1. Organization and Nature of Business
iCurie Lab Inc. (the “Company”) was incorporated in 13th June 2000 under the Commercial Code of the Republic of Korea to engage in the research and development, manufacture and sale of micro cooling system using electronic technology. On May 3, 2001, the Company obtained a certification of Venture Company form Seoul Small and Medium Business Administration.
The Company is located in 3F Joyang Bldg, 23-1, Seokchon Dong, Sonpa Gu, Seoul 138-842, Korea, republic of.
The company’s common stock was ₩600(million) at the incorporation and as of December 31, 2003, the amount of the Company’s common stock is ₩980(million).
Mr. Jeong Hyun Lee is the representative and holding 33.7% of common shares of the Company as the major shareholder.
2. Summary of Significant Accounting Policies
The financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Significant accounting policies followed by the Company in the preparation of the accompanying financial statements are summarized below.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. The most significant estimates and assumptions relate to the allowance for uncollectable accounts receivables, and deferred tax valuation allowance. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments, including time deposits and short-term bonds, which are readily convertible into known amounts of cash and have an original maturity of three months or less.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts to cover estimated losses on receivables, based on collection experience and analysis of the collectibility of individual outstanding trade receivables, other receivables, and loans.
Property, Plant and Equipment
Property, plant and equipment are stated at acquisition cost. Major renewals and betterments, which prolong the useful life or enhance the value of assets, are capitalized; expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the following useful lives:
| | | Useful Lives | |
| Machinery | | | 5 years | |
| Fixture and furniture | | | 5 〃 | |
Intangible Assets
Intangible assets, comprising intellectual property rights are stated at cost less accumulated amortization. Amortization is computed using the straight-line method over the following estimated useful lives.
| Intellectual property rights | | | 5 ~ 10 years | |
| Others | | | 5 years | |
Accounting for the Impairment of Long-Lived Assets
Long-lived assets and intangible assets that do not have indefinite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When the aggregate undiscounted future cash flows (undiscounted and without interest charges) is less than the carrying value of the asset, an impairment loss is recognized, based on the fair value of the asset.
Accrued Severance Benefits
Employees and directors with one year or more of service are entitled to receive a lump-sum payment upon termination of their employment with the Company, based on their length of service and rate of pay at the time of termination. Accrued severance benefits are estimated assuming all eligible employees were to terminate their employment at the balance sheet date. The annual severance benefits expense charged to operations is calculated based on the net change in the accrued severance benefits payable at the balance sheet date, plus the actual payments made during the year.
The Company provides entitled employees with severance payment at payroll date. There is no provision for severance benefit in the Company’s balance sheet as a result of monthly settlement.
Revenue Recognition
Revenues from the sale of the Company’s products are recognized when : i) persuasive evidence of an arrangement exists, ii) delivery has occurred to the customers, iii) the sales price to the customer is fixed or determinable and iv) collectibility is reasonably assured.
Research and Development Costs
Certain costs incurred in connection with the purchase of equipment and facilities used in the Company’s research and development activities are capitalized into property, plant and equipment, to the extent that they have alternative future uses. All other research and development costs are expensed as incurred. The Company has expensed (Won) 565,917 thousand during the year ended December 31, 2003 for research and development costs, which are included in selling, general and administrative expenses. These research and development expenses included depreciation cost of equipment and facilities used specifically for research and development activities amounting to (Won) 19,993 thousand for the year ended December 31, 2003.
Income Taxes
The Company recognizes deferred tax assets and liabilities created by temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets and liabilities are computed on such temporary differences, including available net operating loss carry forwards and tax credits, by applying enacted statutory tax rates applicable to the years when such differences are expected to reverse. A valuation allowance is provided on deferred tax assets to the extent that it is more likely than not that such deferred tax assets will not be realized. The total income tax provision includes current tax expenses under applicable tax regulations and the change in the balance of deferred tax assets and liabilities.
3. Convenience Translation into United States Dollar Amounts
The Company reports its consolidated financial statements in the Korean Won. The United States dollar (“US dollar”) amounts disclosed in the accompanying financial statements are presented solely for the convenience of the reader, and have been converted at the rate of 1,192.0 to one US dollar, which is the noon buying rate of the US Federal Reserve Bank of New York in effect on December 31, 2003. Such transactions should not be construed as representations that the Korean Won amounts represent, have been, or could be, converted into, United States dollar at that or any other rate. The US dollar amounts are unaudited.
4. Accounts Receivable
The following table presents accounts receivable at December 31, 2003:
| (in thousands of Korean won) | | 2003 | | 2003 | |
| Others | | (USD) | 7 | | (Won) | 8,332 | |
| | | | | | | | |
| Sub total | | | 7 | | | 8,332 | |
| Allowance for doubtful accounts | | | (- | ) | | (- | ) |
| Account Receivables, net | | (USD) | 7 | | (Won) | 8,332 | |
5. Property, Plant and Equipment
Property, plant and equipment comprise the following at December 31, 2003:
(in thousands of Korean won) | | 2003 | | 2003 | |
| Machinery | | (USD) | 51 | | (Won) | 61,091 | |
| Fixture and Furniture | | | 105 | | | 125,072 | |
| | | | | | | | |
| Sub total | | | 156 | | | 186,163 | |
| Accumulated depreciation | | | (74 | ) | | (88,506 | ) |
| | | | | | | | |
| Property, plant and equipment, net | | (USD) | 81 | | (Won) | 97,657 | |
6. Intangible Assets
Intangible assets comprise the following at December 31, 2003:
(in thousands of Korean won) | | 2003 | | 2003 | |
| Industrial Properties | | (USD) | 89 | | (Won) | 106,478 | |
| Others | | | 15 | | | 17,633 | |
| | | | | | | | |
| Sub total | | | 104 | | | 124,111 | |
| | | | | | | | |
| Accumulated amortization | | | 15 | | | 17,728 | |
| Intangible assets, net | | (USD) | 89 | | (Won) | 106,383 | |
Amortization expense for the years ended December 31, 2003 amounting to (Won) 5,419 thousand.
7. Short-term Borrowings
Details of the Company's short-term borrowings as of December 31, 2003 are as follows (in thousands of Korean won):
| | | Amounts |
| Creditor | Type of borrowing | Interest rate | 2003 (USD) | | 2003 (KRW) |
| Cho Hung Bank | Operating fund | 7.75% | 196 | | 234,000 |
| Sae Han IT | 〃 | 5% | 126 | | 150,000 |
| Kim Il Han | 〃 | — | 84 | | 100,000 |
| Park Jeong Sik | 〃 | — | 48 | | 56,827 |
| Lee, Jeong Hyun | 〃 | — | 63 | | 74,822 |
| Vantage Consulting | 〃 | 12% | 377 | | 450,000 |
| | Total | | 894 | | 1,065,649 |
8. Convertible Bond
Details of issuance of convertible bond are as follows (in thousands of Korean won):
| | Date of Issue (mm/dd/yr) | Date of maturity | Interest rate | 2003 (USD) | | 2003 (KRW) |
1st | 10/16/01 | 12/16/02 | 7.00 % | — | | — |
2nd | 10/31/01 | 10/31/02 | 7.00 | — | | — |
3rd | 12/05/01 | 12/05/04 | 7.00 | 84 | | 100,000 |
4th | 12/18/01 | 12/18/04 | 7.00 | 84 | | 100,000 |
5th | 11/04/02 | 11/04/05 | 7.00 | 84 | | 100,000 |
6th | 12/10/02 | 12/10/07 | 0.00 | 252 | | 300,015 |
| Sub Total | | | 504 | | 600,015 |
| Current portion of long term bond | | | (168) | | (200,000) |
| Total | | | 336 | | 400,015 |
1st and 2nd issue of convertible bond were exercised and converted to 8,000 common shares in October 31, 2002.
Details of unexercised convertible bond are as follows:
| | | Amount | | Exercise price | | Type and number of shares upon exercise | | Exercise period |
3rd | | 100,000 | | 40,000 | | 2,500 | | 1 year after issuance date. |
4th | | 100,000 | | 40,000 | | 2,500 | | 〃 |
5th | | 100,000 | | 40,000 | | 2,500 | | 〃 |
6th | | 300,015 | | 45,000 | | 6,667 | | 2003.12.09~2007.12.10 |
9. Income Taxes
Income before income taxes and tax provision comprises the following:
| (in thousands of Korean won) | | 2003 | | 2003 | |
| | | | | | | | |
| Income before income taxes: | | | | | | | |
| Domestic | | (USD) | (952 | ) | (Won) | (1,135,386 | ) |
| | | | | | | | |
| Income taxes-Current : | | | | | | | |
| Domestic | | (USD) | — | | (Won) | — | |
| | | | | | | | |
| Income taxes-Deferred : | | | | | | | |
| Domestic | | | (-) 44 | | | (-) 52,018 | |
| | | | | | | | |
| Total income taxes | | (USD) | (-) 44 | | (Won) | (-) 52,018 | |
| | | | | | | | |
The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities at December 31, 2003 are as follows:
| (in thousands of Korean won) | | 2003 | | 2003 | |
| Current deferred income tax asset | | | — | | | — | |
| | | | | | | | |
| Non-Current deferred income tax asset | | (USD) | 671 | | (Won) | 800,052 | |
| | | | | | | | |
| Property, plant and equipment | | | 1 | | | 14,349 | |
| Net loss carry forwards | | | 659 | | | 785,703 | |
Realization of the future tax benefits related to the deferred tax assets is dependent on many factors, including the Company’s ability to generate taxable income within the period during which the temporary differences reverse, the outlook for the Korean economic environment, and the overall future industry outlook. Management periodically considers these factors in reaching its conclusion, and has determined that valuation allowance was required as of December 31, 2003. Therefore, the management concluded that no deferred tax assets and related valuation allowance are recorded in the company’s financial statements with the reason for the remote possibility to generate future taxable income within the period during which the all temporary differences reserve due to the continuing loss from its inception.
The statutory income tax rate, including tax surcharges, applicable to the Company was approximately 29.7% in 2002. The statutory income tax rate was amended to 27.5% effective for fiscal years beginning January 1, 2005 in accordance with the Corporate Income Tax Law enacted in December 2003. Accordingly, deferred income taxes as of December 31, 2003 were calculated based on the enacted rate of 27.5%.
Statutory corporate income tax rate applied to the Company is 29.7% and there is no income tax payable and expense due to cumulative deficit for years.
10. Stockholders Equity
Common Stock
The Company’s capital stock consists entirely of common stock with a par value of ₩5,000 and the numbers of authorized, issued and outstanding shares as of December 31, 2003 are as follows (in Korean won) :
| | | 2003 (USD) | | 2003 | |
| | | | | | |
| Authorized shares | | | 650,000 shares | | | 650,000 shares | |
| | | | | | | | |
| Issued and outstanding shares | | | 195,905 shares | | | 195,905 shares | |
| Par value | | | 4 | | ₩ | 5,000 | |
| | | | | | | | |
| Common stock balance | | | 821,750 | | ₩ | 979,525,000 | |
Retained Earnings (Deficits)
The company carries undisposed deficits amounting to (Won) 3,684 million for the year ended December 31, 2003.
11. Income (Loss) Per share
Loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the year.
Loss per share amounts for the years ended December 31, 2003 is as follows:
(1) Basic Income (loss) per share
| | | 2003 (USD) | | | |
| Net Income (loss) available for common stockholders | | | (952,505 | ) | ₩ | (1,135,385,815 | ) |
| Weighted average number of shares outstanding | | | 195,905 | | | 195,905 | |
| Ordinary Income (loss) per share | | | (4.8 | ) | ₩ | (5,795 | ) |
| Net Income (loss) per share | | | (4.8 | ) | ₩ | (5,795 | ) |
Diluted loss per share is computed in a manner consistent with that of basic earnings per share while giving effect to all potentially dilutive common shares that were outstanding during the period.
(1) Dilutive income (loss) per share
| | | 2003 (USD) | | | |
| Net Income (loss) available for common stockholders | | | (931,897 | ) | ₩ | (1,110,820,873 | ) |
| Weighted average number of shares outstanding | | | 210,072 | | | 210,072 | |
| Ordinary Income (loss) per share | | | (4.4 | ) | ₩ | (5,288 | ) |
| Net Income (loss) per share | | | (4.4 | ) | ₩ | (5,288 | ) |
12. Related Party Transactions
The Company's significant account balances and transactions with related parties as of and for the years ended December 31, 2003 are summarized as follows:
| | | | | | | | (Unit: Thousand won) |
| Related Party | | Account Name | | 2003 (USD) | 2003 | | Description |
| Jeong Hyun, Lee (CEO) | | Short Term Borrowings | | 63 | 74,823 | | For Operating Expenses |
| IL Han, Kim CEO’s wife) | | Short Term Borrowings | | 84 | 100,000 | | For Operating Expenses |
| Jeong Won, Lee and others CEO’s Brother) | | Short Term Loans | | 46 | 55,000 | | |
13. Assets Pledged as a Collateral
Details of assets pledged as a collateral for borrowings as of December 31, 2003 are as follows:
| (Unit: thousand won) |
| Creditor | | Asset pledged | | Collateral value | | Description |
| Byung Chul, Hong | | Guarantee Deposit | | 100,000 | | Convertible bond |
| Byung Chul, Hong, Sae Han IT | | Patent (SSMS, NVIS) | | 100,000 | | 〃, Borrowings |
14. Guarantees Provided by Others
Details of guarantees provided by other parties for short-term borrowings as of December 31, 2003 are as follows:
| (Unit: thousand won) |
| Provider | | Guaranteed amount | | Claimant | | Period |
| Korea Technology Credit Guarantee Fund | | 210,600 | | Cho Hung Bank | | 05/29/03~05/27/04 |
15. Selling and Administrative Expenses
The details of selling and administrative expenses for the years ended December 31, 2003 are as follows:
| | | 2003 (USD) | | 2003 (KRW) | |
| | | | | | |
| Salaries | | | USD 133,205 | | ₩ | 158,780,414 | |
| Severance pay | | | 9,267 | | | 11,046,000 | |
| Employee welfare | | | 52,248 | | | 62,279,848 | |
| Travel expense | | | 84,940 | | | 101,248,612 | |
| Communication expense | | | 14,454 | | | 17,229,243 | |
| Tax and due | | | 307 | | | 365,620 | |
| Rent | | | 64,321 | | | 76,670,180 | |
| Maintenance of vehicle | | | 163 | | | 194,000 | |
| Entertainment | | | 2,668 | | | 3,180,500 | |
| Office supplies | | | 1,602 | | | 1,909,130 | |
| Publication expense | | | 1,071 | | | 1,277,030 | |
| Freight expense | | | 465 | | | 554,500 | |
| Commission | | | 24,103 | | | 28,730,397 | |
| Repairs | | | 1,465 | | | 1,746,000 | |
| Depreciation | | | 15,360 | | | 18,308,763 | |
| Amortization | | | 4,546 | | | 5,419,333 | |
| R&D Expenses | | | 474,763 | | | 565,917,594 | |
| Others | | | 2,142 | | | 2,552,921 | |
| Total | | | USD 887,088 | | ₩ | 1,057,410,085 | |
16. Going Concern
These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the payment of liabilities in the ordinary course of business.
iCurie Lab Inc (the "Company") has incurred significant operating losses in previous years and as at December 31, 2003, has a working capital deficiency of 1,268,854 (1064 thousand USD equivalent) thousand Korean won. In addition, due to the cumulative deficits, the Company total liabilities are greater than the Company’s total assets by the amount of 1,404,080 (1,178 thousand USD equivalent) thousands Korean won as of December 31, 2003. Its continued existence as a going concern is dependent upon the Company's ability to raise additional capital, to increase sales, and ultimately become profitable.
Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due.
The Company believes that future shares issuance and certain sales related efforts would provide sufficient cash flow for it to continue as a going concern in its present form.
However, there can be no assurances that the Company will achieve such results.
Accordingly, the financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern.
