UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the Quarter ended June 30, 2018

 

Commission File Number: 000-49933

 

EMARINE GLOBAL INC.

(Exact name of registrant as specified in its charter)

 

Nevada		95-4886472
(State of organization)		(I.R.S. Employer Identification No.)

 

4th Floor, 15-14, Samsan-ro 308beon-gil, Nam-gu, Ulsan, 44715 Republic of Korea

(Address of principal executive offices)

 

+82-70-7204-9352

Registrant’s telephone number, including area code

 

 

Former address if changed since last report

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [  ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Non-accelerated filer [  ] (Do not check if smaller reporting company)

Accelerated filer [  ] Smaller reporting company [X] Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [  ] Yes [X] No

 

As of August 14, 2018, the registrant had 22,927,992 shares of common stock, par value $0.001 per share, outstanding.

 

 

 

TABLE OF CONTENTS

 

	PART I - FINANCIAL INFORMATION
ITEM 1.	INTERIM FINANCIAL STATEMENTS	F-1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS	2
ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	9
ITEM 4	CONTROLS AND PROCEDURES	9
	PART II - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	10
ITEM 1A.	RISK FACTORS	10
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES	10
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	10
ITEM 4.	MINE SAFETY DISCLOSURES	10
ITEM 5.	OTHER INFORMATION	10
ITEM 6.	EXHIBITS	11
SIGNATURES		12

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. INTERIM FINANCIAL STATEMENTS

 

eMARINE Global Inc. (Formerly Known as e-Marine Co., Ltd.)

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of Korean Won, except share and per share amounts)

 

		June 30				December 31
		2018				2017
			(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		￦	166,228			￦	109,316
Short-term financial instruments			76,000				338,000
Accounts receivable, net of allowance for doubtful accounts of ￦11,227 and ￦11,227, as of June 30, 2018 and December 31, 2017, respectively			754,002				480,673
Inventories			87,422				6,200
Loans to related parties			-				164,000
Other current assets			75,732				65,087
Total Current Assets			1,159,384				1,163,276
Property and equipment, net			51,926				59,808
Goodwill			1,430,625				1,430,625
Intangible assets, net			352,604				403,053
Deposits			100,199				120,499
Total Assets		￦	3,094,738			￦	3,177,261
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Accounts payable		￦	1,202,074			￦	1,129,854
Nontrade payables			1,253,617				1,131,517
Other current liabilities			192,784				193,048
Short-term borrowings			2,393,492				2,789,886
Loans from related parties			9,606				18,895
Current portion of long-term debt			358,960				245,240
Total Current Liabilities			5,410,533				5,508,440
Long-term debt			469,080				684,760
Loans from related parties			48,044				-
Accrued benefit pension liability			1,017,642				930,098
Total Liabilities			6,945,299				7,123,298
Commitments and Contingencies (Note 14)
STOCKHOLDERS’ DEFICIT :
Common stock, $0.001 par value, 300,000,000 shares authorized, 22,927,992 and 22,061,317 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively			26,198				25,265
Additional paid-in capital			7,136,825				6,577,829
Accumulated other comprehensive loss			(64,700	)			(56,593	)
Accumulated deficit			(10,948,884	)			(10,492,538	)
Total Stockholders’ Deficit			(3,850,561	)			(3,946,037	)
Total Liabilities and Stockholders’ Deficit		￦	3,094,738			￦	3,177,261

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

eMARINE Global Inc. (Formerly Known as e-Marine Co., Ltd.)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands of Korean Won, except share and per share amounts)

 

		Three Months Ended								Six Months Ended
		June 30, 2018				June 30, 2017				June 30, 2018				June 30, 2017
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Revenue
Product		￦	769,432			￦	467,842			￦	1,018,433			￦	898,801
Service			279,770				535,629				1,340,252				1,071,322
Total revenue			1,049,202				1,003,471				2,358,685				1,970,123
Cost of revenue
Product			493,431				175,922				675,818				842,290
Service			197,542				430,314				870,170				1,082,670
Total cost of revenue			690,973				606,236				1,545,988				1,924,960
Gross margin			358,229				397,235				812,697				45,163
Selling, general and administrative expenses			771,105				475,570				1,195,183				987,123
Loss from operations			(412,876	)			(78,335	)			(382,486	)			(941,960	)
Other expense:
Interest expense, net			(39,089	)			(65,354	)			(78,905	)			(103,484	)
Other income (expense), net			11,286				(3,990	)			7,241				(9,478	)
Total other expense			(27,803	)			(69,344	)			(71,664	)			(112,962	)
Loss before provision for income taxes			(440,679	)			(147,679	)			(454,150	)			(1,054,922	)
Income tax provision (benefit)			5,126				(27,879	)			2,196				(27,879	)
Net loss		￦	(445,805	)		￦	(119,800	)		￦	(456,346	)		￦	(1,027,043	)
Net loss per common share		￦	(19	)		￦	(486	)		￦	(20	)		￦	(7,799	)
Weighted average common shares outstanding			22,927,992				246,290				22,525,778				131,681
Net loss		￦	(445,805	)		￦	(119,800	)		￦	(456,346	)		￦	(1,027,043	)
Other comprehensive income:
Foreign exchange translation loss			(13,135	)			-				(14,919	)			-
Remeasurement of pension liabilities			(18,174	)			98,845				(7,786	)			98,845
Other comprehensive income (loss), net of tax:			(31,309	)			98,845				(22,705	)			98,845
Comprehensive loss		￦	(477,117	)		￦	(20,955	)		￦	(479,051	)		￦	(928,198	)

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

eMARINE Global Inc. (Formerly Known as e-Marine Co., Ltd.)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of Korean Won)

 

		Six Months Ended
		June 30, 2018				June 30, 2017
		(Unaudited)				(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		￦	(456,346	)		￦	(1,027,043	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			58,332				14,894
Pension plan expenses			108,458				118,889
Bad debt			-				17,209
Deferred income taxes			2,196				-
Foreign currency loss			9,659				4,647
Changes in operating assets and liabilities:
Accounts receivable			(284,561	)			122,066
Inventories			(81,222	)			221,440
Other current assets			(10,645	)			12,868
Deposits			20,300				(12,350	)
Accounts payable			73,793				7,813
Nontrade payables			122,100				(99,357	)
Other current liabilities			14,184				75,418
Pension benefits payments			(30,895	)			(163,500	)
NET CASH USED IN OPERATING ACTIVITIES			(454,647	)			(707,006	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in loans to related parties			(2,710	)			(11,485	)
Decrease in loans to related parties			165,166				-
Proceeds from disposals of short-term financial instruments			262,000				34,999
Purchase of property and equipment			-				(24,004	)
Purchase of intangible assets			-				(2,395	)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES			424,456				(2,885	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement, net			557,336				-
Drawdown of short-term borrowings			122,113				851,275
Repayment of short-term borrowings			(518,508	)			(274,000	)
Repayment of current portion of long-term debt			(101,960	)			(60,000	)
Borrowings of long-term debt			-				24,702
Repayment of long-term debt			-				53,695
Increase in loans from related parties			181,016				10,673
Repayment of loans from related parties			(142,262	)			(53,695	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			97,735				552,650
Effect of exchange rate on cash and cash equivalents			(10,632	)			-
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			56,912				(157,241	)
CASH AND CASH EQUIVALENTS- beginning of year			109,316				157,971
CASH AND CASH EQUIVALENTS- end of period		￦	166,228			￦	730
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest		￦	78,652			￦	164,248
Income taxes		￦	-			￦	-

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

eMARINE Global Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

References to 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”), on a consolidated basis.

 

NOTE 1 – DESCRIPTION OF BUSINESS AND ORGANIZATION

 

eMarine Global Inc. is a Nevada corporation (the “Company”) formed under the name of Web Views Corporation on November 2, 2001. On October 20, 2008, the Company changed its name to Pollex, Inc. (“Pollex”)

 

On July 25, 2017, the Company 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”) in exchange for 14,975,000 restricted shares of its common stock (the “Share Exchange”). As a result of the Share Exchange, e-Marine became the Company’s wholly-owned subsidiary, and the e-Marine Shareholders acquired a controlling interest in the Company.

 

For accounting purposes, the Share Exchange was treated as an acquisition of Pollex and a recapitalization of the Company. The Company is the accounting acquirer, and the results of its operations carryover. Accordingly, the operations of Pollex are not carried over and have been adjusted to ￦0. The assets and liabilities of the Company have been brought forward at its book value and no goodwill has been recognized as a result of the transaction.

 

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, the Company assumed e-Marine’s business operations as its own. The acquisition of e-Marine is treated as a reverse acquisition, and the business of e-Marine became the business of the Company.

 

As part of the recapitalization, the Pollex Shareholders assigned, transferred and delivered, free and clear of all liens, 1,012,233 of the issued and outstanding shares of common stock of Pollex, in exchange for 1,026,317 restricted shares of its common stock.

 

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: (1) Electronic Chart Display & Information System (“ECDIS”); (2) Smart Ship; (3) Overseas Solutions Distributions; and (4) Aids to Navigation.

 

On August 15, 2017, the Company entered into an agreement and plan of (the “Merger Agreement”), pursuant to which it merged with and into a 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.

 

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, 2018, the Company had cash of ￦166,228 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.

 

 

eMARINE Global Inc.

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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management is responsible for establishing and maintaining adequate “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management has concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Report to provide the reasonable assurance discussed above.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act). Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2018. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Our management has concluded that, as of June 30, 2018, our internal control over financial reporting is not effective based on these criteria.

 

Turner Stone & Company, the independent registered public accounting firm that audited our financial statements included in this Quarterly Report on Form 10-Q, was not required to issue an attestation report on our internal control over financial reporting.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On January 18, 2018, the Company commenced a lawsuit in the district court in the Republic of Korea against a customer, Shinwoo E&D., Ltd. (“Shinwoo”), to recover an unpaid balance of ￦ 84,095,000 which was due during fiscal year 2017. The district court ruled in favor of the Company. On February 1, 2018, Shinwoo filed an appeal against the district court’s decision. The Company believes it is probable that it will prevail and that it will not suffer an adverse outcome related to the case. The Company has not recorded any reserve related to this dispute as of June 30, 2018.

 

In addition, from time to time we may be involved in litigation incidental to the conduct of our business. In the ordinary course of business, we may be a party to inquiries, legal proceedings and claims including, from time to time, disagreements with vendors and customers. 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 Shinwoo matter described herein.

 

ITEM 1A. RISK FACTORS.

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

 

ITEM 6. EXHIBITS

 

Exhibit No.		Description
31.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101 SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101 LAB		XBRL Extension Labels Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

 

 

SIGNATURES

 

In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

	EMARINE GLOBAL INC.
Date: August 14, 2018	By:	/s/ Ung Gyu Kim
		Ung Gyu Kim
		Chief Executive Officer