Global Interactive Technologies, Inc.: Form 10-Q for the period ended Sep 30, 2024

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 unaudited 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 in our Annual Report 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” in our Annual Report on Form 10-K 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”), 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.

Going Concern

We have experienced recurring losses from operations and have stockholders’ equity and working capital of $10,615,774 and $8,355,991 as of September 30, 2024, respectively, and $13,068,465 and $10,140,579 as of December 31, 2023, respectively. Also, we have incurred operating losses of $2,109,827 and $8,518,919 for the nine months ended September 30, 2024 and September 30, 2023, respectively. These uncertainties raise substantial doubt about our ability to continue as a going concern for twelve (12) months after the issuance date of our financial statements included in this Form 10-Q.

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 developing markets. We will maintain an ongoing effort to improve and innovate FANTOO platform business to generate funds for our operations. For instance, we recently opened FANTOO House, in Seoul, a complex entertainment space for content video production, studio, music broadcasting, and rental (lease). At FANTOO platform, we plan to launch (i) Epic branded ecommerce platform expected to generate additional income, and (ii) dedicated video production operations designed to 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. As a result, the Company has concluded that management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.

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 2022, we have experienced a significant growth in the number of FANTOO users.

Due to the surge in popularity of 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.

Financial Overview

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 the end of 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. From 2023, we began 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 include 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 in 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 the end of 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 not generated amount of revenue enough from such services in the past, we anticipate earning more steady revenue from this business model by the end of 2024.

As we continue to diversify our product and service offerings, we anticipate additional revenue streams, including the following:

Revenue from Entertainment Agency. Our entertainment agency business is expected to 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 the end of 2024.

While we anticipate generating revenue from sales of our entertainment agency business by the end of 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.

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 and Nine months Ended September 30, 2024 Compared to three and nine months ended September 30, 2023

The following table sets forth a summary of our statements of operations for the nine months ended September 30, 2024 and 2023:

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Revenues

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 meaningful revenue, we began implementing our business plan and commenced distributing content to build and raise brand awareness. Revenue for the nine months ended September 30, 2024 was $198, as compared to revenue of $980,441 for the nine months ended September 30, 2023. This decrease of $980,243 was mostly due to $892,388 in advertising and content sales through FANTOO platform and FNS and $71,521 in product sales thorough Hanryu Bank and FNS in the period ended September 30, 2023 compared to no such sales in the corresponding period in 2024. The substantial decrease in revenue is principally attributable by the restructuring of the FANTOO platform and the strategic decision of the management to upgrade Famtoo App 3.0 version.

Cost of Revenues

Cost of revenue for the nine months ended September 30, 2024 and the months ended September 30, 2023 was $0, and $514,314, respectively. The substantial decrease in cost of revenue is principally due to the substantial decrease in revenue reported during the nine-month period ending September 30, 2024, compared to the corresponding period in 2023.

Operating Expense

Marketing and Advertising

Marketing and advertising expense for the nine months ended September 30, 2024 was $3,437, as compared to $1,076,592 for the nine months ended September 30, 2023. The decrease is due to the restructuring of the FANTOO platform and the strategic decision of the management to improve FANTOO platform by upgrading Fantoo App 3.0 to efficiently reach the targeted users.

Research and Development

Research and development expense for the nine months ended September 30, 2024 was $0, as compared to $45,768 for the nine months ended September 30, 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 nine months ended September 30, 2024 was $2,106,588 as compared to $7,896,445 for the nine months ended September 30, 2023. The decrease of $5,789,857 was primarily due to a decrease in commissions and consulting costs of $1,418,990, a decrease in labor related costs of $2,791,480, and a decrease in travel expense of $897,338. 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 by upgrading Fantoo App 3.0.

Other income (expense)

Other income (expense) for the nine months ended September 30, 2024 was $9,148 a decrease of $179,199 as compared to the nine months ended September 30, 2023, which was primarily driven by $189,992 of the bad debt expense.

Liquidity and Capital Resources

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 $2,109,827 and $8,552,478 for the nine months ended September 30, 2024 and 2023, respectively. We used $660,632 and $10,803,751of cash for operating activities for the nine months ended September 30, 2024 and 2023, respectively.

As of September 30, 2024, we had cash and cash equivalents of approximately $6,975. Based on our available cash resources and current operating plan, there is substantial doubt regarding the Company’s ability to continue as a going concern for a period of one year after the date that its financial statements for the nine months ended September 30, 2024 are issued. The Company’s existing capital resources, including the net proceeds from its IPO will not be sufficient to enable it to continue its operation as planned. The Company will need to raise substantial additional funds in the future in order to continue its operations. Our cash needs will depend on numerous factors, including our revenues, completion of our product development activities, customer and market acceptance of our platform, and our ability to reduce and control costs.

We expect to continue to incur substantial expenditures in the foreseeable future for the development of our technologies and platform infrastructure. We will require additional financing to further develop and market our platform business, and otherwise execute our business plan. Our current financial condition raises substantial doubt about our ability to continue as a going concern. Our failure to raise capital as and when needed would have a material adverse impact on our financial condition, our ability to meet our obligations, and our ability to pursue our business strategies.

In July 2023, we consummated our IPO of 877,328 shares of its common stock at a public offering price of $10.00 pper 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 if at all. As a result, the Company has concluded that management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.

We may seek to raise capital through equity offerings or debt financings, which may include collaboration agreements, or other arrangements with other companies, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our consolidated financial condition and our ability to pursue our business strategies.

Summary of Cash Flows

The following table summarizes changes in cash for the nine months ended September 30, 2024 and 2023:

Cash Flows from Operating Activities.

Net cash used in operating activities for the nine months ended September 30, 2024 was $660,632, which primarily reflected our net loss of $2,100,679, net of adjustments to reconcile net loss to net cash provided by operating activities of $1,443,401 which included a depreciation charge of $167,564. 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 nine months ended September 30, 2023 was $10,803,751 which primarily reflected our net loss of $8,373,279, net of adjustments to reconcile net loss to net cash provided by operating activities of $2,430,472, which included a depreciation charge of $235,579. 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 used in investing activities was $5,107,477 for the nine months ended September 30, 2024, representing a decrease of $3,844,881, as compared to $1,262,596 of cash provided by investing activities for the nine months ended September 30, 2023. This decrease was driven by a $5,332,446 decrease in payment for the short term loan receivables.

Cash Flows from Financing Activities.

Our net cash provided by financing activities was $599,508 for the nine months ended September 30, 2024, consisting of a $614,292 net increase of proceeds from short-term loan payables. Our net cash provided by financing activities was $24,605,548 for the nine months ended September 30, 2023, consisting of a $2,315,781 net decrease in cash payment of short-term loan receivables from related parties, a $6,054,390 increase in cash proceeds from exercising warrants, a $10,000,000 increase in cash proceeds from issuance of common stock.

Convertible Debt.

As of September 30, 2024, the remaining outstanding principal amount of bonds with warrants was approximately $3,410,124. There was no issuance of bonds with warrants for the nine months ended September 30, 2024. A $79,871 decrease in bonds with warrants compared to the balance of $3,489,995 as of December 31, 2023 was due to currency translation adjustment.

Contractual Obligations

As of September 30, 2024, there have been no material changes to our contractual obligations and other commitments compared to those disclosed on Form 10-K.

Critical Accounting Policies and Estimates

This discussion and analysis of financial condition and results of operation is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of expenses during the reporting period. On an ongoing basis, management evaluates its estimates and assumptions. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For further information on our significant accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on July 16, 2024.

Recent Accounting Pronouncements

We have determined that all other issued, but not yet effective accounting pronouncements are inapplicable or insignificant to us and once adopted are not expected to have a material impact on our financial position. Refer to Note 2, Significant Accounting Policies, for detailed disclosures regarding the recent accounting pronouncement.

Other Information

JOBS Act Accounting Election

We are 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 will remain an emerging growth company until the earliest of (1) December 31, 2028 (the last day of the fiscal year following the fifth anniversary of the closing of our IPO), (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.235 billion, (3) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year or (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act of 1934, as amended (the “Exchange Act”) and are not required to provide information under this item.

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 Exchange Act), as of September 30, 2024. Based on such evaluation, our interim Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 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 SEC rules and forms and (b) is accumulated and communicated to our management, including our interim 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 September 30, 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 September 30, 2024, are fairly stated, in all material respects, in accordance with GAAP.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our interim Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost–effective control system, misstatements due to error or fraud may occur and not be detected.

We area smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide information required by this item.