[At a Crossroads] GV Faces Three Consecutive Years of Losses Needing Performance Improvement This Year

[Asia Economy Reporter Yoo Hyun-seok] GV has reached a critical period this year. Until last year, it recorded losses for three consecutive years, with a continuing business loss rate before corporate tax expenses exceeding 50%. If performance does not improve, the likelihood of being designated as a management item is increasing.

◆ Three consecutive years of losses with a continuing business loss rate before corporate tax expenses of 117% last year

GV was established on July 15, 1999. Its original name was Hwahu Technology, and it entered the KOSDAQ market in 2005. The company name has changed several times. In July 2011, it was renamed Dongbu Litec, then DB Litec in 2017, and finally GV in 2018. The largest shareholder has also changed multiple times. In April 2011, DB HiTek was the largest shareholder, followed by Fructus in 2018, and since July last year, Klemm has been the largest shareholder. GV’s main business is the manufacturing and sales of CNC dedicated equipment, CNC laser equipment, and LED lighting.

GV showed steady individual financial results until 2015. From 2012, it recorded sales of around 75 billion KRW and operating profits of 4 to 5 billion KRW. However, in 2016, sales dropped to 67.2 billion KRW and operating profit to 3.1 billion KRW, marking the beginning of a downturn. From 2017, it turned to losses. In 2017, GV recorded sales of 65.8 billion KRW and an operating loss of 2.9 billion KRW.

Especially from 2018, large-scale losses were recorded due to the sluggish domestic LED lighting market. At that time, sales were 50.3 billion KRW with an operating loss of 18.1 billion KRW. Last year, sales were 55.2 billion KRW with an operating loss of 16.6 billion KRW. The financial situation also deteriorated. Retained earnings, which were 5.6 billion KRW in 2017, turned into a deficit of 6.9 billion KRW in 2018 and surged to 46.1 billion KRW last year. Along with this, the debt ratio increased from 108.0% in 2018 to 216.0% last year.

The company explained in a disclosure, "In 2018, there was a decrease in operating profit due to sales decline and inventory asset valuation losses, and a decrease in net income due to impairment of development costs." It added, "Last year, sales increased and operating losses decreased due to entry into the irrigation market of the LED business, but continuing business profit before corporate tax expenses and net income decreased due to a 15.4 billion KRW decrease in gains from disposal of affiliates and joint ventures."

As a result of the large losses last year, GV recorded operating losses for three consecutive years on an individual basis. Also, the continuing business loss rate before corporate tax expenses reached 117.6%. In the KOSDAQ market, designation as a management item occurs when there are operating losses for four consecutive years or when continuing business losses before corporate tax expenses exceed 50% of equity capital two or more times in the last three years. In other words, GV is highly likely to meet two of these conditions. Samduck Accounting Corporation stated in its audit report, "A net loss of 38.527 billion KRW occurred, and current liabilities exceed current assets by 28.735 billion KRW," adding, "There is significant uncertainty that raises substantial doubt about the company's ability to continue as a going concern."

◆ Supply contract worth 112.7 billion KRW signed... but period changes cause concerns

Despite capital increases and convertible bond (CB) issuances during changes in GV’s largest shareholder, no improvements were made. The situation worsened. In October 2018, DB HiTek and DB INC, then largest shareholders of GV, sold their entire shares to Fructus for 13.6 billion KRW at 1,982 KRW per share. This made Fructus the largest shareholder of GV. Subsequently, GV issued the 7th series convertible bonds worth 30 billion KRW in March last year to raise facility funds.

After issuing large-scale CBs, GV’s largest shareholder changed again. In July last year, GV conducted a third-party allotment capital increase worth 13.3 billion KRW targeting Klemm, making Klemm the largest shareholder with a 21.49% stake. In the following month, August, the 6th series CB was issued. The 6th series CB was initially planned to be issued at 28 billion KRW in October 2018 for facility funds. However, after 10 amendments, the total amount was reduced to 22.6 billion KRW, with 9 billion KRW for operating funds and 13.6 billion KRW for acquisition of securities of other companies. The recipients also changed from Baekdu Bio 1st and 2nd partnerships to Sangsangin Securities, Joanne Stone, and Mr. Yoon Hyun-chul.

However, despite issuing large-scale CBs and capital increases for acquisitions, mergers and acquisitions (M&A) did not occur immediately. GV disclosed on January 31 that "Plans for acquisition of stocks and investments in other companies are under review, but no concrete details have been finalized yet."

There is a positive factor for performance improvement this year: a large-scale supply contract. The company signed an LED screen supply contract worth 112.7 billion KRW in January, more than twice last year’s sales. Under this contract, GV will supply outdoor LED screen color modules and controllers to Golden Eagle in six installments within the year.

However, the changing contract period is a concern. The initial supply period was from January 4 to November 10. But GV announced on January 20 that the end date was changed to December 8. Then on February 21, it was changed to March 10 next year, and again on March 3 to July 21 next year, showing continuous changes. Consequently, the dates for receiving advance payments and balances are also being postponed.

Meanwhile, GV plans to proceed with asset sales to continue as a going concern. The company stated in its audit report, "The CNC business unit located at the Incheon plant will be relocated and integrated into the headquarters, and the currently vacant Incheon plant site is planned to be sold within this year." It added, "To achieve stable operating profitability, sales will be maximized focusing on the irrigation market and explosion-proof markets, and cost reduction through parts commonality, standardization, and streamlining of partner companies will be pursued by increasing unit part volume, lowering unit prices, and improving quality."