[Public Companies at a Crossroads]⑥ "The Glorious Days Are Gone"... 'JiSmartGlobal' Faces Imminent Liquidity Crisis

Key details of convertible bonds of Gsmart Global. Source=Captured from Gsmart Global investment prospectus

[Asia Economy Reporter Yoo Hyun-seok] G-Smart Global, which made a dazzling debut in the stock market with smart glasses but fell to a penny stock due to poor performance and changes in major shareholders, is attempting a third rights offering. G-Smart Global tried two rights offerings last year citing new business progress but failed. The company plans to use this rights offering to repay debts, and if it fails, it could face a liquidity crisis.

◆From Korea's Times Square to a Penny Stock

G-Smart Global was established in 2000. Its main business was developing and selling image sensors used in digital imaging devices such as digital cameras, digital camcorders, and mobile phones. It entered the KOSDAQ market in 2010. In 2014, Jeju Semiconductor, the former major shareholder, transferred its shares and management rights to CEO Lee Ho-jun of G-Smart and G-Smart, changing the company name from SETIA to the current name.

After changing its name, G-Smart Global began to make its name known in the stock market. At that time, CEO Lee Ho-jun had a brilliant career, having earned bachelor's, master's, and doctoral degrees from the University of Cambridge in the UK and served as a JP Morgan analyst. The company's new smart glasses business attracted attention. It was even called a beneficiary stock of Korea's version of Times Square development.

Smart glasses are 'transparent electroluminescent glass' that embeds light-emitting diodes (LEDs) densely into ordinary transparent glass to maintain transparency while displaying images. Various patterns can be implemented on the transparent glass surface, making it applicable to curtain wall advertisements on building exteriors, interior design, displays, and other fields. At that time, the securities industry evaluated G-Smart Global's business as having high growth potential.

In the early stages of the business, the securities industry's outlook seemed to be accurate. Sales based on individual financial statements were 25.7 billion KRW in 2014, increasing to 47.1 billion KRW in 2015, and operating profit rose from 2.1 billion KRW to 8 billion KRW. Especially in 2016 and 2017, sales reached 90.1 billion KRW and 96.1 billion KRW, and operating profits were 19.2 billion KRW and 21.3 billion KRW, respectively. However, the only years with sales exceeding 90 billion KRW were 2016 and 2017. G-Smart Global's sales in 2018 dropped to 31.5 billion KRW, a 67.17% decrease from the previous year, and operating profit turned to a loss of 9 billion KRW.

Last year, cumulative sales until the third quarter were 7.9 billion KRW, with an operating loss of 9.5 billion KRW, widening the deficit. The change in accounting recognition standards for long-term installment sales since 2018 affected this. The future outlook is also bleak. On December 31 last year, G-Smart Global announced the cancellation of two supply contracts totaling about 30 billion KRW, nearly matching the entire sales of 2018. According to G-Smart Global's investment prospectus released in December last year, "From the third quarter of 2018, due to changes in major management such as the sale of management rights, scheduled orders were canceled or delayed, causing a sharp decline in sales volume," and "this impact continued until the third quarter of last year."

Long-term installment sales, once a driver of sales growth, are now a burden on performance. As of the third quarter last year, considering bad debt write-offs, G-Smart Global's accounts receivable and other current receivables amounted to 58.217 billion KRW, and long-term receivables and other non-current receivables were 42.615 billion KRW, totaling 100.832 billion KRW. The total accounts receivable ratio compared to sales in the third quarter last year was about 955.09%, indicating poor collection ability or long-term collection periods.

Additionally, changes in the sales method of the smart glasses business also had an impact. In March last year, G-Smart Global changed its distribution contract with G-Smart, acquiring joint sales rights. Previously, smart glasses were sold only through G-Smart Global, but now G-Smart can also sell them.

To make matters worse, unpaid receivables occurred. According to G-Smart Global's investment prospectus as of December 3 last year, "From April to November 2019, 500 million KRW was to be paid monthly on the 25th, with a final payment of 1 billion KRW in December," but "payments for joint sales rights owed by G-Smart to G-Smart Global have been delayed, and the entire 5 billion KRW of unpaid joint sales rights payments have been set as unpaid receivables."

◆Two Failed Rights Offerings... What About the Third?

From the end of 2018, G-Smart Global underwent major changes. First, a change in the major shareholder. In September 2018, G-Smart agreed to transfer its 20.63% stake in G-Smart Global to four individuals from Trinieu for 43.5 billion KRW, with the final payment completed in March last year. In January last year, a third-party rights offering worth 12 billion KRW was conducted, targeting JS Holding Company (current major shareholder) for acquiring tangible assets. In February, the company purchased land at Haneulbit Country Club in Asan, Chungnam, from AIBIT for 23 billion KRW, financing through own funds and bank loans. In March, a 1 billion KRW rights offering was decided targeting Son Eun-kyung for operating funds.

G-Smart Global did not stop there and attempted two more rights offerings, both of which failed. In May last year, G-Smart Global decided on a 40.4 billion KRW shareholder allocation rights offering. However, due to schedule changes and a drop in issue price, the final amount raised was 26.5 billion KRW. Of the 26.5 billion KRW raised, 15.3 billion KRW was planned for convertible bond (CB) repayment, 6.8 billion KRW for loan repayment, and the remaining 4.3 billion KRW for purchasing G-Tainers needed for the Asan Haneul Country Club complex theme park. However, the subscription rate was only 35.37%, and the actual funds raised were 9.3 billion KRW. At that time, G-Smart Global said it would cover the shortfall with its own funds.

Despite stating it would cover the shortfall with its own funds, G-Smart Global decided on another rights offering. In October last year, the company announced a 30 billion KRW general public offering rights offering. In December, the schedule and new share issue price were set. The company explained it would use 17.4 billion KRW to repay convertible bonds, 2.7 billion KRW for loan repayment, purchase G-Tainers for the Asan Haneul Country Club complex theme park for 8.4 billion KRW, and buy G-Glass for 1.3 billion KRW to prepare for public sector operation business orders. However, the rights offering result was disastrous, with a 0% subscription rate. The reference price was 514 KRW with a 30% discount, but since shares cannot be issued below the par value (500 KRW), the final issue price was 500 KRW. This meant there was no attraction for the public offering.

After consecutive failures, G-Smart Global decided on a capital reduction on the 7th. The reason was to improve financial structure and adjust capital size. They merged 10 common shares into 1 share. Capital decreased from 47.32351 billion KRW to 4.73235 billion KRW, and issued shares dropped sharply from about 113.4 million to about 11.34 million. On the same day, G-Smart Global decided on a 29.6 billion KRW shareholder preferential rights offering. This is the third attempt following two failures, and it is expected that the capital reduction will maintain the par value while raising the stock price. The planned issue price is 2,280 KRW and will be used entirely for debt repayment.

Loan repayment is essential for G-Smart Global. According to the investment prospectus released in December last year, "If the planned amount falls short, there is a high risk of default on early redemption of convertible bonds (5th, 6th, 7th, 8th issues)," and "in case of default, there is a high possibility of a serious liquidity crisis due to chain repayment demands from other financial institutions." As of December last year, the face value of the 5th CB was 489 million KRW, the 6th was 1 billion KRW, the 7th was 1 billion KRW, and the 8th was 15 billion KRW.

Meanwhile, G-Smart Global is currently reviewing 2 to 3 new businesses such as theme park operation using its owned golf course. The company will hold a shareholders' meeting on the 25th of next month. The main agenda items are amendments to the articles of incorporation, director appointments, and capital reduction. To enter new businesses, G-Smart Global plans to add the following to its business purposes: ▲tourism accommodation operation and restaurant business, ▲tourism accommodation operation and restaurant business, ▲specialized recreation business, ▲amusement facility business, ▲tourism convenience facility business, ▲real estate development business, ▲entertainment, culture, sports-related services, and consulting business.

This content was produced with the assistance of AI translation services.