SEC Form 10-Q filed by Hanryu Holdings Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
For the transition period from __________ to __________
Commission File Number:
(Exact name of Registrant as specified in its charter)
| 7370 | ||||
| (State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification Number) |
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The Nasdaq Stock Market LLC ( |
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. Yes ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted 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 such files).
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 | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| ☐ | 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 Exchange Act). Yes ☐ No
The registrant has
TABLE OF CONTENTS
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on our management’s beliefs and assumptions and on information currently available to management, and which statements involve substantial risk and uncertainties. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth and trends, and objectives for future operations are forward-looking statements. Forward- looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward- looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions.
These risks and uncertainties include, among other things, the risk that we may not be able to successfully implement our growth strategy due to the following reasons;
| ● | overall strength and stability of general economic conditions and of the social media platform and content creation industry in the United States and globally; |
| ● | changes in consumer demand for, and acceptance of, our services, including our platform, as well as social media platforms in general; |
| ● | changes in the competitive environment, including adoption of technologies, services and products that compete with our own; |
| ● | our expectations regarding our future operating and financial performance; |
| ● | our ability to effectively execute our business plan and continue to expand internationally; |
| ● | our ability to recruit, retain, and motivate skilled personnel, including key members of senior management; |
| ● | changes in the price of equipment, network infrastructure, hosting and maintenance; |
| ● | uncertainties around the successful improvement and modification of our existing applications and development of new products and services, which may require significant expenditures and time; |
| ● | changes in laws or regulations governing our business and operations; |
| ● | our ability to maintain adequate liquidity and financing sources and an appropriate level of debt on terms favorable to us; |
| ● | our ability to effectively market our services; |
| ● | costs and risks associated with litigation brought against us; |
| ● | our ability to obtain and protect our existing intellectual property protections, including trademarks and copyrights; |
| ● | changes in accounting principles, or their application or interpretation, and our ability to make estimates and the assumptions underlying the estimates, which could have an effect on earnings; |
| ● | our ability to list our shares on the Nasdaq Capital Market or any other exchange and maintain such listing; and |
| ● | other risks described from time to time in periodic and current reports that we file with the SEC. |
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and found on Form 10-K/A filed for the year ended December 31, 2023. We undertake no obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q or to conform such statements to actual results or revised expectations, except as required by law.
ii
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
HANRYU HOLDINGS, INC. AND ITS SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2024 and December 31, 2023
(Unaudited)
| March 31, 2024 | December 31, 2023 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Short-term loans receivable | ||||||||
| Accounts receivable, net of allowance | ||||||||
| Non-trade receivables | ||||||||
| Prepaid expenses and other receivable | ||||||||
| Total current assets | ||||||||
| PROPERTY PLANT AND EQUIPMENT, NET | ||||||||
| OPERATING LEASE RIGHT-OF-USE ASSET | ||||||||
| OTHER ASSETS | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Short-term loans payable | $ | $ | ||||||
| Non-trade accounts payable | ||||||||
| Bonds with warrants, net | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies (Note 13) | ||||||||
| STOCKHOLDER’S EQUITY: | ||||||||
| Common Stock, $ | ||||||||
| Authorized | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ( | ) | ||||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying footnotes are an integral part of these unaudited consolidated financial statements
1
HANRYU HOLDINGS, INC. AND ITS SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2024 and 2023
(Unaudited)
| March 31, 2024 | March 31, 2023 | |||||||
| Sales | $ | $ | ||||||
| Cost of Revenue | ||||||||
| Gross profit | ||||||||
| Operating cost and expenses | ( | ) | ( | ) | ||||
| Loss from operations | ( | ) | ( | ) | ||||
| OTHER INCOME (EXPENSE): | ||||||||
| Loss on disposal of tangible assets | ( | ) | ||||||
| Interest income (expense), net | ( | ) | ||||||
| Gain (loss) on foreign currency transactions | ( | ) | ||||||
| Other expense, net | ( | ) | ( | ) | ||||
| Net other income | ( | ) | ||||||
| Net Loss from continuing operations before taxes | ( | ) | ( | ) | ||||
| Net loss from continuing operations | ( | ) | ( | ) | ||||
| Discontinued operations: | ||||||||
| Loss from discontinued operations | ( | ) | ||||||
| Loss from discontinued operation | ( | ) | ||||||
| Net Loss | ( | ) | ( | ) | ||||
| Less net loss attributable to non-controlling interest | ( | ) | ||||||
| Net Loss attributable to equity holders of the Company | ( | ) | ( | ) | ||||
| Net Loss | ( | ) | ( | ) | ||||
| Basic net loss per share: | ||||||||
| Loss from continuing operations | ( | ) | ( | ) | ||||
| Loss from discontinued operations | ( | ) | ||||||
| Total basic net loss per share | ( | ) | ( | ) | ||||
| Diluted net loss per share | ||||||||
| Loss from continuing operations | ( | ) | ( | ) | ||||
| Loss from discontinued operations | ( | ) | ||||||
| Total diluted net loss per share | ( | ) | ( | ) | ||||
| Weighted average number of common shares outstanding: | ||||||||
The accompanying footnotes are an integral part of these unaudited consolidated financial statements
2
HANRYU HOLDINGS, INC. AND ITS SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months Ended March 31, 2024 and 2023
(Unaudited)
| Common Stock | Additional Paid-in and Other | Accumulated | Accumulated other Comprehensive | Non-controlling | Total Stockholder’s Equity | |||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Gain (Loss) | interests | (Deficit) | ||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||
| Issuance of common stock at $ | ||||||||||||||||||||||||||||
| Exercise of warrants at $ | ||||||||||||||||||||||||||||
| Exercise of warrants at $ | ||||||||||||||||||||||||||||
| Exercise of warrants at $ | ||||||||||||||||||||||||||||
| Currency translation adjustment | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||
| Balance at December 31, 2023 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||
| Currency translation adjustment | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||
The accompanying footnotes are an integral part of these unaudited consolidated financial statements
3
HANRYU HOLDINGS, INC. AND ITS SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2024 and 2023
(Unaudited)
| March 31, 2024 | March 31, 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Depreciation | ||||||||
| Loss on disposal of tangible assets | ||||||||
| Amortization of right-of-use asset | ||||||||
| Accounts receivable | ( | ) | ||||||
| Non-trade receivable | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ||||||
| Non-trade payable | ( | ) | ||||||
| Accrued expenses and other current liabilities | ( | ) | ||||||
| Net cash used in operating activities of continuing operations | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Receipt from collection of short-term loan receivable | ||||||||
| Proceeds from the sale of property, plant, and equipment | ||||||||
| Sales of investments | ||||||||
| Payment for short-term loan receivable | ( | ) | ( | ) | ||||
| Purchase of property plant and equipment | ( | ) | ||||||
| Net cash (used in) provided by investing activities of continuing operations | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from short-term loan payable | ||||||||
| Proceeds from short-term loan payable from related parties | ||||||||
| Proceeds from exercising warrants | ||||||||
| Net proceeds from issuance of common stock | ||||||||
| Repayment of short-term loan payable | ( | ) | ( | ) | ||||
| Repayment of short-term loan payable from related parties | ( | ) | ||||||
| Net cash provided by financing activities of continuing operations | ||||||||
| Net change in cash – continued operations | ( | ) | ||||||
| Cash from discontinued operations: | ||||||||
| Net cash used in operating activities of discontinued operations | ( | ) | ||||||
| Net cash used in investing activities of discontinued operations | ( | ) | ||||||
| Net cash used in financing activities of discontinued operations | ( | ) | ||||||
| Net change in cash – discontinued operations | ( | ) | ||||||
| Cash beginning of the year- continued operations | ||||||||
| Cash beginning of the year - discontinued operations | ||||||||
| Beginning cash | ||||||||
| Cash end of the year – continued operations | ||||||||
| Cash end of the year - discontinued operations | ||||||||
| Ending cash | ||||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | ( | ) | ( | ) | ||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS AT END OF THE PERIOD | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
| Cash receipt (paid) for interest – all operations | ( | ) | ||||||
| Less Cash receipt for interest - discontinued operations | ||||||||
| Cash receipt (paid) for interest – continued operations | $ | $ | ( | ) | ||||
| Cash receipt (paid) during the period for interest | $ | $ | ( | ) | ||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Offsetting short-term loan payables by exercising warrants to purchase | ( | ) | ||||||
| Total | $ | $ | ( | ) | ||||
The accompanying footnotes are an integral part of these unaudited consolidated financial statements
4
HANRYU HOLDINGS,
INC. AND ITS SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
For the Three Months Ended
March 31, 2024 and 2023
(Unaudited)
| March 31, 2024 | March 31, 2023 | |||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | ||
| Other comprehensive income (loss): | ||||||||
| Change in foreign currency translation adjustment | ( | ) | ( | ) | ||||
| Change in foreign currency translation adjustment to attributable to noncontrolling interest | ||||||||
| COMPREHENSIVE LOSS | $ | ( | ) | $ | ( | ) | ||
| Less : Comprehensive Income/(Loss) attributable to noncontrolling interest | ( | ) | ||||||
| Comprehensive Income(Loss) attributable to the Company | ( | ) | ( | ) | ||||
The accompanying footnotes are an integral part of these unaudited consolidated financial statements
5
HANRYU HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Business
Hanryu Holdings, Inc., a Delaware corporation (“Hanryu Holdings”), together with its wholly owned subsidiaries Hanryu Bank Co., Ltd (“HBC”), FNS Co., Ltd. (“FNS”), , and Marine Island Co., Ltd (“Marine Island”), all incorporated under the laws of the Republic of Korea (“Korea” or “ROK”) (collectively, the “Company”, “we”, or “us”), aims to be the leader in the global Korean entertainment market, also known as “Hanryu” or “K-Culture”, through its engaging social-media platform, FANTOO. The FANTOO platform is an all-inclusive global playground for fans, where they can consume, create, and get rewarded for all things related to their interests, and interact with other like-minded fans.
Corporate History
Since the inception of HBC in 2018, we have accomplished a number of key objectives, as follows:
| Date | Event/Milestone | |
| October 18, 2018 | HBC is incorporated under the laws of the ROK with the idea of creating an all-in-one product to capture the growing global momentum and popularity of K-Culture. | |
| October 29, 2020 | HBC establishes FNS,and begins the initial stages of designing and implementing a platform that can create a fandom networking system. | |
| March 11, 2021 | HBC establishes Hanryu Times. Hanryu Times begins operations as HBC’s media outlet, reporting on and providing up-to-date K-Culture news within the FANTOO platform, across a number of languages, including English, Japanese, Chinese (simplified/traditional), Indonesian, Spanish, Russian, and Portuguese. | |
| March 31, 2021 | HBC consummates an agreement and plan of merger (the “Merger Agreement”) with RnDeep, Co. Ltd, a Korean corporation (“RnDeep”), pursuant to which RnDeep merged with and into HBC, with HBC continuing as the surviving corporation (the “RnDeep Acquisition”). As consideration for the RnDeep Acquisition, HBC ratably issued a total
As a result of the RnDeep Acquisition, HBC acquired the underlying technologies that the Company plans on utilizing in the future development of new functions and integrations within the FANTOO platform. Once the FANTOO platform is ready to integrate the technology acquired, this technology will support new functions and integrations including, without limitation, the Company’s enterprise resource planning solution, and its artificial intelligence (“AI”), which the Company plans on using to power many of FANTOO’s upcoming features such as speech synthesis, curated content delivery, deepfake detection and blocking, and nudity detection and blocking. | |
| May 17, 2021 | The FANTOO platform is launched and made available to the public. | |
| June 30, 2021 | HBC enters into an agreement to acquire all the issued and outstanding common shares of Marine Island (the “Marine Island Acquisition”), which owns the right to use and occupy |
6
HANRYU HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION (cont.)
| Date | Event/Milestone | |
| August 30, 2021 | HBC establishes FANTOO Entertainment. FANTOO Entertainment provides a variety of content to the Company’s FANTOO platform, which contributes to the spread of the Korean Wave by promoting new entertainers and artists. | |
| October 3, 2021 | HBC consummates the Marine Island Acquisition, making it the owner of | |
| October 3, 2021 | HBC consummates a strategic acquisition of
HBC’s investment into K-Commerce was a strategic acquisition in order to integrate K-Commerce’s retail platform, “SelloveLive” into the FANTOO ecosystem as the FANTOO Fanshop. When launched as the FANTOO Fanshop, K-Commerce’s platform will offer combined services of shopping and live broadcasting, allowing users to easily live-stream travel and share local attractions, local festivals, cultures, and news from around the world.
Prior to HBC’s acquisition of its shares in K-Commerce, K-Commerce was | |
| October 20, 2021 | Hanryu Holdings is incorporated in the State of Delaware. | |
| February 25, 2022 through May 10, 2022 | Hanryu Holdings, HBC, and the shareholders of HBC (the “HBC Shareholders”) enter into a share exchange agreement (the “Share Exchange Agreement”), pursuant to which the HBC Shareholders agreed to assign, transfer, and deliver, free and clear of all liens,
Concurrently with entering into the Share Exchange Agreement, the Company, HBC, and the holders (the “HBC Warrantholders”) of all outstanding warrants to purchase Common Shares (“HBC Warrants”) enter into a warrant exchange agreement, pursuant to which the HBC Warrantholders agreed to assign, transfer, and delivery, free and clear of any liens,
The Warrants and Common Shares of HBC transferred to the Company in the Share Exchange and the Warrant Exchange constituted |
7
HANRYU HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION (cont.)
| Date | Event/Milestone | |
|
June 16, 2022
June 22, 2022
|
Hanryu Holdings, HBC, the HBC Shareholders, and the HBC Warrantholders consummate the Share Exchange and Warrant Exchange concurrently, pursuant to which HBC became a wholly owned subsidiary of the Company, and the HBC Stockholders and HBC Warrantholders, collectively, acquired a controlling interest in the Company.
The Company divests itself of all Kingdom Coin (“KDC”) holdings and terminates all crypto-currency-related activity, including, without limitation, the operation of the MainNet (FandomChain) and the Kingdom Wallet, pursuant to a Business Transfer Agreement (the “Divestiture Agreement”) between HBC and an unaffiliated and unrelated third party, Kingdom Coin Holdings, a Cayman Islands Foundation Company (the “KDC Foundation”) (the “KDC Divestiture”), to substantially reduce its involvement with blockchain technologies. Pursuant to the Divestiture Agreement, as of June 22, 2022, the Company no longer owns any KDC, and no longer conducts or controls the operations, issuances, or sales of KDC. In connection with the KDC Divestiture, the Company revised its procedures regarding FP and no longer allows, nor has the technology to allow, for the transfer of FP outside of the FANTOO platform or the exchange of FP and KDC | |
| August 1, 2023 | The shares of the Company are listed at NASDAQ exchange market. | |
| December 28, 2023 | HBC sold owned whole shares of Hanryu Times, Fantoo Entertainment, and K-Commerce, so the business from the three companies became the discontinued operations. |
8
HANRYU HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION (cont.)
Going Concern
The Company has experienced recurring losses from
operations and has a stockholders’ equity and working capital of $
Our future operations are dependent upon multiple factors, including (i) the success of our FANTOO platform business; (ii) competition from existing and future services from other companies; and (iii) securing new sources of capital to fund operations and develop markets. We will maintain an ongoing effort to improve and innovate FANTOO platform business to generate funds for our operations. For instance, we recently launched FANTOO House which is located in Seoul, and at FANTOO platform, we will launch (i) Epic branded ecommerce platform that we will expect it as a major source of new income, and (ii) dedicated video production operations that will create short episodic content that focuses on K-POP fandom. In addition, we maintain an ongoing effort to raise funds for our operations from current investors and new sources of capital through the issuance of additional common stock and/or short-term notes. However, there can be no assurance as to the outcome of these factors or that future funding efforts will generate sufficient capital to maintain our operations.
9
HANRYU HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies followed by the Company in the preparation of the accompanying Condensed Consolidated financial statements follows:
Principles of Consolidation
The Condensed Consolidated financial statements
of the Company include the financial statements of Hanryu Holdings, and its three wholly owned subsidiaries, HBC, FNS, and Marine Island
in the 1st quarter of 2024 and in 2023, and its five wholly owned subsidiaries, HBC, FNS, Hanryu Times, Fantoo Entertainment,
and Marine Island and majority-owned subsidiary (
Non-controlling interests are measured at their proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Changes in the Condensed Consolidated group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.
The ownership of non-controlling interests of
K-Commerce, out significant Condensed Consolidated subsidiary as of March 31, 2023, was
Foreign Currency
The Company’s functional currency for all
operations is the KRW. The Company’s accounting records are maintained in KRW, and translated into U.S. Dollars at year-end
for the purposes of presentation. During the translation process, the year-end closing exchange rate is used for the valuation of all
assets and liabilities, historical exchange rate is used to value stockholder’s equity, and the average exchange rate for the year
is used for the calculation of the Condensed Consolidated financial statements. The net impact of the translation into the U.S. Dollar
is included in the accumulated other comprehensive income (loss) of the Company’s Condensed Consolidated balance sheet as of March
31, 2024 and December 31, 2023. During the three months ended March 31, 2024, there was a fluctuation in the exchange rates ranging from
KRW
Use of Estimates
The preparation of the Company’s Condensed Consolidated financial statements and related disclosures in conformity with U.S. Generally Accepted Accounting Principles (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management evaluates its estimates on an ongoing basis. Although estimates are based on the Company’s historical experience, knowledge of current events and actions it may undertake in the future, actual results may materially differ from these estimates and assumptions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. The Company maintains its cash in bank deposit accounts which, at times, may exceed the federal insurance limit, and the balance of deposit accounts of the Company doesn’t exceed the federal insurance limit as of March 31, 2024.
10
HANRYU HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (cont.)
Accounts Receivable
Accounts receivables are recorded at the invoiced
amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities
in the Condensed Consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses
inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted
to take into account current market conditions and customers’ financial condition in dispute, and the current receivables aging
and current payment patterns. The Company reviews its allowance for doubtful accounts quarterly. Past-due balances over 90 days and
over a specified amount are reviewed individually for collectability. Account balances are written off against the allowance after all
means of collection have been exhausted and the potential for recovery is considered remote. The Company recorded the allowance of $
Non-Trade Receivables
Non-trade receivables are recorded at the invoiced
amount and do not bear interest. Amounts collected on non-trade receivables are included in net cash provided by operating activities
in the Condensed Consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses
inherent in its non-trade receivables portfolio. In establishing the required allowance, management considers historical losses adjusted
to take into account current market conditions and customers’ financial condition in dispute, and the current receivables aging
and current payment patterns. The Company reviews its allowance for doubtful accounts quarterly. Past-due balances over 90 days and
over a specified amount are reviewed individually for collectability. Account balances are written off against the allowance after all
means of collection have been exhausted and the potential for recovery is considered remote. The Company recorded the allowance of $
Credit Losses
The Company maintains current receivable amounts with most of its customers and vendors. The Company regularly monitors and assesses its risk of not collecting amounts owed by them. This evaluation is based upon an analysis of current and past due amounts, along with relevant history and facts particular to the customer. The Company records its allowance for credit losses based on the results of this analysis. The analysis requires the Company to make significant estimates and as such, changes in facts and circumstances could result in material changes in the allowance for credit losses. The Company considers as past due any receivable balance not collected within its contractual terms.
The Company wrote off $
Revenue Recognition
The Company anticipates generating revenues from (i) FANTOO platform through advertising, direct sales, and user to user commissions, and (ii) other businesses. Revenue billed or collected in advance will be recorded as deferred revenue until the event occurs or until applicable performance obligations are satisfied.
Revenue is recognized when the Company transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services. In this regard, revenue is recognized when: (i) the parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations; (ii) the entity can identify each party’s rights regarding the goods or services to be transferred; (iii) the entity can identify the payment terms for the goods or services to be transferred; (iv) the contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract); and (v) it is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
Transaction prices are based on the amount of consideration to which we expect to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties, if any. We consider the explicit terms of the revenue contract, which are typically written and executed by the parties, our customary business practices, the nature, timing, and the amount of consideration promised by a customer in connection with determining the transaction price for our revenue arrangements. Refunds and sales returns historically have not been material.
11
HANRYU HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (cont.)
For the three months ended March 31, 2024 and
March 31, 2023, the Company recognized product sales revenue amounting to $
Revenue is recognized when control of the product passes to the customer, typically at the date of delivery of the merchandise to the customer, or the date a service is provided and is recognized in an amount that reflects the expected consideration to be received in exchange for such goods or services. As such, customer orders are recorded as unearned revenue prior to delivery of products or services ordered. If the Company ships high volumes of packages through multiple carriers, the Company will use estimates to determine which shipments are to be delivered and, therefore, recognized as revenue at the end of the period. Delivery date estimates are based on average shipping transit times, which are calculated using the following factors: (i) the type of shipping carrier (as carriers have different in-transit times); (ii) the fulfilment source; (iii) the delivery destination; and (iv) actual transit time experience, which shows that delivery date is typically one to eight business days from the date of shipment. The Company reviews and updates our estimates on a quarterly basis based on our actual transit time experience. However, actual shipping times may differ from our estimates.
Generally, the Company requires authorization from credit cards or other payment vendors whose services the Company offers to customers or verification of receipt of payment, before the Company ships products to purchasers. The Company generally receives payments from our customers before our payments to our suppliers are due. The Company does not recognize assets associated with costs to obtain or fulfill a contract with a customer.
Shipping and handling is considered a fulfillment activity, as it takes place prior to the customer obtaining control of the merchandise, and fees charged to customers are included in net revenue upon completion of our performance obligations. The Company presents revenue net of sales taxes, discounts, and expected refunds.
Merchandise sales contracts include terms that could cause variability in the transaction price for items such as discounts, credits, or sales returns. Accordingly, the transaction price for product sales includes estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. At the time of sale, the Company estimates a sales return liability for the variable consideration based on historical experience, which is recorded within “Accrued Liabilities” in the Condensed Consolidated balance sheet. The Company records an allowance for returns based on current period revenues and historical returns experience. The Company analyzes actual historical returns, current economic trends and changes in order volume, and acceptance of our products when evaluating the adequacy of the sales returns allowance in any accounting period.
The Company evaluates the criteria outlined in
the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606-10-55,
Principal versus Agent Considerations, in determining whether it is appropriate to record the gross amount of merchandise sales
and related costs or the net amount earned as commissions. When the Company is the principal in a transaction and controls the specific
good or service before it is transferred to the customer, revenue is recorded gross; otherwise, revenue is recorded on a net basis. Currently,
the Company records all advertising revenue as a net basis, and other revenues are recorded as a gross basis, and the revenues as a gross
basis for the three months ended March 31, 2024 and March 31, 2023 are $
12
HANRYU HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (cont.)
Cost of Revenue
Cost of revenue is recognized at the time the products or services are delivered to the customers. Cost of revenue includes all direct labor, material, shipping and handling cost and other direct costs such as travel, postage, telecommunication, vehicle charge, printing, and training, and allocated indirect costs related to revenue such as supplies, utilities, office equipment rental, and computers.
Property Plant and Equipment
Property plant and equipment are carried at cost
(see Note 5). Depreciation expense is provided over the estimated useful lives of the assets using the straight line method for vehicles
and the declining balance method for fixtures and equipment.
| Classification | Estimated Useful Life in Years | |
| Vehicles | ||
| Fixtures | ||
| Equipment |
Maintenance and repairs are charged to expense as incurred, while any additions or improvements are capitalized.
The Company evaluates property and equipment for impairment when facts and circumstances indicate that the carrying values of such assets may not be recoverable. When evaluating for impairment, the Company first compare the carrying value of the asset to the asset’s estimated future undiscounted cash flows. If the estimated undiscounted future cash flows are less than the carrying value of the asset, the Company determines if there is an impairment loss by comparing the carrying value of the asset to the asset’s estimated fair value and recognizes an impairment charge when the asset’s carrying value exceeds its estimated fair value. The fair value of the asset is estimated using a discounted cash flow model based on forecasted future revenues and operating costs, using internal projections. There were no significant property and equipment asset impairment charges recorded during the three months ended March 31, 2024, and the year ended March 31, 2023.
Impairment of Long-Lived Assets
The Company assesses the recoverability of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the cost basis of a long-lived asset is greater than the projected future undiscounted net cash flows from such asset, an impairment loss is recognized. Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair value. There were no significant long-lived assets impairment charges recorded during the three months ended March 31, 2024 and March 31, 2023.
13
HANRYU HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (cont.)
Concentrations of Credit Risk
Cash and cash equivalents are financial instruments that potentially subject the Company to concentrations of credit risk. The Company may maintain deposits in financial institutions in excess of government insured limits. The Company believes that it is not exposed to significant credit risk as its deposits are held at financial institutions that management believes to be of high credit quality and the Company has not experienced any losses on these deposits. The Company is also potentially subject to concentrations of credit risk in its accounts receivable and loans. Credit risk with respect to receivables is limited due to the number of companies comprising the Company’s customer base. Credit risk with respect to loans is limited since they are made principally related to the collaborative activities between the Company and loan holders. Since the Company is directly affected by the financial condition of its customers and loan holders, management carefully watch if any significant credit risks exist, and they will make actions to remove or mitigate such risks if there are any. For the three months ended March 31, 2024 and March 31, 2023, over 10% of the revenues are from two customers and one customer, but there are no receivable balances from them. Also, over 10% of the account receivable for the year ended December 31, 2023 is from Hanryu Times, which was the affiliated company by December 28, 2023, and Hanryu Times and the company already agreed to the payment plan that Hanryu Times would pay back all by the end of December 31, 2024. Therefore, as of March 31, 2024 and December 31, 2023, the Company believes that the credit risk for the account receivables is manageable and controllable. Generally, the Company does not require collateral or other securities to support its accounts receivable and loans.
Fair Value of Financial Instruments
The fair value of Company’s financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, debt receivables, debt payables approximate their recorded amounts due to their relatively short settlement terms.
Fair Value Measurements
The Company applies a three-level valuation hierarchy for fair value measurements. The categorization of assets and liabilities within the valuation hierarchy is based on the lowest level of input that is significant to the measurement of fair value.
| Level 1 | Inputs to the valuation methodology utilize unadjusted quoted market prices in active markets for identical assets and liabilities. |
| Level 2 | Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets and liabilities, quoted prices for identical and similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. |
| Level 3 | Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of the inputs that market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk. |
A change to the level of an asset or liability within the fair value hierarchy is determined at the end of a reporting period.
Investments
The Company’s investments are carried at historical cost. As of March 31, 2024 and December 31, 2023, there is no balance of investments.
Earning (Loss) Per Share
Basic earning (loss) per share is computed by dividing the income or loss by the weighted-average number of outstanding shares of Common Stock for the applicable period. Diluted earning (loss) per share is computed by dividing the income or loss by the weighted-average number of outstanding shares of Common Stock for the applicable period, including the dilutive effect of Common Stock equivalents. Potentially dilutive Common Stock equivalents primarily consist of warrants issued in connection with financings. For purposes of computing both basic and diluted earning (loss) per share, income or loss shall exclude the income or loss attributable to the non-controlling interest. The Company calculates net loss per share in accordance with FASB ASC Topic 260, Earnings Per Share. Basic net loss per share amounts have been computed by dividing net loss excluded loss attributable to the non-controlling interest by the weighted-average number of common shares outstanding during the period. For the three months ended March 31, 2024 and 2023, the Company reported net losses and, accordingly, potential common shares were not included since such inclusion would have been anti-dilutive. As a result, our basic and diluted net loss per share are the same because the Company generated a net loss in all periods presented.
14
HANRYU HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (cont.)
Income Taxes
Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits which are not expected to be realized. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. We have determined that all of our deferred tax benefits are not likely to be realized due to our historical and expected future taxable losses. Accordingly, we have maintained a full valuation allowance.
The Company applies the provisions of FASB ASC Topic 740-10, Uncertainty in Income Taxes. The Company has evaluated our tax positions, and there are none as of March 31, 2024 and December 31, 2023.
Income taxes on the Company’s taxable income from operating activities are subject to various tax laws and determinations of the authority in the ROK. Regarding taxes payable in the ROK, if a certain portion of taxable income is not used for investments or for increases in wages or dividends, in accordance with the Tax System for Recirculation of Corporate Income, the Company is liable to pay additional income tax calculated based on Korean tax law.
The Company assesses uncertainty over a tax treatment. When the Company concludes it is not probable that the taxation authority will accept an uncertain tax treatment, the Company will reflect the effect of uncertainty for each uncertain tax treatment by using either of the following methods, depending on which method the Company expects to better predict the resolution of the uncertainty;
| ● | The most likely amount: The single most likely amount in a range of possible outcomes. |
| ● | The expected value: The sum of the probability-weighted amounts in a range of possible outcomes. |
Lease
Under ASC 842, the determination of whether an arrangement is a lease is made at the lease’s inception and a contract is (or contains) a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control is defined under the standard as having both the right to obtain substantially all of the economic benefits from use of the asset and the right to direct the use of the asset. Management only reassesses its determination if the terms and conditions of the contract are changed. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our balance sheets.
ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The Company uses the implicit rate when it is readily determinable. Since most of the Company’s leases do not provide an implicit rate, to determine the present value of lease payments, management uses the Company’s incremental borrowing rate based on the information available at lease commencement. Operating lease ROU assets also includes any lease payments made and excludes any lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
15
HANRYU HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (cont.)
The Company has lease agreements with lease and non-lease components, which are generally accounted for separately with amounts allocated to the lease and non-lease components based on stand-alone prices or for which it has made an accounting policy election to account for these as a single lease component. For certain equipment leases, like vehicles, the Company accounts for the lease and non-lease components as a single lease. Refer to Note 7 for additional disclosures required as a result of the adoption of this new standard.
Recently Issued Accounting Standards
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740) Improvements to Income Tax Disclosures. ASU 2023-09 will improve the transparency and decision usefulness of income tax disclosures to better assess how operations and related tax risks affect tax rates and future cash flows on an interim and annual basis. It will be effective for us on May 1, 2025, with the option to early adopt at any time prior to the effective date and will require adoption on a retrospective basis. We are currently evaluating the impacts of the standard on our financial statements and disclosures.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures. ASU 2023-07 will improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses on an interim and annual basis. It will be effective for our annual period beginning May 1, 2024, and interim periods beginning May 1, 2025, with the option to early adopt at any time prior to the effective date and will require adoption on a retrospective basis. We are currently evaluating the impacts of the standard on our financial statements and disclosures.
In August 2020, the FASB issued ASU No. 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 changes how entities account for convertible instruments and contracts in an entity’s own equity and simplifies the accounting for convertible instruments by removing certain separation models for convertible instruments. ASU 2020-06 also modifies the guidance on diluted earnings per share calculations. ASU 2020-06 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023.
In November 2019, the FASB issued ASU 2019-10, “Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates”, which amended the effective date of the various topics. As the Company is a smaller reporting company, the provisions of ASU 2016-13 and the related amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022 (quarter ending September 30, 2023 for the Company). Entities are required to apply these changes through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which requires an entity to assess impairment of its financial instruments based on its estimate of expected credit losses. Since the issuance of ASU 2016-13, the FASB released several amendments to improve and clarify the implementation guidance.
NOTE 3 — SHORT-TERM LOAN RECEIVABLES
| Interest Rate | March 31, 2024 | December 31, 2023 | ||||||||||
| Hanryu Times | % | $ | $ | |||||||||
| K-Commerce | % | |||||||||||
| FANTOO Entertainment | % | |||||||||||
| LA PRIMERA CAPITAL INVESTMENTS | % | |||||||||||
| Jacob Asset | % | |||||||||||
| Ticket Land | % | |||||||||||
| AMERIDGE CORPORATION | % | |||||||||||
| KD Korea Corporation | % | |||||||||||
| Total short-term loans | $ | $ | ||||||||||
For the year ended December 31, 2023, the company
wrote off $
16
HANRYU HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 4 — PREPAID EXPENSES AND OTHER RECEIVABLES
| March 31, 2024 | December 31, 2023 | |||||||
| Jacob Asset, Co.Ltd | ||||||||
| Orumplus Design, Co., Ltd | ||||||||
| Asia Model Festival Organization Foundation | ||||||||
| Others | ||||||||
| Total prepaid expenses and other receivables | $ | $ | ||||||
For the year ended December 31, 2023, the company
wrote off $
NOTE 5 — PROPERTY PLANT AND EQUIPMENT
| March 31, 2024 | December 31, 2023 | |||||||
| Vehicles | $ | $ | ||||||
| Fixtures | ||||||||
| Equipment | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Property plant and equipment, net | $ | $ | ||||||
Total depreciation expense for the three months
ended March 31, 2024 and December 31, 2023 are $
The Company disposed one of Vehicles with $
17
HANRYU HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 6 — LEASE
The Company uses approximately
Annual lease cost —
Assumed annual rent increase -
Interest cost -
Exchange rate:
The Company determined that the present value
of ten years of free rent amount to $
As of March 31, 2024 and December 31, 2023, the
balances of the Right-of-Use-Asset was $
Lease cost consists of approximately $
NOTE 7 — SHORT-TERM LOAN PAYABLES
| Interest Rate | March 31, 2024 | December 31, 2023 | ||||||||||
| Short-term loan payables from Hyun Joo Kim and others maturing in January 2025 | % | |||||||||||
| Short-term loan payables from Junwoo Choi maturing in August 2024 | % | |||||||||||
| Short-term loan payables from Kye Sook Kim and others maturing in June 2024 | % | |||||||||||
| Short-term loan payables from Byoung Ik Choi maturing in September 2024 | % | |||||||||||
| Short-term loan payables from Bong Sang Kim and others maturing in September 2024 | % | |||||||||||
| Short-term loan payables from Se Kyoung Kim and others maturing in November 2024 | % | |||||||||||
| Total short-term loan payables | $ | $ | ||||||||||
The Company recorded interest expense of the three months ended March 31, 2024 and March 31, 2023, and the Company paid $
18
HANRYU HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 8 — SHORT-TERM LOAN PAYABLES FROM RELATED PARTIES
As of March 31, 2024, and December 31, 2023, there were outstanding short-term loan payables from related parties.
NOTE 9 — BONDS WITH WARRANTS
Bonds with warrants were issued by HBC from December 17, 2018 through July 2, 2021, and the terms and conditions of the remaining outstanding bonds with warrants as of March 31, 2024 and December 31, 2023 at the time of acquiring bonds and issuance of such bonds are set forth below.
On July 2, 2021, HBC issued bonds with warrants
for an aggregate purchase price of $
| Amount as of December 31, 2023 | $ | |||
| Translation adjustment | ( | ) | ||
| Amount as of March 31, 2024 | $ |
19
HANRYU HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 9 — BONDS WITH WARRANTS (cont.)
| No. | Issue Date | Maturity | Amount | Nominal Interest Rate | Interest Rate of Return | |||||||||||||
| 11 | $ | % | % | |||||||||||||||
| Total | $ | |||||||||||||||||
| * | Nominal interest rate and interest rate of return are waived by the separate agreements between the Company and the bondholders. |
Warrants
There are no remaining outstanding warrants as of March 31, 2024 and December 31, 2023.
NOTE 10 — FAIR VALUE MEASUREMENTS
Fair value has been determined on a basis consistent with the requirements of FASB ASC Topic 825, Financial Instruments, and the Company adopted on a prospective basis required provisions of FASB ASC Topic 820, Fair Value Measurement.
Financial Items Measured at Fair Value on a Recurring Basis
The carrying amounts reported in the Condensed Consolidated balance sheet for short-term financial instruments, including cash and cash equivalents, short-term loans, accounts receivable, prepaid expenses, short-term borrowings, accrued expense and other current liabilities due to the short maturities of these instruments.
| March 31, 2024 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets | ||||||||||||||||
| Investments | $ | $ | $ | $ | ||||||||||||
| Liabilities | ||||||||||||||||
| Bonds with warrants | $ | $ | $ | $ | ||||||||||||
20
HANRYU HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 10 — FAIR VALUE MEASUREMENTS (cont.)
| December 31, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets | ||||||||||||||||
| Investments | $ | $ | $ | $ | ||||||||||||
| Liabilities | ||||||||||||||||
| Bonds with warrants | $ | $ | $ | $ | ||||||||||||
Financial Items Measured at Fair Value on a Nonrecurring Basis
There are financial assets or liabilities measured at fair value on a nonrecurring basis as of March 31, 2024 and December 31, 2023.
Nonfinancial Items Measured at Fair Value on a Recurring Basis
There are nonfinancial assets measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023.
Nonfinancial Items Measured at Fair Value on a Nonrecurring Basis
The fair value of long-lived assets is measured whenever the carrying value of long-lived asset or asset group is not recoverable on an undiscounted cash flow basis. No impairment is recognized for long-lived assets as of March 31, 2024 and December 31, 2023.
NOTE 11 — SIGNIFICANT NON-CASH TRANSACTION
| March 31, 2024 | March 31, 2023 | |||||||
| Offsetting short-term loan payables by exercising warrants to purchase | ( | ) | ||||||
| Total | $ | $ | ( | ) | ||||
For the three months ended March 31, 2023,
conversion to equity by offsetting short-term loan payables was $
21
HANRYU HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 12 — SHARE CAPITAL
As of March 31, 2024 and December 31, 2023, Hanryu
Holdings’ total authorized capital stock is
On January 4, 2023, through March 8,
2023, warrants of $
In February and March of 2023, the Company closed
two private placements solely to accredited investors (as defined by Rule 501(a) of Regulation D of the Securities Act)
pursuant to which the Company sold an aggregate amount of
On March 24, 2023, warrants of $
On April 13, 2023, warrants of $
On May 4, 2023, thorough May 8, 2023, warrants
of $
On May 31, 2023, the Company completed a
private placement to solely to an accredited investor (as defined by Rule 501(a) of Regulation D of the Securities Act)
pursuant to which the Company sold an aggregate amount of
On July 31 2023, the Company consummated its initial
public offering (the “IPO”) of
The Company also granted the underwriters a 45-day
option to purchase up to
As a result, the total number of issued and outstanding
shares of Common Stock issued increased from
22
HANRYU HOLDINGS, INC. AND
SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 13 — COMMITMENTS AND CONTINGENCIES
Other Leases
On September 14, 2022, the Company entered
into a one-year lease agreement which expired on September 14, 2023. And the Company expand its lease term to September 14, 2024.
Upon entering into the lease, the Company paid a deposit, which is recorded as Other Assets in the Condensed Consolidated balance sheet
in the amount of $
The Company has a lease agreement for a vehicle
which was initially made on September 16, 2021, and matures on September 21, 2025. The deposit paid on the beginning date of
the lease agreement is recorded as other asset in the Condensed Consolidated balance sheet in the amount of $
Expenses related to these leases totaled approximately
$
Legal Matters
The Company is subject to various legal proceedings
and claims that arise in the ordinary course of business. In the opinion of management, the outcome of these matters will not have a material
adverse effect on the Condensed Consolidated financial position or results of operations of the Company.
| Case Number | Opponent | Case Summary | Litigation Value | |||||
| Seoul South Federal Court ; 2023GADAN218067 | $ | |||||||
| Seoul South Federal Court ; 2024GASO214189 | $ | |||||||
NOTE 14 — RELATED PARTY TRANSACTIONS
The Company is affiliated with several individuals that have common ownership, and transacts a portion of its business with related parties. There are no remaining outstanding related party transactions as of March 31, 2024 and December 31, 2023.
23
HANRYU HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 15 — DISPOSAL OF SUBSIDIARIES AND DISCONTINUED OPERATIONS
HBC sold owned whole shares of Hanryu Times with
$
| As of December 28, 2023 | ||||
| Considerations | $ | |||
| The carrying amount of any noncontrolling interest | ||||
| Net liabilities | ( | ) | ||
| Gain on disposal of subsidiaries | $ | |||
| December 31, 2023 | ||||
| CURRENT ASSETS: | $ | |||
| Cash and Cash Equivalents | ||||
| Short-term loans | ||||
| Accounts receivable, net of allowance | ||||
| Non-trade receivables | ||||
| Prepaid expenses and other receivables | ||||
| PROPERTY PLANTAND EQUIPMENT, NET | ||||
| Total Assets | $ | |||
| CURRENT LIABILITIES: | $ | |||
| Short-term borrowings | ||||
| Account Payable | ||||
| Non-trade accounts payable | ||||
| Accrued expenses and other current liabilities | ||||
| Total Liabilities | $ | |||
| Total Stockholder's Equity (Deficiency) | $ | ( | ) | |
| December 31, 2023 | ||||
| Sales | ||||
| Cost of Revenue | ||||
| Gross profit (Loss) | $ | |||
| OPERATING EXPENSES: | ||||
| OPERATING LOSS | ( | ) | ||
| OTHER INCOME(EXPENSE): | ( | ) | ||
| Net loss before taxes | ( | ) | ||
| Income tax expense | ||||
| NET INCOME(LOSS) | $ | ( | ) | |
NOTE 16 — SUBSEQUENT EVENTS
The Company has evaluated subsequent events that occurred subsequent to December 31, 2023 through September 30, 2024 at which the Condensed Consolidated financial statements were prepared.
Among the short-term loan payables from Kye Sook
Kim and others of ($
The Company is in discussion to convert Bond with
warrants ($
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included on Form 10-K for the year ending December 31, 2023. As discussed in the section titled “Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” on Form 10-K/A for the year ending December 31, 2023.
Overview
Hanryu Holdings, Inc., a Delaware corporation (“Hanryu Holdings”), along with our wholly owned operating subsidiaries, Hanryu Bank Co., Ltd. (“HBC”), FNS Co., Ltd. (“FNS”), and Marine Island Co., Ltd. (“Marine Island”)a, and majority owned subsidiary, K-Commerce Co., Ltd. (“K-Commerce”), all incorporated under the laws of the Republic of Korea (collectively, the “Company”, “we”, “us”, or “our”), is the creator of the engaging and innovative social media platform, “FANTOO”. FANTOO connects users around the world that share similar interests by providing distinctive service offerings, technologies, applications, and websites. Through FANTOO, we provide a global multi-media platform for our users to interact with other like-minded users, to share their appreciation of various types of entertainment and cultures, create their own content, enjoy other users’ content, engage in commerce, and experience a “fandom” community unlike any other.
Although we anticipate expanding into additional entertainment genres, currently, the majority of FANTOO’s users are enthusiasts of Korean culture (“K-Culture”), also known as the “Korean Wave.” The growing popularity of the Korean Wave has historically been driven by social networking services and online video sharing platforms. Through these channels, the dispersion and exportation of Korean arts, music and entertainment has grown rapidly from a regional influence into a global appreciation of South Korean culture. The expansion of the Korean Wave into a global phenomenon provides a significant opportunity to unite fans across the globe within the FANTOO platform. We aim to become a leading global platform for fans who are passionate about the Korean Wave, eventually expanding into other areas of fandom. Since the FANTOO platform launch in May 2021, its user base has exceeded 27 million users.
We differentiate ourselves from potential competition through the power of a fully-integrated platform, and established partnerships with leaders in the K-Culture entertainment industry within South Korea. Our core strategy is to pursue initiatives that promote the viral growth of our user base, and in doing so, drive advertising revenue, user-generated revenue, and create other new revenue streams.
Our Business Model and Growth Strategies
We focus on providing user-centric services to provide a single platform that can address and satisfy all the needs of fans within that platform. FANTOO will enrich users’ fandom experience by providing an all-in-one platform for fandom content, including news, popular culture, discussions, live shows, fan creativity. FANTOO is currently available in 17 languages, with real-time translation services. These real time translation services enable our users to communicate with each other across the globe without language barriers. For languages that are not available for real-time translation, the FANTOO platform provides a solution through the use of translation matching services among users. Through the translation matching services, the FANTOO platform ensures that content is accurately translated and available to a greater number of global fans in their own languages The FANTOO platform further allows users to freely create and monetize their own content and enables fast and secure user-to-user sales on the FANTOO platform.
We intend to create value for our shareholders through developing multiple revenue streams, including (1) direct sales revenue, driven by advertisement, content and commerce sales; and (2) revenue derived from collecting a percentage of user-to-user sales of emojis, online stickers, web novels, webtoons, translation matching, and other user-to-user transactions.
In the long term, we expect the majority of our revenue will be generated from commissions from user-to-user transactions. Deriving revenue from user-to-user transactions gives our platform an advantage over other existing platforms that primarily rely on advertisement sales. We recognize both the creative power and purchasing power of our users and fans in general, and as such, we designed our platform to maximize the economic effects of FANTOO users. Since May 2021, we have experienced a significant growth in the number of FANTOO users.
Due to the surge in popularity of Korean culture (“K-Culture”), we believe that we have great potential to continue growing our user base, while maintaining a high percentage of Monthly Active Users (“MAUs”). According to the Korea Foundation and Korean Ministry of Foreign Affairs, in 2021, Korean culture had 156.6 million fans in 116 countries, and generated approximately $21.5 billion in global revenue in 2019. Furthermore, K-Culture was ranked as the seventh most influential global culture in 2021, and contributed over $10 billion in exports in 2020, as reported by the Korean Foundation for International Cultural Exchange. The global purchasing power of K-Culure was at $124.3 billion in 2020, based on the 2021 report by the Organization for Economic Co-operation and Development.
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Components of Results of Operations
Revenue
We anticipate that our primary source of revenue will be generated from FANTOO platform operations. Additionally, we have generated limited revenue from the Company’s other subsidiaries’ operations, such as revenue from marketing services, retail sales, and content sales. We started generating revenue from FANTOO business, and we anticipate earning more steady revenue from the Company’s other businesses by 2024.
We expect that our primary sources of revenue on the FANTOO platform will be derived from (i) direct sales and (ii) commissions from user-to-user sales.
Revenue from FANTOO business We expect that our primary sources of revenue on the FANTOO platform will be derived from (i) direct sales and (ii) commissions from user-to-user sales. We started generating revenue from FANTOO platform.
(i) Direct Sales We started generating direct sales revenue through: (i) original content sales, such as FANTOO produced web series that can be purchased by users on our platform or licensed to distributors; (ii) e-commerce goods through FANTOO’s Fanshop, which sells items such as the latest fandom goods and upcoming concert tickets; and (iii) advertising sales, including banner placements, splash advertising, pop-up advertisements within the platform, in-platform promotions, and branded content productions. For advertising sales, we act as an agent in arranging third-party promotions to our users. Our business model provides for the distribution of a percentage of our advertising revenue to FANTOO users in the form of FP as incentives for certain activities within the FANTOO platform. Users can then spend FP within the FANTOO platform to purchase goods and/or services, either directly from us or from other users.
(ii) User-to-User Commissions We intend to generate commissions on user-to-user transactions when FANTOO users sell their own products, content, and services to other users. Users can sell: (i) items they have created or produced such as emojis, online stickers, web novels, and webtoons; and (ii) tangible goods or other non-FANTOO platform based fandom items, such as concert tickets. For each sale by a user of content and non-tangible goods, we intend to collect a percentage of the gross purchase price. For sales of tangible goods and non-FANTOO platform based fandom goods, transactions are processed through a secure escrow account, for which we will receive a commission based upon the aggregate purchase price of the transaction.
Revenue from Retail Sales Revenue from retail sales which offers a wide variety of products for purchase. Although we have generated limited revenue from such services in the past, we anticipate earning more steady revenue from this business model by 2024.
Revenue from Marketing Services Revenue from marketing services provided by the Company’s other subsidiaries such as Hanryu Bank, which will include activities such as creating and distributing flyers, hosting events and giveaways, producing advertisement videos, and more. Although we have generated limited revenue from such services in the past, we anticipate earning more steady revenue from this business model by 2024.
Revenue from News Agency Revenue from news agency content sales, which provides news articles and original content to other third-party media outlets. Although we have generated a de minimis amount of revenue from such services in the past, we anticipate earning more steady revenue from this business model by 2024.
As we continue to diversify our product and service offerings, we anticipate additional revenue streams, including
Revenue from Entertainment Agency Our entertainment agency business will assist influencers in growing their influence base both within and outside of the FANTOO platform. As each influencer’s status grows, we expect to monetize their influencer status through entering into advertisement agreements or performance-based contracts. We anticipate earning revenue from this business model by 2024.
While we anticipate generating revenue from sales of our entertainment agency business by the end of the year ended December 31, 2024, no assurances can be given that we will successfully launch such affiliated businesses, and if so, whether such businesses will be successful.
Cost of Revenue
Cost of revenue consists primarily of service costs, hosting costs, and production costs such as advertising costs, down payments, and royalty payments to artists under entertainment contracts for original FANTOO platform content, such as web series and concerts. We expect that cost of revenue will increase proportionately with the growth of the user base for the FANTOO platform.
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Sales, Marketing and Advertising Expense
Sales and marketing expense consists of compensation and commission costs of the sales and related support teams, as well as travel, trade show, and other marketing related costs. Advertising costs are expensed to operations when incurred. Expense also includes the cost of creating and implementing marketing strategies, conducting market research, and producing advertisements. Those expenses are recognized as incurred based on the accrual basis of accounting. We expect that sales, advertising, and marketing expense will increase on a proportionate basis with user-growth, and will vary from period-to-period as a percentage of revenue for the foreseeable future. This variation is due to our plans to continue to invest in marketing in order to grow both sales and our user-base by way of increasing brand awareness. The trend and timing of our marketing costs will depend in part on the timing of marketing campaigns.
Research and Development Expense
Research and development expense includes costs to maintain and develop the FANTOO platform. Costs incurred for research and product development are expensed as incurred and include salaries, taxes and benefits, contracting, and travel expense related to research and development.
General and Administrative Expense
General and administrative expense consists primarily of personnel-related costs, including salaries and benefits, non-cash stock compensation expense, equipment expense, office and facilities costs, legal, accounting and other professional fees, public relations costs and other corporate and administrative costs.
Results of Operations
Three months Ended March 31, 2024 Compared to three months ended March 31, 2023
The following table sets forth a summary of our statements of operations for the three months ended March 31,2024 and 2023:
| Three months ended | ||||||||||||||||
| March 31, | Increase / (Decrease) | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| Revenue | $ | 185 | $ | 223 | $ | (38 | ) | (17 | )% | |||||||
| Cost of Revenue | - | - | - | |||||||||||||
| Gross Profit | 185 | 223 | (38 | ) | (17 | )% | ||||||||||
| Operating Expense | ||||||||||||||||
| Marketing and advertising expense | 3,500 | 289,473 | $ | (285,973 | ) | (99 | )% | |||||||||
| Research and Development | - | 71,732 | $ | (71,732 | ) | (100 | )% | |||||||||
| General and administrative expense | 1,094,686 | 2,445,475 | $ | (1,350,789 | ) | (55 | )% | |||||||||
| Total operating expense | 1,098,186 | 2,806,680 | $ | (1,708,494 | ) | (61 | )% | |||||||||
| Total Other Income (Expense) | 50,930 | (16,802 | ) | $ | 67,732 | 403 | % | |||||||||
| Net Loss | $ | (1,047,071 | ) | $ | (3,067,331 | ) | $ | 2,020,260 | (66 | )% | ||||||
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| Three months ended | ||||||||
| March 31, | ||||||||
| (as a percentage of revenues) | ||||||||
| 2024 | 2023 | |||||||
| Revenue | 100 | % | 100 | % | ||||
| Cost of Revenue | 0 | % | 0 | % | ||||
| Gross Profit | 100 | % | 100 | % | ||||
| Operating Expense | ||||||||
| Marketing and advertising expense | 1,892 | % | 129,809 | % | ||||
| Research and Development | 0 | % | 32,167 | % | ||||
| General and administrative expense | 591,722 | % | 1,096,626 | % | ||||
| Total operating expense | 593,614 | % | 1,258,601 | % | ||||
| Total Other Income (Expense) | 27,530 | % | (7,535 | )% | ||||
| Net Loss | (565,984 | )% | (1,375,485 | )% | ||||
We have generated revenue from the FANTOO platform, and we have started to generate contents sales through FNS and other platforms, including third party news agencies and YouTube. While the FANTOO platform itself has not yet generated revenue enough, we began implementing our business plan and commenced distributing content to build up and raise brand awareness. Revenue for the three months ended March 31, 2024 was $185, as compared to revenue of $223 for the three months ended March 31, 2023. This decrease of $38 was due to $38 in advertising and content sales through FANTOO platform and FNS.
Cost of Revenues
Cost of revenue for three months ended March 31, 2024 and 2023 was $0, respectively since there are no direct cost of revenues related the revenues.
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Operating Expense
Marketing and Advertising
Marketing and advertising expense for the three months ended March 31, 2024 was $3,500, as compared to $289,973 for the three months ended March 31, 2023. The decrease is due to the restructuring of the FANTOO platform and the strategic decision of the management to improve FANTOO platform to efficiently reach the targeted users.
Research and Development
Research and development expense for the three months ended March 31, 2024 was $0, as compared to $71,732 for the three months ended March 31, 2023. The decrease in research and development expense is primarily due to the restructuring of the FANTOO platform and the strategic decision of the management.
General and Administrative
General and administrative expense for the three months ended March 31, 2024 decreased $1,350,789 or 55%, as compared to the three months ended March 31, 2023. The decrease was primarily due to a decrease in commissions and consulting costs of $591,944, a decrease in labor related costs of $495,424, and a decrease in travel expense of $372,287. The substantial decrease in general and administrative expense is principally attributable to the decrease in consulting costs, labor related costs and Travel expense by the restructuring of the FANTOO platform and the strategic decision of the management.
Other income (expense)
Other income (expense) for the three months ended March 31, 2024 was $50,930 an increase of $67,732, or 403%, as compared to the three months ended March 31, 2023, which was primarily driven by $76,313 of the interest income.
Liquidity and Going Concern
We have a history of operating losses and negative cash flow in operating activities. We have incurred recurring net losses, including net losses from operations before income taxes of $1,047,071 and $2,823,259 for the three months ended March 31, 2024 and 2023, respectively. We used $402,054 and $3,958,869of cash for operating activities for the three months ended March 31, 2024 and 2023, respectively.
Our cash needs will depend on numerous factors, including our revenues, completion of our product development activities, customer and market acceptance of our product, and our ability to reduce and control costs. We expect to devote substantial capital resources to, among other things, fund operations and continue development plans.
In July 2023, we consummated our IPO of 877,328 shares of its common stock at a public offering price of $10.00 per share, generating gross proceeds of $8,773,280. Net proceeds from the IPO were approximately $7.7 million after deducting underwriting discounts and commissions and other offering expenses of approximately $1.1 million.
To support our existing and planned business model, we need to raise additional capital to fund our future operations. We have not experienced any difficulty in raising funds through loans and have not experienced any liquidity problems in settling payables in the normal course of business and repaying loans when they fall due. Successful renewal of our loans, however, is subject to numerous risks and uncertainties. In addition, the increasingly competitive industry conditions under which we operate may negatively impact our results of operations and cash flows. Additional debt financing is anticipated to fund our operations in the near future. However, there are no current agreements or understandings with regard to the form, time or amount of such financing and there is no assurance that any of this financing can be obtained or that we can continue as a going concern.
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Summary of Cash Flows
The following table summarizes changes in cash for the three months ended March 31, 2024 and 2023:
| 2024 | 2023 | |||||||
| Statement of Cash Flow Data: | ||||||||
| Net cash used in operating activities | $ | (402,054 | ) | $ | (3,958,869 | ) | ||
| Net cash (used in) provided by investing activities | (5,289,272 | ) | 653,290 | |||||
| Net cash provided by financing activities | 432,835 | 3,630,331 | ||||||
Cash Flows from Operating Activities.
Net cash used in operating activities for the three months ended March 31, 2024 was $402,054, which primarily reflected our net loss of $1,047,071, net of adjustments to reconcile net loss to net cash provided by operating activities of $646,017 which included a depreciation charge of $59,620. Changes in working capital primarily reflected increases in receivables and the settlement of payables in the ordinary course. Net cash used in operating activities for the three months ended March 31, 2023 was $3,958,869 which primarily reflected our net loss of $2,823,259, net of adjustments to reconcile net loss to net cash provided by operating activities of $1,135,619, which included a depreciation charge of $62,363. Changes in working capital primarily reflected increases in receivables and the settlement of payables in the ordinary course.
Cash Flows from Investing Activities.
Our net cash provided in investing activities was $5,288,926 for the three months ended March 31, 2024, representing a decrease of $5,942,216, or 909.58%, as compared to $653,290 of cash used in investing activities for the three months ended March 31, 2023. This decrease was driven by a $5,430,389 decrease in payment for the short term loan receivables.
Cash Flows from Financing Activities.
Our net cash provided by financing activities was $432,835 for the three months ended March 31, 2024, consisting of a $432,835 net increase of proceeds from short-term loan payables. Our net cash provided by financing activities was $3,630,331 for the three months ended March 31, 2023, consisting of a $71,151 net decrease in cash payment of short-term loan receivables from related parties, a $1,428,543 increase in cash proceeds from exercising warrants, a $2,400,000 increase in cash proceeds from issuance of common stock.
Convertible Debt.
As of March 31, 2024, the remaining outstanding principal amount of bonds with warrants was approximately $3,341,253. There was no issuance of bonds with warrants for the three months ended March 31, 2024. A $148,742 decrease in bonds with warrants compared to the balance of $3,489,995 as of December 31,2023 was due to currency translation adjustment.
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Contractual Obligations
We have no contractual obligations as of March 31, 2024.
On September 14, 2022, the Company entered into a one-year lease agreement which expired on September 14, 2023. And the Company expand its lease term to September 14, 2024. Upon entering into the lease, the Company paid a deposit, which is recorded as Other Assets in the consolidated balance sheet in the amount of $111,375 as of March 31, 2024, and $116,333 as of December 31, 2023.
The Company has a lease agreement for a vehicle which was initially made on September 16, 2021, and matures on September 21, 2025. The deposit paid on the beginning date of the lease agreement is recorded as other asset in the consolidated balance sheet in the amount of $116,279 as of December 31, 2022. On December 28, 2023, the Company terminated the lease agreement earlier than the original contract, and the deposit amount of $64,725 was returned to the Company and the remaining of $51,554 was paid as the penalties.
Expenses related to these leases totaled approximately $24,088 and $24,695 for the three month ended March 31, 2024 and March 31, 2023.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet financial guarantees or other off-balance sheet commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our financial statements included elsewhere in this prospectus. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in foreign currency and credit.
Foreign Currency Risk
We have accounts on our foreign subsidiaries’ ledgers, which are maintained in the respective subsidiary’s local currency and translated into USD for reporting of our condensed consolidated financial statements. As a result, we are exposed to fluctuations in the exchange rates of various currencies against the USD and other currencies, including KRW.
Transactional
We generate the majority of our revenue from customers within Korea. Typically, we aim to align costs with revenue denominated in the same currency, but we are not always able to do so. As a result of the geographic spread of our operations and due to our reliance on certain products and services priced in currencies other than KRW, our business, results of operations, and financial condition have been and will continue to be impacted by the volatility of the KRW against foreign currencies.
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Translational
Our functional currency and reporting currency is the USD. The local and functional currency for our Korean subsidiaries, Hanryu Bank, FSN, and Marine Island, which are our primary operating subsidiaries, is the KRW. Assets and liabilities of each subsidiary are translated into USD at the exchange rate in effect at the end of each period. Revenue and expenses for these subsidiaries are translated into USD using average rates that approximate those in effect during the period. Consequently, increases or decreases in the value of the USD affect the value of these items with respect to the non-USD-denominated businesses in the condensed consolidated financial statements, even if their value has not changed in their original currency. For example, a stronger USD will reduce the reported results of operations of non-USD-denominated businesses and conversely a weaker USD will increase the reported results of operations of non-USD-denominated businesses. An assumed hypothetical 10% adverse change in average exchange rates used to translate foreign currencies to USD would have resulted in a decline in total net revenues of $72,197 and a change in net loss of $744,726 for the year ended December 31, 2023. An assumed hypothetical 10% adverse change in average exchange rates used to translate foreign currencies to USD would have resulted in a decline in total net revenues of $21 and a change in net loss of $256,660 for the three months ended March 31, 2024.
At this time, we do not, but we may in the future, enter into derivatives or other financial instruments in an attempt to hedge our foreign currency risk. It is difficult to predict the impact hedging activities would have on our results of operations.
Credit Risk
Our cash and cash equivalents, deposits, and loans with banks and financial institutions are potentially subject to concentration of credit risk. We place cash and cash equivalents with financial institutions that management believes are of high credit quality. The degree of credit risk will vary based on many factors including the duration of the transaction and the contractual terms of the agreement. As appropriate, management evaluates and approves credit standards and oversees the credit risk management function related to investments.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates and assumptions include the fair value of the Company’s common stock, stock-based compensation, the recoverability and useful lives of long-lived assets, and the valuation allowance relating to the Company’s deferred tax assets.
Recent Accounting Pronouncements
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740) Improvements to Income Tax Disclosures. ASU 2023-09 will improve the transparency and decision usefulness of income tax disclosures to better assess how operations and related tax risks affect tax rates and future cash flows on an interim and annual basis. It will be effective for us on May 1, 2025, with the option to early adopt at any time prior to the effective date and will require adoption on a retrospective basis. We are currently evaluating the impacts of the standard on our financial statements and disclosures.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures. ASU 2023-07 will improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses on an interim and annual basis. It will be effective for our annual period beginning May 1, 2024, and interim periods beginning May 1, 2025, with the option to early adopt at any time prior to the effective date and will require adoption on a retrospective basis. We are currently evaluating the impacts of the standard on our financial statements and disclosures.
In August 2020, the FASB issued ASU No. 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 changes how entities account for convertible instruments and contracts in an entity’s own equity and simplifies the accounting for convertible instruments by removing certain separation models for convertible instruments. ASU 2020-06 also modifies the guidance on diluted earnings per share calculations. ASU 2020-06 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023.
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In November 2019, the FASB issued ASU 2019-10, “Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates”, which amended the effective date of the various topics. As the Company is a smaller reporting company, the provisions of ASU 2016-13 and the related amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022 (quarter ending September 30, 2023 for the Company). Entities are required to apply these changes through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which requires an entity to assess impairment of its financial instruments based on its estimate of expected credit losses. Since the issuance of ASU 2016-13, the FASB released several amendments to improve and clarify the implementation guidance.
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management, in consultation with its legal counsel as appropriate, assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company, in consultation with legal counsel, evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates a potentially material loss contingency is not probable, but is reasonably possible, or is probable, but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
Relaxed Ongoing Reporting Requirements
We expect to become a public reporting company under the Exchange Act, and will be required to publicly report on an ongoing basis. We expect to elect to report as an “emerging growth company” (as defined in the JOBS Act) under the reporting rules set forth under the Exchange Act. For so long as we remain an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other Exchange Act reporting companies that are not “emerging growth companies,” including but not limited to:
| ● | not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act; |
| ● | taking advantage of extensions of time to comply with certain new or revised financial accounting standards; |
| ● | being permitted to comply with reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and |
| ● | being exempt from the requirement to hold a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. |
We will be subject to ongoing public reporting requirements that are less rigorous than Exchange Act rules for companies that are not “emerging growth companies,” and our stockholders could receive less information than they might expect to receive from more mature public companies.
We expect to take advantage of these reporting exemptions until we are no longer an emerging growth company. We would remain an “emerging growth company” for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by 17 C.F.R. 229.10(f)(1) and are not required to provide information under this item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of March 31, 2024. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2024, our disclosure controls and procedures were ineffective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified by Securities and Exchange Commission (“SEC”) rules and forms and (b) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding any required disclosure.
Management has identified control deficiencies regarding inadequate accounting resources, the lack of segregation of duties and the need for a stronger internal control environment. Our management believes that these material weaknesses are due to the small size of our accounting staff. The small size of our accounting outsourced staff may prevent adequate controls in the future due to the cost/benefit of such remediation.
To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of external legal and accounting professionals. As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.
These control deficiencies could result in a misstatement of account balances that would result in a reasonable possibility that a material misstatement to our financial statements may not be prevented or detected on a timely basis. In light of this material weakness, we performed additional analyses and procedures in order to conclude that our financial statements for the quarter ended March 31, 2024, included in this Quarterly Report on Form 10-Q were fairly stated in accordance with GAAP. Accordingly, management believes that despite our material weaknesses, our financial statements for the quarter ended March 31, 2024, are fairly stated, in all material respects, in accordance with GAAP.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the outcome of these matters will not have a material adverse effect on the Condensed Consolidated financial position or results of operations of the Company. For the three months ended March 31, 2024, the Company two suspended legal cases as follows, and as of September 30, 2024, the result of the two cases are not certain.
| Case Number | Opponent | Case Summary | Litigation Value | |||||
| Seoul South Federal Court ; 2023GADAN218067 | Seoul Yacht Marina, Co.Ltd, and another | Building Delivery | $ | 85,686 | ||||
| Seoul South Federal Court ; 2024GASO214189 | Seoul Yacht Marina, Co.Ltd | Compensation for damages | $ | 10,644 | ||||
Item 1A. Risk Factors.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During the three months ended March 31, 2024, none of our directors
or officers (as defined in Rule 16a-1(f) of the Exchange Act)
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Item 6. Exhibits.
The following exhibits are included herein or incorporated herein by reference:
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Hanyru Holdings, Inc |
| Signature | Title | Date | ||
| /s/ Taehoon Kim | Interim Chief Executive Officer | September 30, 2024 | ||
| Taehoon Kim | (Principal Executive Officer) | |||
| /s/ Juhyon Shin | Chief Financial Officer | September 30, 2024 | ||
| Juhyon Shin | (Principal Financial and Accounting Officer) |
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