
|
Less:
Inventory reserve
|
|
|
-
|
|
|
|
-
|
|
Total, net
|
|
₩
|
143,295
|
|
|
₩
|
7,217
|
|
NOTE
5 — PROPERTY AND EQUIPMENT
The
components of property and equipment are as follows (in thousands of Korean Won):
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
Office equipment
|
|
₩
|
219,980
|
|
|
₩
|
219,980
|
|
Fixtures and furniture
|
|
|
48,520
|
|
|
|
48,520
|
|
Other
|
|
|
285,113
|
|
|
|
285,112
|
|
Total, at cost
|
|
|
553,613
|
|
|
|
553,612
|
|
Less:
Accumulated depreciation
|
|
|
(517,023
|
)
|
|
|
(509,388
|
)
|
|
|
|
36,590
|
|
|
|
44,224
|
|
|
|
|
|
|
|
|
|
|
Right-of-use lease assets - operating
|
|
|
438,885
|
|
|
|
-
|
|
Less: Accumulated
depreciation
|
|
|
(206,636
|
)
|
|
|
-
|
|
Right-of-use
lease assets - operating, net
|
|
|
232,249
|
|
|
|
-
|
|
Total, net
|
|
₩
|
268,839
|
|
|
₩
|
44,224
|
|
Depreciation
expense amounted to ₩7,635 thousand and ₩7,882 thousand for the periods ended June 30, 2019 and 2018, respectively.
Amortization
expense on right-of-use lease assets amounted to ₩58,647 and nil for the periods ended June 30, 2019 and 2018, 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 — DEBT
Short-term
Borrowings
The
Company borrowed ₩260,000 thousand from Kookmin Bank at October 8, 2015 with the maturity of October 2, 2019. The borrowings
bear an interest at 6.09% and 4.70% per annum for 2018 and 2017, respectively. The Company paid ₩26,000 thousand and entered
into a refinancing agreement at October 2, 2018. At June 30, 2019 and December 31, 2018, 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 4, 2019. The borrowings
bear an interest at 6.13% and 5.05% per annum for 2018 and 2017, respectively. The Company paid ₩26,000 thousand and entered
into a refinancing agreement at November 2, 2018. At June 30, 2019 and December 31, 2018, 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.
eMARINE
Global Inc.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
(Unaudited)
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 4.79% and 4.27% per annum for 2018 and 2017. The Company paid ₩1,000,000 thousand and entered into
an extension agreement at May 1, 2019 through which the maturity was extended through 2020. At June 30, 2019 and December 31,
2018, the balance for the borrowings was ₩900,000 thousand and ₩900,000 thousand, respectively. The borrowings are
guaranteed by Korea Technology Finance Corporation, a government-funded institution.
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,
2019 and December 31, 2018, the balance for the borrowings was ₩428,000 thousand and ₩428,000 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 ₩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, 2019 and December 31, 2018, the balance for the borrowings was ₩195,000
thousand. The Company is in negotiation with the lender to extend the maturity. The balance is currently in default.
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, 2019 and December 31, 2018, the balance for the borrowings was ₩300,000
thousand. The Company is in negotiation with the lender to extend the maturity. The balance is currently in default.
The
Company borrowed ₩130,000 thousand from Kwangju Bank at September 27, 2018 with the maturity of August 24, 2019. The borrowings
bear an interest at 5.65 % per annum for 2018 and 2019. At June 30, 2019 and December 31, 2018, the balance for the borrowings
was ₩23,636 thousand and ₩94,545 thousand, respectively. The borrowings are guaranteed by Ung Gyu Kim, President
and CEO.
As
of June 30, 2019 and December 31, 2018, 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, 2019
|
|
|
December
31, 2018
|
|
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 2019 and 2018, respectively, guaranteed by Ung Gyu Kim, President and CEO
|
|
₩
|
333,120
|
|
|
₩
|
374,760
|
|
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 and CEO
|
|
|
177,600
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
Loans from Small
& medium Business Corporation borrowed at August 13, 2018 with the maturity of August 14, 2023 and at an interest of 2.43%
per annum, guaranteed by Ung Gyu Kim, President and CEO
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
610,720
|
|
|
|
674,760
|
|
|
|
|
|
|
|
|
|
|
Less: current
portion
|
|
|
(256,980
|
)
|
|
|
(222,260
|
)
|
Total long-term
debt less current portion
|
|
₩
|
353,740
|
|
|
₩
|
452,500
|
|
eMARINE
Global Inc.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
(Unaudited)
As
of June 30, 2019 and December 31, 2018, the estimated fair value of the long-term debt, including the current portion, were ₩610,720
and ₩674,760, respectively.
As
of June 30, 2019 and December 31, 2018, respectively, the Company was in compliance with the financial covenant in credit agreements
as defined in the credit agreements.
NOTE
8 – PENSION PLANS
The
Company has a defined benefit plan 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.
The
components of benefit expense are as follows (in thousands of Korean Won):
|
|
June
30, 2019
|
|
|
June
30, 2018
|
|
|
|
|
|
|
|
|
Service cost
|
|
₩
|
103,665
|
|
|
₩
|
102,871
|
|
Interest cost
|
|
|
7,089
|
|
|
|
5,587
|
|
Prior service
cost
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
₩
|
110,754
|
|
|
₩
|
108,458
|
|
NOTE
9 – STOCKHOLDERS’ DEFICIT
Authorized
and Outstanding Capital Stock
The
Company authorized 300,000,000 shares of common stock, par value $0.001, of which 23,159,105 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.
eMARINE
Global Inc.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
(Unaudited)
Warrants
As
of June 30, 2019, 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.
On
April 17, 2019, the Company issued 231,133 warrants to purchase up to an aggregate of 231,133 shares of common stock, par
value $0.001 per share, for a period of three years from the date of issuance, April 17, 2022, 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.
NOTE
10 – RELATED PARTY TRANSACTIONS
The
Company borrowed ₩141,216 thousand from Ung Gyu Kim, President, at February 25, 2018 with the maturity of June 25, 2020.
The borrowings bear an interest at 4.60 % per annum. At June 30, 2019 and December 31, 2018, the balance for the borrowings was
₩52,240 thousand and ₩45,980, respectively.
NOTE
11 – COMMITMENTS AND CONTINGENCIES
Operating
leases
The
Company entered into noncancelable operating leases for office facilities and vehicles. The leases do not include renewal options
and, in the normal course of business, it is expected that these leases will be renewed. Rent expense under the operating leases
totaled ₩67,906 thousand for the six month period ended June 30, 2019.
Short-term
leases are leases having a term of twelve months or less. The Company recognizes short-term leases on a straight-line basis and
does not record a related lease asset or liability for such leases.
The
following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities as of June 30, 2019
(in thousands of Korean Won):
Year Ending June 30,
|
|
|
|
2020
|
|
₩
|
100,897
|
|
2021
|
|
|
88,451
|
|
2022
|
|
|
47,363
|
|
2023
|
|
|
14,440
|
|
Total
|
|
₩
|
251,151
|
|
|
|
June
30, 2019
|
|
Lease cost:
|
|
|
|
|
Operating lease cost
|
|
₩
|
65,506
|
|
Short-term lease
cost
|
|
|
2,400
|
|
|
|
|
|
|
Total lease cost
|
|
₩
|
67,906
|
|
|
|
|
|
|
Other information
|
|
|
|
|
Cash paid for amounts included in the
measurement of lease liabilities
|
|
₩
|
67,906
|
|
Operating cash flows from operating
leases
|
|
₩
|
67,906
|
|
Weighted-average remaining lease term
- operating leases
|
|
|
2.7 years
|
|
Weighted-average discount rate - operating
leases
|
|
|
5.74
|
%
|
eMARINE
Global Inc.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
(Unaudited)
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 June 30, 2019. 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, 2019.
NOTE
12 — 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 four and four of the Company’s customers
in June 30, 2019 and December 31, 2018, respectively.
At
June 30, 2019, G2 ICT Co., Ltd., Hyundai Electric & Systems Co., Ltd., Shinwoo E&D Co., Ltd. and Hanjin Heavy Industries
& Construction Co., Ltd. represented 45%, 17%, 15% and 12% of accounts receivable outstanding.
At
December 31, 2018, G2 ICT Co., Ltd., Shinwoo E&D Co., Ltd., Hyundai Heavy Industries Co., Ltd. and Hanjin Heavy Industries
& Construction Co., Ltd. represented 44%, 15%, 13% and 11% 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 six month period ended June 30, 2019, Naval Logistics Command and Hyundai Global Service Co., Ltd. represented 41% and 10%
of the Company’s net sales.
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.
NOTE
13 — REVENUE CLASSES
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;
|
eMARINE
Global Inc.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
(Unaudited)
|
●
|
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.
|
Accounting
Policy
Revenue
for sale of goods is recognized when the significant risks and rewards of ownership have been transferred to the customer, recovery
of the consideration is probable, the associated costs and possible return of the goods can be estimated reliably, there is no
continuing involvement with goods, and the amount of revenue can be measured reliably. If it is probable that discounts will be
granted and the amount can be measured reliably, then the discount is recognized as a reduction of revenue as the sales are recognized.
Revenue
from services is recognized by reference to the stage of performance of the services when the Company can reliably measure the
amount of revenue and the recovery of the consideration is considered probable.
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 Six Months Ended
|
|
|
|
|
|
June
30, 2019
|
|
|
June
30, 2018
|
|
Products
|
|
e-Navigation
|
|
₩
|
637,182
|
|
|
₩
|
953,243
|
|
|
|
Smart Ship
|
|
|
486,806
|
|
|
|
65,190
|
|
|
|
|
|
|
|
|
|
|
|
|
Projects
|
|
e-Navigation
|
|
|
801,194
|
|
|
|
745,245
|
|
|
|
Smart Ship
|
|
|
22,070
|
|
|
|
595,007
|
|
Total
|
|
|
|
₩
|
1,947,252
|
|
|
₩
|
2,358,685
|
|
NOTE
14 — 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 management solutions.
Electronic
Chart Display and Information Systems
We
offer e-Navigator, our branded electronic chart display and information system (“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 Internet of Things (“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.
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 Management Systems
We
implement Aids to Navigation (“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 2018, we won a contract from the R.O.K. Navy to provide maintenance services to navy ships through fiscal year 2020.
This marks the 9
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, 2018, and accompanying notes, in the our Annual Report on Form 10-K filed with the Securities and Exchange Commission
on April 15, 2019.
CRITICAL
ACCOUNTING POLICIES
Our
management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S.
GAAP. The preparation of these consolidated financial statements requires us to exercise considerable judgment with respect to
establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets
and liabilities, our recognition of revenues and expenses, and disclosure of commitments and contingencies at the date of the
consolidated financial statements.
We
base our estimates on our historical experience, knowledge of our business and industry, current and expected economic conditions,
the attributes of our products, the regulatory environment, and in certain cases, the results of outside appraisals. We periodically
re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate
that modifications are necessary. These estimates and assumptions form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
While
we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies,
we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise
of judgment, actual results could differ from such estimates.
There
have been no material changes except to the Company’s critical accounting policies and estimates as compared to the critical
accounting policies and estimates described in the Company’s 2018 Annual Report, which we believe are the most critical
to our business and the understanding of our results of operations and affect the more significant judgments and estimates that
we use in the preparation of our consolidated financial statements.
RESULTS
OF OPERATIONS
Three
Months Ended June 30, 2019 and 2018
The
following table summarizes the results of our operations during the three months ended June 30, 2019 and 2018, 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
|
|
June
30, 2019 (unaudited)
|
|
|
June
30, 2018 (unaudited)
|
|
|
Increase
(Decrease)
|
|
Percentage
Increase (Decrease)
|
|
Revenue
|
|
₩
|
666,921
|
|
|
₩
|
1,049,202
|
|
|
₩
|
(382,281
|
)
|
|
(36
|
)%
|
Operating
expense
|
|
₩
|
1,287,729
|
|
|
₩
|
1,489,881
|
|
|
₩
|
(207,278
|
)
|
|
(14
|
)%
|
Net
loss
|
|
₩
|
620,808
|
|
|
₩
|
445,805
|
|
|
₩
|
175,003
|
|
|
39
|
%
|
Revenue
.
Total revenue for the three months ended June 30, 2019 and 2018 was ₩666,921 thousand and ₩1,049,202 thousand, respectively.
The decrease of ₩382,281 thousand, or 36%, was primarily due to the delay of contracting the annual Navy ASWTT maintenance
project.
Cost
of Revenue
. Total cost of revenue for the three months ended June 30, 2019 and 2018 was ₩394,931 thousand and ₩690,973
thousand, respectively. The decrease of ₩296,042 thousand, or 43%, was primarily due to the decreased cost of revenue on
maintenance projects.
Selling,
General and Administrative Expenses
. Selling, general and administrative expenses for the three months ended June 30,
2019 and 2018 was ₩721,587 thousand and ₩741,295 thousand, respectively. The decrease of ₩19,708 thousand,
or 3%, was primarily due to the expense saving efforts, including the reduction of rent and service fees, resulting in the decrease
in general and administrative expense.
Research
and Development
. Research and development expenses for the three months ended June 30, 2019 and 2018 was ₩105,184
thousand and ₩29,810, respectively. The increase of ₩75,374 thousand, or 253%, was primarily due to the increase
in the research and development activities on smart ship technology enhancement.
Loss
from Operations.
Loss from operations for the three months ended June 30, 2019 and 2018 was ₩554,781 thousand and
₩412,876 thousand, respectively. The increase of ₩141,905 thousand, or 34%, was due to the combination of the decrease
in gross margin and the increase in legal and professional fees.
Other
Expense
. Other expense for the three months ended June 30, 2019 and 2018 was ₩52,748 thousand and ₩27,803
thousand, respectively. The increase of ₩24,945 thousand, or 90%, was primarily due to the increase in interest expense.
Net
Loss
. Net loss for the three months ended June 30, 2019 and 2018 was ₩620,808 thousand and ₩445,805 thousand,
respectively. The increase of ₩175,003 thousand, or 39%, was due to the combination of the decrease in gross margin and
the increase in the research and development expenses.
Six
Months Ended June 30, 2019 and June 30, 2018
The
following table summarizes the results of our operations during the six months ended June 30, 2019 and 2018, 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
|
|
June
30, 2019
(unaudited)
|
|
|
June
30, 2018
(unaudited)
|
|
|
Increase
(Decrease)
|
|
|
Percentage
Increase
(Decrease)
|
|
Revenue
|
|
₩
|
1,947,252
|
|
|
₩
|
2,358,685
|
|
|
₩
|
(411,433
|
)
|
|
|
(17
|
)%
|
Operating
expense
|
|
₩
|
2,459,651
|
|
|
₩
|
2,815,031
|
|
|
₩
|
(355,380
|
)
|
|
|
(13
|
)%
|
Net
loss
|
|
₩
|
512,399
|
|
|
₩
|
456,346
|
|
|
₩
|
56,053
|
|
|
|
12
|
%
|
Revenue
.
Total revenue for the six months ended June 30, 2019 and 2018 was ₩1,947,252 thousand and ₩2,358,685 thousand, respectively.
The decrease of ₩411,433 thousand, or 17%, was primarily due to the delay of contracting the annual Navy ASWTT maintenance
project.
Cost
of Revenue
. Total cost of revenue for the six months ended June 30, 2019 and 2018 was ₩1,128,395 thousand and ₩1,545,988
thousand, respectively. The decrease of ₩417,593 thousand, or 27%, 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, 2019
and 2018 was ₩1,045,921 thousand and ₩978,849 thousand, respectively. The increase of ₩67,072 thousand, or
7%, was primarily due to the increase in legal and professional fees.
Research
and Development
. Research and development expenses for the six months ended June 30, 2019 and 2018 was ₩177,044
thousand and ₩216,334, respectively. The decrease of ₩39,290 thousand, or 18%, was primarily due to the decrease
in the research and development activities on typhoon monitoring system algorithms.
Loss
from Operations.
Loss from operations for the six months ended June 30, 2019 and 2018 was ₩404,108 thousand and
₩382,486 thousand, respectively. The increase of ₩21,622 thousand, or 6%, was due to the combination of the decrease
in revenue and the increase in the selling, general and administrative expenses.
Other
Expense
. Other expense for the six months ended June 30, 2019 and 2018 was ₩96,632 thousand and ₩71,664
thousand, respectively. The increase of ₩24,968 thousand, or 35%, was primarily due to the increase in interest expense.
Net
Loss
. Net loss for the six months ended June 30, 2019 and 2018 was ₩512,399 thousand and ₩456,346 thousand,
respectively. The increase of ₩56,053 thousand, or 12%, was due to the combination of the decrease in revenue and the increase
in the selling, general and administrative expenses.
LIQUIDITY
AND CAPITAL RESOURCES
Sources
of Liquidity
As
of June 30, 2019, the Company had ₩84,339 thousand of cash on hand as compared to ₩126,406 thousand as of December
31, 2018. For the six months ended June 30, 2019, the Company reported loss from operations of ₩404,108 thousand and net
cash provided by operating activities of ₩196,386 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
2019, management has been 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, 2019. There is no certainty that the Company will be able to arrange sufficient funding to continue its operations.
Operating
Cash Flows.
Net cash provided by operating activities for the six
months ended June 30, 2019 was ₩196,386 thousand, which was due to the net loss of ₩512,399 thousand, the
increase in net operating assets of ₩102,563, and payments of pension benefits of ₩27,327 offset by the adjustment
of noncash items of ₩618,072 thousand to the net loss and increase in operating liabilities of ₩220,603 thousand.
Investing
Cash Flows.
Net cash used in investing activities for the six months ended June 30, 2019 was ₩18,000 thousand,
which was due to the purchase of short-term financial instruments of ₩18,000 thousand.
Financing
Cash Flows.
Net cash used in financing activities for the six months
ended June 30, 2019 was ₩221,985 thousand, which was due the proceeds from warrants exercised of ₩20,944 thousand
offset by the net decrease in short-term borrowings of ₩70,909, repayment of current portion of long-term debt of ₩64,040
thousand, payment of lease obligations of ₩58,647 thousand and net decrease in loans from related parties of ₩49,333
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.