HeartCore Enterprises, Inc 10-Q for FY2024 Q3
HeartCore Enterprises, Inc. (HTCR)
About this 10-Q
HeartCore Enterprises, Inc filed this 10-Q on November 14, 2024, covering the quarter ended September 30, 2024 (FY2024 Q3).
Headline figures
Quarter ended September 30, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $17.85M
- up 280.7% from $4.69M a year earlier
- Net income
- $11.06M
- compared with a net loss of $2.31M a year earlier
- Diluted EPS
- $0.53
- compared with -$0.11 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______, 20___, to _____, 20___.
Commission
File Number
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification Number) |
(Address of Principal Executive Offices) (Zip Code)
(Registrant’s Telephone Number, Including Area Code)
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
|
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.
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
As of November 14, 2024, there were shares of outstanding common stock, par value $ per share, of the registrant.
HeartCore Enterprises, Inc.
Contents
| Page | ||
| PART I – FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | F-1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 3 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 14 |
| Item 4. | Controls and Procedures | 14 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 15 |
| Item 1A. | Risk Factors | 15 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 15 |
| Item 3. | Defaults Upon Senior Securities | 15 |
| Item 4. | Mine Safety Disclosures | 15 |
| Item 5. | Other Information | 15 |
| Item 6. | Exhibits | 15 |
| Signatures | 16 | |
| 2 |
Item 1. Financial Statements.
HEARTCORE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Investments in marketable securities | ||||||||
| Investment in equity securities | ||||||||
| Prepaid expenses | ||||||||
| Current portion of long-term note receivable | ||||||||
| Due from related party | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Accounts receivable, non-current | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangible asset, net | ||||||||
| Goodwill | ||||||||
| Long-term investment in SAFE | ||||||||
| Long-term investment in equity securities | ||||||||
| Long-term investment in warrants | ||||||||
| Long-term note receivable | ||||||||
| Deferred tax assets | ||||||||
| Security deposits | ||||||||
| Long-term loan receivable from related party | ||||||||
| Long-term loan receivable | ||||||||
| Other non-current assets | ||||||||
| Total non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accounts payable and accrued expenses – related party | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Accrued payroll and other employee costs | ||||||||
| Due to related party | ||||||||
| Short-term debt | ||||||||
| Current portion of long-term debts | ||||||||
| Insurance premium financing | ||||||||
| Factoring liability | ||||||||
| Operating lease liabilities, current | ||||||||
| Finance lease liabilities, current | ||||||||
| Income tax payables | ||||||||
| Deferred revenue | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Long-term debts | ||||||||
| Operating lease liabilities, non-current | ||||||||
| Finance lease liabilities, non-current | ||||||||
| Deferred tax liabilities | ||||||||
| Other non-current liabilities | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred shares ($ par value, shares authorized, shares issued and outstanding as of September 30, 2024 and December 31, 2023) | ||||||||
| Common shares ($ par value, shares authorized; and shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively) | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Total HeartCore Enterprises, Inc. shareholders’ equity | ||||||||
| Non-controlling interests | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| F-1 |
HEARTCORE ENTERPRISES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Research and development expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ||||||||||||
| Other income (expenses): | ||||||||||||||||
| Changes in fair value of investments in marketable securities | ( | ) | ( | ) | ( | ) | ||||||||||
| Changes in fair value of investment in warrants | ( | ) | ( | ) | ||||||||||||
| Loss on sale of warrants | ( | ) | ( | ) | ||||||||||||
| Interest income | ||||||||||||||||
| Interest expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income | ||||||||||||||||
| Other expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) before income tax provision | ( | ) | ( | ) | ||||||||||||
| Income tax expense | ||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||
| Less: net loss attributable to non-controlling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) attributable to HeartCore Enterprises, Inc. | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| Total comprehensive income (loss) | ( | ) | ( | ) | ||||||||||||
| Less: comprehensive loss attributable to non-controlling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive income (loss) attributable to HeartCore Enterprises, Inc. | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Net income (loss) per common share attributable to HeartCore Enterprises, Inc. | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Diluted | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| F-2 |
HEARTCORE ENTERPRISES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
Number of Shares | Amount | Paid-in Capital | Accumulated Deficit | Comprehensive Income | Shareholders’ Equity | Non-controlling Interests | Shareholders’ Equity | |||||||||||||||||||||||||
| Common Shares | Additional | Accumulated Other | Total HeartCore Enterprises, Inc. | Total | ||||||||||||||||||||||||||||
Number of Shares | Amount | Paid-in Capital | Accumulated Deficit | Comprehensive Income | Shareholders’ Equity | Non-controlling Interests | Shareholders’ Equity | |||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | |||||||||||||||||||||||||||||
| Capital contribution from non-controlling shareholder | - | |||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||
| Balance, March 31, 2024 | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Distribution of dividends | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||
| Balance, June 30, 2024 | ( | ) | ||||||||||||||||||||||||||||||
| Net income (loss) | - | ( | ) | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | |||||||||||||||||||||||||||||
| Distribution of dividends | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||||
| Common Shares | Additional | Accumulated Other | Total HeartCore Enterprises, Inc. | Total | ||||||||||||||||||||||||||||
Number of Shares | Amount | Paid-in Capital | Accumulated Deficit | Comprehensive Income | Shareholders’ Equity | Non-controlling Interest | Shareholders’ Equity | |||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||||
| Net income (loss) | - | ( | ) | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Issuance of common shares for acquisition of subsidiary | ||||||||||||||||||||||||||||||||
| Non-controlling interest arising from acquisition of subsidiary | - | |||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | ( | ) | ||||||||||||||||||||||||||||||
| Balance | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Net income (loss) | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||||
| Balance | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| F-3 |
HEARTCORE ENTERPRISES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
| 2024 | 2023 | |||||||
| For the Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash flows used in operating activities: | ||||||||
| Depreciation and amortization expenses | ||||||||
| Loss (gain) on disposal of property and equipment | ( | ) | ||||||
| Amortization of debt issuance costs | ||||||||
| Non-cash lease expense | ||||||||
| Loss (gain) on termination of lease | ( | ) | ||||||
| Deferred income taxes | ( | ) | ( | ) | ||||
| Stock-based compensation | ||||||||
| Marketable securities received as noncash consideration | ( | ) | ||||||
| Warrants received as noncash consideration | ( | ) | ( | ) | ||||
| Changes in fair value of investments in marketable securities | ||||||||
| Changes in fair value of investment in warrants | ( | ) | ||||||
| Loss on sale of warrants | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses | ( | ) | ||||||
| Other assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ||||||||
| Accounts payable and accrued expenses – related party | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Accrued payroll and other employee costs | ( | ) | ||||||
| Due to related party | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Income tax payables | ||||||||
| Deferred revenue | ( | ) | ||||||
| Other liabilities | ||||||||
| Net cash flows used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from disposal of property and equipment | ||||||||
| Advance on note receivable | ( | ) | ||||||
| Purchase of long-term investment in SAFE | ( | ) | ||||||
| Net proceeds from sale of warrants | ||||||||
| Repayment of loan provided to related party | ||||||||
| Payment for acquisition of subsidiary, net of cash acquired | ( | ) | ||||||
| Net cash flows provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Payments for finance leases | ( | ) | ( | ) | ||||
| Proceeds from short-term and long-term debts | ||||||||
| Repayment of short-term and long-term debts | ( | ) | ( | ) | ||||
| Repayment of insurance premium financing | ( | ) | ( | ) | ||||
| Net proceeds from factoring arrangement | ||||||||
| Net repayment of factoring arrangement | ( | ) | ||||||
| Payments for debt issuance costs | ( | ) | ||||||
| Distribution of dividends | ( | ) | ||||||
| Capital contribution from non-controlling shareholder | ||||||||
| Net cash flows used in financing activities | ( | ) | ( | ) | ||||
| Effect of exchange rate changes | ( | ) | ( | ) | ||||
| Net change in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents – beginning of the period | ||||||||
| Cash and cash equivalents – end of the period | $ | $ | ||||||
| Supplemental cash flow disclosures: | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
| Non-cash investing and financing transactions: | ||||||||
| Finance lease right-of-use assets obtained in exchange for finance lease liabilities | $ | $ | ||||||
| Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | $ | ||||||
| Remeasurement of operating lease liabilities and right-of-use assets due to lease modification | $ | $ | ||||||
| Liabilities assumed in connection with purchase of property and equipment | $ | $ | ||||||
| Insurance premium financing | $ | $ | ||||||
| Common shares issued for acquisition of subsidiary | $ | $ | ||||||
| Warrants converted to marketable securities | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| F-4 |
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
HeartCore Enterprises, Inc. (“HeartCore USA” or the “Company”), a holding company, was incorporated under the laws of the State of Delaware on May 18, 2021.
On July 16, 2021, the Company executed a share exchange agreement with certain shareholders of HeartCore Co., Ltd. (“HeartCore Japan”), a company that was incorporated in Japan on June 12, 2009. Pursuant to the terms of the share exchange agreement, the Company issued shares of its common shares to the shareholders of HeartCore Japan in exchange for shares out of shares of common shares issued by HeartCore Japan, representing approximately % of HeartCore Japan’s outstanding common shares. On February 24, 2022, the Company purchased the remaining shares of common shares of HeartCore Japan. As a result, HeartCore Japan became a wholly-owned operating subsidiary of the Company.
The share exchange on July 16, 2021 has been accounted for as a recapitalization between entities under common control since the same controlling shareholders controlled these two entities before and after the transaction. The consolidation of the Company and its subsidiary has been accounted for at historical cost and prepared on the basis as if the transaction had become effective as of the beginning of the earliest period presented in the accompanying unaudited consolidated financial statements.
The Company, via its wholly-owned operating subsidiary, HeartCore Japan, is mainly engaged in the business of developing and sales of comprehensive software. Beginning from early 2022, HeartCore USA is engaged in the business of providing consulting services to Japanese companies with intention to go public in the United States capital market.
On
September 6, 2022, HeartCore USA entered into a share exchange and purchase agreement (“Sigmaways Agreement”) to acquire
In January 2023, HeartCore USA incorporated a wholly-owned subsidiary, HeartCore Financial, Inc. (“HeartCore Financial”), under the laws of the State of Delaware. HeartCore Financial is engaged in the business of providing financial consulting services.
In February 2023, HeartCore USA incorporated a wholly-owned subsidiary, HeartCore Capital Advisors, Inc. (“HeartCore Capital Advisors”), in Japan. HeartCore Capital Advisors is engaged in the business of providing financial consulting services to Japanese companies.
In
November 2023, HeartCore Japan established a
On November 17, 2023, HeartCore Japan and HeartCore Capital Advisors entered into a merger agreement to merge the two entities into one with HeartCore Japan being the surviving entity. On January 1, 2024, the merger was completed and HeartCore Capital Advisors transferred all of its assets and liabilities to HeartCore Japan. The merger has been accounted for as a recapitalization between entities under common control since the same controlling shareholders controlled the two entities before and after the transaction.
In April 2024, HeartCore Financial incorporated a branch office, HeartCore Financial, Inc. – Japan Branch Office (“HeartCore Financial – Japan”), in Japan. HeartCore Financial – Japan is engaged in the business of providing financial consulting services.
HeartCore USA, HeartCore Japan, Sigmaways, Sigmaways B.V., Sigmaways Technologies, HeartCore Financial, HeartCore Capital Advisors, HeartCore Luvina and HeartCore Financial – Japan are hereafter referred to as the Company.
| F-5 |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
These unaudited interim consolidated financial statements do not include all of the information and disclosure required by the U.S. GAAP for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments consisting of normal recurring nature considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2023.
Use of Estimates
In preparing the unaudited consolidated financial statements in conformity U.S. GAAP, the management is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available as of the date of the unaudited consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the allowance for credit losses, useful lives of property and equipment and intangible asset, the impairment of long-lived assets and goodwill, valuation of stock-based compensation, valuation allowance of deferred tax assets, implicit interest rate of operating and finance leases, valuation of asset retirement obligations, valuation of investment in warrants, revenue recognition and purchase price allocation with respect to business combination. Actual results could differ from those estimates.
Asset Retirement Obligations
Pursuant to the lease agreements for the office space, the Company is responsible to restore these spaces back to its original statute at the time of leaving. The Company recognizes an obligation related to these restorations as asset retirement obligation included in other non-current liabilities in the consolidated balance sheets, in accordance with the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) Topic 410, “Asset Retirement Obligation Accounting”. The Company capitalizes the associated asset retirement cost by increasing the carrying amount of the related property and equipment. The following table presents changes in asset retirement obligations:
SCHEDULE OF CHANGES IN ASSET RETIREMENT OBLIGATIONS
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Beginning balance | $ | $ | ||||||
| Liabilities incurred | ||||||||
| Accretion expense | ||||||||
| Liabilities settled | ( | ) | ||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
Software Development Costs
Software development costs are expensed as incurred until the point the Company establishes technological feasibility. Technological feasibility is established upon completion of a detailed program design or the completion of a working model. Costs incurred by the Company between establishment of technological feasibility and the point at which the product is ready for general release are capitalized and amortized over the economic life of the related products. The Company’s software development costs incurred subsequent to achieving technological feasibility have not been significant and all software development costs have been expensed as incurred.
In
the nine months ended September 30, 2024 and 2023, software development costs expensed as incurred amounted to $
Investment in Warrants
Investment in warrants represents stock warrants of its consulting service customers. The warrants are measured at fair value and any changes in fair value are recognized in other income (expenses). Investment in warrants is classified as long-term if the warrants are exercisable over one year after the date of receipt.
| F-6 |
Investments in Marketable Securities
Investments in marketable securities represent equity securities registered for public sale with readily determinable fair value. The marketable securities were obtained through stocks of its customers as noncash consideration from consulting services and through exercise of stock warrants of its consulting service customers and measured at fair value with changes in fair value recognized in other income (expenses).
Investment in Equity Securities
Investment in equity securities represents investment in a privately held entity that does not have a readily determinable fair value or report net asset value. Investment in equity securities is accounted for using a measurement alternative, under which this investment is measured at cost, adjusted for observable price changes and impairments, with changes recognized in other income (expenses). Investment in equity securities is classified as long-term if the Company anticipates to dispose of the investment over one year after the date of receipt based on information available as of the date the unaudited consolidated financial statements are issued. The Company did not recognize any impairment loss on investment in equity securities for the nine months ended September 30, 2024.
Investment in SAFE
Investment in SAFE represents investment in a privately held entity that does not have a readily determinable fair value or report net asset value through a simple agreement for future equity (“SAFE”). Investment in SAFE is accounted for using a measurement alternative, under which this investment is measured at cost, adjusted for observable price changes and impairments, with changes recognized in other income (expenses). Investment in SAFE is classified as long-term if the Company anticipates the equity financing or dissolution or liquidity event prescribed in the SAFE to take place over one year after the date of receipt based on information available as of the date the unaudited consolidated financial statements are issued. The Company did not recognize any impairment loss on investment in SAFE for the nine months ended September 30, 2024.
Intangible Asset, Net
Intangible
asset represents the customer relationship acquired from business acquisition of Sigmaways and its subsidiaries. The acquired intangible
asset is recognized and measured at fair value at the time of acquisition and is amortized on a straight-line basis over the estimated
economic useful life of the respective asset. The estimated useful life of the customer relationship is
Impairment of Long-Lived Assets Other Than Goodwill
Long-lived assets with finite lives, primarily property and equipment, operating lease right-of-use assets and intangible asset, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition are below the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value. There were no impairments of these assets during the nine months ended September 30, 2024 and 2023.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. In accordance with ASC Topic 350, “Intangibles – Goodwill and Others”, goodwill is subject to at least an annual assessment for impairment or more frequently if events or changes in circumstances indicate that an impairment may exist, applying a fair-value based test. Fair value is generally determined using a discounted cash flow analysis.
Foreign Currency Translation
The functional currency of HeartCore Japan, HeartCore Capital Advisors and HeartCore Financial – Japan is the Japanese Yen (“JPY”). The functional currency of HeartCore USA, HeartCore Financial and Sigmaways is the United States Dollar (“US$”). The functional currency of Sigmaways B.V. is the Euro (“EUR”). The functional currency of Sigmaways Technologies is the Canada Dollar (“CAD”). The functional currency of HeartCore Luvina is the Vietnam Dong (“VND”). Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the unaudited consolidated statements of operations and comprehensive income (loss).
The reporting currency of the Company is the US$, and the accompanying unaudited consolidated financial statements have been expressed in US$. In accordance with ASC Topic 830-30, “Translation of Financial Statements”, assets and liabilities of the Company whose functional currency is not US$ are translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from the translation of financial statements are recorded as a separate component of accumulated other comprehensive income within the unaudited consolidated statements of changes in shareholders’ equity.
| F-7 |
Revenue Recognition
The Company recognizes revenues under ASC Topic 606, “Revenue from Contracts with Customers”.
To
determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract(s)
with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable
consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price
to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance
obligation.
The Company currently generates its revenue from the following main sources:
Revenues from On-premise Software
Licenses for on-premise software provide the customers with a right to use the software as it exists when made available to the customers. The Company provides on-premise software in the form of both perpetual licenses and term-based licenses which grant the customers with the right for a specified term. Revenues from on-premise licenses are recognized upfront at the point in time when the software is made available to the customers. Licenses for on-premise software are typically sold to the customers with maintenance and support services in a bundle. Revenues under the bundled arrangements are allocated based on the relative standalone selling prices (“SSP”) of on-premise software and maintenance and support service. The SSP for maintenance and support services is estimated based upon observable transactions when those services are sold on a standalone basis. The SSP of on-premise software is typically estimated using the residual approach as the Company is unable to establish the SSP for on-premise licenses based on observable prices given the same products are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions or other observable evidence.
Revenues from Maintenance and Support Services
Maintenance and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted by the customers.
Revenues from Software as a Service (“SaaS”)
The Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company’s solution is made available to the customers. The subscription contracts are generally one year or less in length.
Revenues from Software Development and Other Miscellaneous Services
The Company provides customers with software development and support services pursuant to their specific requirements, which primarily compose of consulting, integration, training, custom application, and workflow development. The Company also provides other miscellaneous services, such as 3D Space photography. The Company generally recognizes revenues at a point in time when control is transferred to the customers and the Company is entitled to the payment, which is when the promised services are delivered and accepted by the customers.
| F-8 |
Revenues from Customized Software Development and Services
The Company’s customized software development and services revenues primarily include revenues from providing software development solutions and other support services to its customers. The contract pricing is at stated billing rates per hour. These contracts are generally short-term in nature and not longer than one year in duration. For services provided under the contracts that result in the transfer of control over time, the underlying deliverable in the contracts is owned and controlled by the customers and does not create an asset with an alternative use to the Company. The Company recognizes revenues on rate per hour contracts based on the amount billable to the customers, as the Company has the right to invoice the customers in an amount that directly corresponds with the value to the customers of the Company’s performance to date.
Revenues from Consulting Services
The Company provides public listing related consulting services to customers pursuant to the specific requirements prescribed in the contracts, which primarily include communicating with intermediary parties, preparing required documents related to the initial public offering and supporting the listing process. The consulting service contracts normally include both cash and noncash considerations. Cash consideration is paid in installment payments and is recognized in revenues over the period of the contract by reference to progress toward complete satisfaction of that performance obligation. Noncash consideration is in the form of warrants of the customers and is measured at fair value at contract inception. Noncash consideration that is variable for reasons other than only the form of the consideration is included in the transaction price, but is subject to the constraint on variable consideration. The Company assesses the estimated amount of the variable noncash consideration at contract inception and subsequently, to determine when and to what extent it is probable that a significant reversal in the amount of cumulative revenues recognized will not occur once the uncertainty associated with the variable consideration is subsequently resolved. Only when the significant revenues reversal is concluded probable of not occurring can variable consideration be included in revenues. Based on evaluation of likelihood and magnitude of a reversal in applying the constraint, the variable noncash consideration is recognized in revenues until the underlying uncertainties have been resolved.
The Company records reduction to revenues for estimated customer returns and allowances. The Company bases its estimates on historical rates of customer returns and allowances as well as the specific identification of outstanding returns. The actual amount of customer returns and allowances, which is inherently uncertain, may differ from the Company’s estimates. If the Company determines that actual or expected returns or allowances are significantly higher or lower than the reserves it established, it would record a reduction or increase, as appropriate, to revenues in the period in which it makes such a determination. Reserves for customer refunds are included within other current liabilities on the consolidated balance sheets. At a minimum, the Company reviews and refines these estimates on a quarterly basis.
The
timing of revenue recognition may differ from the timing of invoicing to the customers. The Company has determined that its contracts
do not include a significant financing component. The Company records a contract asset, which is included in accounts receivable, current
or non-current, in the consolidated balance sheets, when revenues are recognized prior to invoicing. The Company factors certain accounts
receivable upon or after the performance obligation is being met. The Company records deferred revenue in the consolidated balance sheets
when revenues are recognized subsequent to cash collection for an invoice. Deferred revenue is reported net of related uncollected deferred
revenue in the consolidated balance sheets. The amount of revenues recognized during the nine months ended September 30, 2024 and 2023
that were included in the opening deferred revenue balance was approximately $
| F-9 |
Disaggregation of Revenues
The Company disaggregates its revenues from contracts by product/service types, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenues and cash flows are affected by economic factors. The Company’s disaggregation of revenues by revenue stream for the three and nine months ended September 30, 2024 and 2023 is as following:
SCHEDULE OF DISAGGREGATION OF REVENUES
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues from on-premise software | $ | $ | $ | $ | ||||||||||||
| Revenues from maintenance and support services | ||||||||||||||||
| Revenues from software as a service (“SaaS”) | ||||||||||||||||
| Revenues from software development and other miscellaneous services | ||||||||||||||||
| Revenues from customized software development and services | ||||||||||||||||
| Revenues from consulting services | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
The Company’s disaggregation of revenues by product/service is as following:
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues from customer experience management platform | $ | $ | $ | $ | ||||||||||||
| Revenues from process mining | ||||||||||||||||
| Revenues from robotic process automation | ||||||||||||||||
| Revenues from task mining | ||||||||||||||||
| Revenues from customized software development and services | ||||||||||||||||
| Revenues from consulting services | ||||||||||||||||
| Revenues from others | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
As of September 30, 2024 and 2023, and for the periods then ended, the majority of the long-lived assets (excluding intangible asset) and revenues generated were attributed to the Company’s operation in Japan.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist primarily of accounts receivable, note receivable and other receivable. The Company usually does not require collateral or other security to support these receivables. The Company conducts periodic reviews of the financial condition and payment practices of its customers to minimize collection risk on accounts receivable.
For
the nine months ended September 30, 2024, customer A represents
For
the nine months ended September 30, 2024, no vendor accounts for more than 10% of the Company’s total purchases. For the nine months
ended September 30, 2023, vendor A, B, C and D represent
| F-10 |
Stock-based Compensation
The Company accounts for stock-based compensation awards in accordance with ASC Topic 718, “Compensation – Stock Compensation”. The cost of services received from employees and non-employees in exchange for awards of equity instruments is recognized in the unaudited consolidated statements of operations and comprehensive income (loss) based on the estimated fair value of those awards on the grant date and amortized on a straight-line basis over the requisite service period or vesting period. The Company records forfeitures as they occur.
Business Combinations
The Company accounts its business combinations using the acquisition method of accounting in accordance with ASC Topic 805. The purchase price of the acquisition is allocated to the tangible assets, liabilities, identifiable intangible asset acquired and non-controlling interests, if any, based on their estimated fair values as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. Acquisition-related expenses are expensed as incurred.
Consideration transferred in a business combination is measured at the fair value as of the date of acquisition. Where the consideration in an acquisition includes contingent consideration, and the payment of which depends on the achievement of certain specified conditions post-acquisition, the contingent consideration is recognized and measured at its fair value at the acquisition date and is recorded as a liability. It is subsequently carried at fair value with changes in fair value reflected in earnings.
In a business combination achieved in stages, the Company remeasures the previously held equity interest in the acquiree immediately before obtaining control at its acquisition-date fair value and the remeasurement gain or loss, if any, is recognized in the unaudited consolidated statements of operations and comprehensive income (loss).
Fair value is determined based upon the guidance of ASC Topic 820, “Fair Value Measurements and Disclosures”, and generally are determined using Level 2 inputs and Level 3 inputs. The determination of fair value involves the use of significant judgments and estimates. The Company utilizes the assistance of a third-party valuation appraiser to determine the fair value as of the date of acquisition.
Fair Value Measurements
The Company performs fair value measurements in accordance with ASC Topic 820. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or a liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC Topic 820 establishes three levels of inputs that may be used to measure fair value:
| ● | Level 1: quoted prices in active markets for identical assets or liabilities; | |
| ● | Level 2: inputs other than Level 1 that are observable, either directly or indirectly; or | |
| ● | Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities. |
As of September 30, 2024 and December 31, 2023, the carrying values of current assets, except for investments in marketable securities, and current liabilities approximated their fair values reported in the consolidated balance sheets due to the short-term maturities of these instruments.
| F-11 |
Assets measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023 are summarized below (also see NOTE 6):
SCHEDULE OF ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS
| Fair Value Measurements as of September 30, 2024 | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | Fair Value at September 30, 2024 | |||||||||||||
| Investments in marketable securities | ||||||||||||||||
| Long-term investment in warrants | ||||||||||||||||
| Fair Value Measurements as of December 31, 2023 | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | Fair Value at December 31, 2023 | |||||||||||||
| Investments in marketable securities | ||||||||||||||||
| Long-term investment in warrants | ||||||||||||||||
Recent Accounting Pronouncements
In November 2023, the FASB issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU No. 2023-07 is effective for public companies for annual reporting periods beginning after December 15, 2023, on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its unaudited consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures, to enhance the transparency and decision usefulness of income tax disclosures, primarily related to the rate reconciliation and income taxes paid information. ASU No. 2023-09 is effective for public companies for annual reporting periods beginning after December 15, 2024, on a prospective basis. For all other entities, it is effective for annual reporting periods beginning after December 15, 2025, on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its unaudited consolidated financial statements and related disclosures.
NOTE 3 – ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
SCHEDULE OF ACCOUNTS RECEIVABLE NET
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Accounts receivable – non-factored | $ | $ | ||||||
| Accounts receivable – factored with recourse | ||||||||
| Total accounts receivable, gross | ||||||||
| Less: allowance for credit losses | ||||||||
| Total accounts receivable | ||||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Accounts receivable, non-current | $ | $ | ||||||
| F-12 |
NOTE 4 – PREPAID EXPENSES
Prepaid expenses consist of the following:
SCHEDULE OF PREPAID EXPENSES
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Prepayments to software and consulting services vendors | $ | $ | ||||||
| Prepaid marketing and consulting fees | ||||||||
| Prepaid subscription fees | ||||||||
| Prepaid insurance premium | ||||||||
| Others | ||||||||
| Total | $ | $ | ||||||
NOTE 5 – RELATED PARTY TRANSACTIONS
As
of September 30, 2024 and December 31, 2023, the Company has a due to related party balance of $
As
of September 30, 2024 and December 31, 2023, the Company has a loan receivable balance of $
During
the nine months ended September 30, 2024, the Company engaged Luvina Software Joint Stock Company, the non-controlling interest shareholder
of HeartCore Luvina, for software development and other support services in the amount of $
NOTE 6 – INVESTMENTS
Investment in SAFE
On
April 17, 2024, the Company entered into a simple agreement for future equity (“SAFE”) for $
Investment in Equity Securities
On
May 2, 2023, the Company purchased a $
Investment in Warrants
The Company received warrants from its customers as noncash consideration from consulting services. The warrants are not registered for public sale and are initially measured at fair value at contract inception. The Company’s investment in warrants is measured on a recurring basis and carried on the balance sheets at an estimated fair value at the end of the period. The valuation of investment in warrants is determined using the Black-Scholes model based on the stock price, exercise price, expected volatility, time to maturity, and a risk-free interest rate for the term of the warrants exercise.
| F-13 |
The following table summarizes the Company’s investment in warrants activities for the nine months ended September 30, 2024 and 2023:
SCHEDULE OF INVESTMENT IN WARRANTS ACTIVITY
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Fair value of investment in warrants at beginning of the period | $ | $ | ||||||
| Warrants received as noncash consideration | ||||||||
| Changes in fair value of investment in warrants | ( | ) | ||||||
| Warrants converted to marketable securities | ( | ) | ( | ) | ||||
| Warrants sold* | ( | ) | ||||||
| Fair value of investment in warrants at end of the period | $ | $ | ||||||
| * |
Investments in Marketable Securities
The Company’s investments in marketable securities represent stocks received from its customers as noncash consideration from consulting services and stocks received upon the exercise of warrants described above. They are registered for public sale with readily determinable fair values, and are measured at quoted prices on a recurring basis at the end of the period. The following table summarizes the Company’s investments in marketable securities activities for the nine months ended September 30, 2024 and 2023:
SCHEDULE OF INVESTMENTS IN MARKETABLE SECURITIES
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Fair value of investments in marketable securities at beginning of the period | $ | $ | ||||||
| Marketable securities received as noncash consideration | ||||||||
| Warrants converted to marketable securities | ||||||||
| Changes in fair value of investments in marketable securities | ( | ) | ( | ) | ||||
| Marketable securities sold | ||||||||
| Fair value of investments in marketable securities at end of the period | $ | $ | ||||||
NOTE 7 – LONG-TERM NOTE RECEIVABLE
On
September 1, 2023, the Company purchased a $
| F-14 |
NOTE 8 – PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT NET
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Leasehold improvements | $ | $ | ||||||
| Machinery and equipment | ||||||||
| Vehicle | ||||||||
| Software | ||||||||
| Subtotal | ||||||||
| Less: accumulated depreciation | ( |
) | ( |
) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
expenses are $
NOTE 9 – INTANGIBLE ASSET, NET
Intangible asset, net is as follows:
SCHEDULE OF INTANGIBLE ASSETS
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Customer relationship | $ | $ | ||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Intangible asset, net | $ | $ | ||||||
Amortization
expenses are $
As of September 30, 2024, the future estimated amortization cost for intangible asset is as follows:
SCHEDULE OF AMORTIZATION INTANGIBLE ASSET
| Estimated | ||||
| Year Ended December 31, | Amortization | |||
| Remaining of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
NOTE 10 – LEASES
The
Company has entered into six leases for its office space, one of which was terminated in February 2024, and these leases were classified
as operating leases. The Company has also entered into a lease for office equipment and it was terminated in March 2024, and two leases
for vehicles, one of which was terminated in September 2023, and these leases were classified as finance leases. Right-of-use assets
of these finance leases in the amount of $
Operating lease expenses for lease payments are recognized on a straight-line basis over the lease term. Finance lease costs include amortization, which are recognized on a straight-line basis over the expected life of the leased assets, and interest expenses, which are recognized following an effective interest rate method. Leases with initial term of twelve months or less are not recorded in the consolidated balance sheets.
The components of lease costs are as follows:
SCHEDULE OF LEASE COSTS
| 2024 | 2023 | |||||||
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Finance lease costs | ||||||||
| Amortization of right-of-use assets | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Total finance lease costs | ||||||||
| Operating lease costs | ||||||||
| Total lease costs | $ | $ | ||||||
| F-15 |
The following table presents supplemental information related to the Company’s leases:
SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO COMPANY’S LEASES
| 2024 | 2023 | |||||||
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from finance leases | $ | $ | ||||||
| Operating cash flows from operating leases | ||||||||
| Financing cash flows from finance leases | ||||||||
| Finance lease right-of-use assets obtained in exchange for finance lease liabilities | ||||||||
| Operating lease right-of-use assets obtained in exchange for operating lease liabilities | ||||||||
| Remeasurement of operating lease liabilities and right-of-use assets due to lease modification | ||||||||
| Weighted average remaining lease term (years) | ||||||||
| Finance leases | ||||||||
| Operating leases | ||||||||
| Weighted average discount rate (per annum) | ||||||||
| Finance leases | % | % | ||||||
| Operating leases | % | % | ||||||
As of September 30, 2024, the future maturity of lease liabilities is as follows:
SCHEDULE OF FINANCE LEASE AND OPERATING LEASE FUTURE MATURITY OF LEASE LIABILITIES
| Year Ended December 31, | Finance Lease | Operating Lease | ||||||
| Remaining of 2024 | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less: imputed interest | ( | ) | ( | ) | ||||
| Total lease liabilities | ||||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Non-current lease liabilities | $ | $ | ||||||
Pursuant
to the operating lease agreements, the Company made security deposits to the lessors. The security deposits amount to $
NOTE 11 – OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
SCHEDULE OF OTHER CURRENT LIABILITIES
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Accrued consumption taxes | $ | $ | ||||||
| Customer refund liability* | ||||||||
| Others | ||||||||
| Total other current liabilities | $ | $ | ||||||
| * |
| F-16 |
NOTE 12 – FACTORING LIABILITY
Sigmaways,
the subsidiary acquired by the Company in February 2023, entered into a factoring and security agreement (“Factoring Agreement”)
with The Southern Bank Company, an unrelated factor (the “Factor”), in 2017, for the purpose of factoring certain accounts
receivable. Under the terms of the Factoring Agreement, the Company may offer for sale, and the Factor may purchase in its sole discretion,
certain accounts receivable of the Company (the “Purchased Receivable”). The Factoring Agreement provided for a maximum of
$
Selected
accounts receivable is submitted to the Factor, and the Company receives
The Factoring Agreement specifies that eligible accounts receivable is factored with recourse. Under the terms of the recourse provision, the Company is required to reimburse the Factor, upon demand, for Purchased Receivable that is not paid on time by the customers. The performance of all obligations and payments to the Factor is personally guaranteed by Prakash Sadasivam, CEO of Sigmaways and Chief Strategy Officer (“CSO”) of the Company, and secured by all Sigmaways’ now owned and hereafter assets and any sums maintained by the Factor that are identified as payable to the Company.
The Factoring Agreement has an initial term of twelve months and automatically renews for successive twelve-month renewal periods unless terminated pursuant to the terms of the Factoring Agreement. The Company may terminate the Factoring Agreement with sixty days’ written notice to the Factor and is subject to certain early termination fee.
The Factoring Agreement contained covenants that are customary for accounts receivable-based factoring agreements and also contained provisions relating to events of default that are customary for agreements of this type.
As
of September 30, 2024 and December 31, 2023, there was $
NOTE 13 – INSURANCE PREMIUM FINANCING
In
January 2024, the Company entered into an insurance premium financing agreement with BankDirect Capital Finance for $
In
January 2023, the Company entered into an insurance premium financing agreement with BankDirect Capital Finance for $
As
of September 30, 2024 and December 31, 2023, the balances of the insurance premium financing were $
| F-17 |
NOTE 14 – DEBTS
Short-term Debt
The Company’s short-term debt represents a loan borrowed from a financial institution as follows:
SCHEDULE OF SHORT-TERM DEBTS
| Name of Financial Institution | Original Amount Borrowed | Loan Duration | Annual Interest Rate | Balance as of September 30, 2024 | Balance as of December 31, 2023 | |||||||||||
| Biz Forward Co., Ltd. | JPY | % | $ | $ | ||||||||||||
| (a) |
Long-term Debts
The Company’s long-term debts included bond payable and loans borrowed from banks and financial institutions, which consist of the following:
SCHEDULE OF LONG-TERM DEBTS
| Name
of Banks/Financial Institutions | Original
Amount Borrowed | Loan Duration | Annual Interest Rate | Balance
as of September 30, 2024 | Balance
as of December 31, 2023 | |||||||||||
| Bond payable | ||||||||||||||||
| Corporate bond issued through Resona Bank, Limited | JPY | (b)(d) | % | $ | $ | |||||||||||
| Loans with banks and financial institutions | ||||||||||||||||
| Resona Bank, Limited | JPY | (b)(c) | % | |||||||||||||
| Resona Bank, Limited | JPY | (b)(c) | % | |||||||||||||
| Resona Bank, Limited | JPY | (b)(c) | % | |||||||||||||
| Resona Bank, Limited | JPY | (b)(c) | % | |||||||||||||
| Sumitomo Mitsui Banking Corporation | JPY | (b) | % | |||||||||||||
| Sumitomo Mitsui Banking Corporation | JPY | (b)(c) | % | |||||||||||||
| Sumitomo Mitsui Banking Corporation | JPY | (b)(c) | % | |||||||||||||
| Sumitomo Mitsui Banking Corporation | JPY | (b)(c) | % | |||||||||||||
| The Shoko Chukin Bank, Ltd. | JPY | % | ||||||||||||||
| The Shoko Chukin Bank, Ltd. | JPY | Tokyo Interbank Offered Rate + | % | |||||||||||||
| Japan Finance Corporation | JPY | % | ||||||||||||||
| Higashi-Nippon Bank | JPY | (b) | % | |||||||||||||
| Higashi-Nippon Bank | JPY | (b)(c) | % | |||||||||||||
| First Home Bank | $ | (e) | Wall Street Journal U.S. Prime Rate + | % | ||||||||||||
| U.S. Small Business Administration | $ | (e) | % | |||||||||||||
| Aggregate outstanding principal balances | ||||||||||||||||
| Less: unamortized debt issuance costs | ( | ) | ( | ) | ||||||||||||
| Less: current portion | ( | ) | ( | ) | ||||||||||||
| Non-current portion | $ | $ | ||||||||||||||
| (b) | |
| (c) | |
| (d) | |
| (e) |
| F-18 |
Interest
expense for short-term debt and long-term debts was $
As of September 30, 2024, future minimum principal payments for long-term debts are as follows:
SCHEDULE OF FUTURE MINIMUM LOAN PAYMENTS
| Principal | ||||
| Year Ended December 31, | Payment | |||
| Remaining of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
NOTE 15 – INCOME TAXES
United States
HeartCore
USA, Sigmaways and HeartCore Financial, incorporated in the United States, are subject to federal income tax at
Netherlands
Sigmaways
B.V. is a company incorporated in Netherlands in November 2019.
Canada
Sigmaways
Technologies is a company incorporated in British Columbia in Canada in August 2020. It is subject to income tax on income arising in,
or derived from, the tax jurisdiction in British Columbia it operates. The basic federal rate of Part I tax is
Vietnam
HeartCore
Luvina is a company incorporated in Vietnam in November 2023. It is subject to standard income tax rate at
Japan
The
Company conducts its major businesses in Japan and is subject to tax in this jurisdiction. As a result of its business activities, the
Company files tax returns that are subject to examination by the local tax authority. Income taxes in Japan applicable to the Company
are imposed by the national, prefectural and municipal governments, and in the aggregate result in an effective statutory tax rate of
approximately
For the nine months ended September 30, 2024 and 2023, the Company’s income tax expense are as follows:
SCHEDULE OF INCOME TAX EXPENSES
| 2024 | 2023 | |||||||
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Current | $ | $ | ||||||
| Deferred | ( | ) | ( | ) | ||||
| Income tax expense | $ | $ | ||||||
The
effective tax rate was
Options
On August 6, 2021, the Board of Directors and shareholders of the Company approved a 2021 Equity Incentive Plan (the “2021 Plan”), under which shares of common shares are authorized for issuance.
On February 3, 2023, the Company awarded options to purchase shares of common shares pursuant to the 2021 Plan at an exercise price of $ per share to an employee of the Company. The options vest % on the grant date and February 1, 2024, respectively, with the expiration date on .
On August 25, 2023, the Company awarded options to purchase shares of common shares pursuant to the 2021 Plan at an exercise price of $ per share to an employee of the Company. The options vest on each annual anniversary of the date of issuance, in an amount equal to % of the applicable shares of common shares, with the expiration date on .
On August 1, 2023, the Board of Directors of the Company approved a 2023 Equity Incentive Plan (the “2023 Plan”), under which shares of common shares are authorized for issuance. shares were issued pursuant to the 2023 Plan as of September 30, 2024.
| F-19 |
SCHEDULE OF STOCK OPTION ACTIVITY
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Term (Years) | Intrinsic Value | |||||||||||||
| As of January 1, 2023 | $ | $ | ||||||||||||||
| Granted | - | |||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited | ( | ) | - | - | ||||||||||||
| As of September 30, 2023 | $ | $ | - | |||||||||||||
| As of January 1, 2024 | $ | $ | ||||||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited | ( | ) | - | - | ||||||||||||
| As of September 30, 2024 | $ | $ | ||||||||||||||
| Vested and exercisable as of September 30, 2024 | $ | $ | ||||||||||||||
The Company calculated the fair value of options granted in the nine months ended September 30, 2023 using the Black-Scholes model. Significant assumptions used in the valuation include expected volatility, risk-free interest rate, dividend yield and expected exercise term.
For the three and nine months ended September 30, 2024, the Company recognized stock-based compensation related to options of $ and $, respectively. For the three and nine months ended September 30, 2023, the Company recognized stock-based compensation related to options of $ and $, respectively. The outstanding unamortized stock-based compensation related to options was $ (which will be recognized through December 2025) as of September 30, 2024.
Restricted Stock Units (“RSUs”)
On March 22, 2023, the Company entered into agreements with employees and service providers of Sigmaways and granted RSUs pursuant to the 2021 Plan. The RSUs were fully vested upon issuance. The fair value of the RSUs at grant date was $.
The following table summarizes the RSUs activity for the nine months ended September 30, 2024 and 2023:
SCHEDULE OF RESTRICTED STOCK UNITS
Number of RSUs | Weighted Average Grant Date Fair Value Per Share | |||||||
| Unvested as of January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ||||||||
| Unvested as of September 30, 2023 | $ | |||||||
| Unvested as of January 1, 2024 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ||||||||
| Unvested as of September 30, 2024 | $ | |||||||
For the three and nine months ended September 30, 2024, the Company recognized stock-based compensation related to RSUs of $ and $, respectively. For the three and nine months ended September 30, 2023, the Company recognized stock-based compensation related to RSUs of $ and $, respectively. The outstanding unamortized stock-based compensation related to RSUs was $ (which will be recognized through February 2026) as of September 30, 2024.
| F-20 |
NOTE 17 – SHAREHOLDERS’ EQUITY
On
February 1, 2023, shares of common shares were issued for the acquisition of
In
November 2023, the Company established a
On
March 29, 2024, the Board of Directors approved a dividend declaration of $ per share of common share for the shareholders of record
at the close of business on April 26, 2024. The dividends in the amount of $
On
July 22, 2024, the Board of Directors approved a dividend declaration of $ per share of common share for the shareholders of record
at the close of business on August 19, 2024. The dividends in the amount of $
As of September 30, 2024 and December 31, 2023, there were and shares of common shares issued and outstanding, respectively.
preferred shares were issued and outstanding as of September 30, 2024 and December 31, 2023.
Basic net income (loss) per share is calculated on the basis of weighted average outstanding common shares. Diluted net income (loss) per share is computed on the basis of basic weighted average outstanding common shares adjusted for the dilutive effect of stock options, RSUs and other dilutive securities. Common shares equivalents are determined by applying the treasury stock method to the assumed conversion of share repurchase liability to common shares related to the early exercised stock options and unvested RSUs, and are not included in the calculation of diluted income (loss) per share if their effect would be anti-dilutive.
SCHEDULE OF COMPUTATION OF BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net income (loss) per share – basic and diluted | ||||||||||||||||
| Numerator | ||||||||||||||||
| Net income (loss) attributable to HeartCore Enterprises, Inc. common shareholders | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Denominator | ||||||||||||||||
| Weighted average number of common shares outstanding used in calculating net income (loss) per share | ||||||||||||||||
| Net income (loss) per share – basic and diluted | $ | $ | ) | $ | $ | ) | ||||||||||
For the three and nine months ended September 30, 2024 and 2023, the weighted average common shares outstanding are the same for basic and diluted net income (loss) per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect.
| F-21 |
NOTE 19 – BUSINESS COMBINATION
On
September 6, 2022, HeartCore USA entered into the Sigmaways Agreement to acquire
The total purchase price is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed and non-controlling interest based on their estimated fair values as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill.
The purchase price is allocated on the acquisition date as follows:
SCHEDULE OF BUSINESS PURCHASE PRICE ALLOCATION
| Amount | ||||
| Current assets | $ | |||
| Acquired intangible asset | ||||
| Non-current assets | ||||
| Current liabilities | ( | ) | ||
| Deferred tax liabilities | ( | ) | ||
| Non-current liabilities | ( | ) | ||
| Goodwill | ||||
| Non-controlling interest | ( | ) | ||
| Total purchase consideration | $ | |||
The results of operations, financial position and cash flows of Sigmaways and its subsidiaries have been included in the Company’s unaudited consolidated financial statements since the date of acquisition.
Pro forma results of operations for the business combination have not been presented because they are not material to the unaudited consolidated statements of operations and comprehensive income (loss).
The Company’s policy is to perform its annual impairment testing on goodwill for its reporting unit on December 31 of each fiscal year or more frequently if events or changes in circumstances indicate that an impairment may exist. The Company did not recognize any impairment loss on goodwill for the nine months ended September 30, 2024 and 2023.
NOTE 20 – SUBSEQUENT EVENTS
On October 1, 2024, the Company granted RSUs pursuant to the 2023 Plan to four executives of the Company. The RSUs were fully vested upon issuance.
On October 8, 2024, the Company entered into share transfer agreements with multiple third parties to sell stocks obtained through exercise of stock warrants of a consulting service customer for approximately $.
| F-22 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provide a safe harbor for forward-looking statements made by us or on our behalf. We and our representatives may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange Commission (“SEC”) and in our reports and presentations to stockholders or potential stockholders. In some cases, forward-looking statements can be identified by words such as “believe,” “expect,” “anticipate,” “plan,” “potential,” “continue” or similar expressions. Such forward-looking statements include risks and uncertainties and there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors, risks and uncertainties can be found in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as the same may be updated from time to time, including in Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q.
Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, it is not possible to foresee or identify all factors that could have a material effect on the future financial performance of the Company. The forward-looking statements in this report are made on the basis of management’s assumptions and analyses, as of the time the statements are made, in light of their experience and perception of historical conditions, expected future developments and other factors believed to be appropriate under the circumstances.
Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q and the information incorporated by reference in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.
Business Overview
We are a leading software development company based in Tokyo, Japan. We provide software through two business units. The first business unit, our CX division, includes a customer experience management business (the “CXM Platform”) that has been in existence for 15 years. Our CXM Platform includes marketing, sales, service and content management systems, as well as other tools and integrations, that enable companies to attract and engage customers throughout the customer experience. We also provide education, services and support to help customers be successful with our CXM Platform.
The second business unit, our DX division, is a digital transformation business which provides customers with robotics process automation, process mining and task mining to accelerate the digital transformation of enterprises. We also have an ongoing technology innovation team to develop software that supports the narrow needs of large enterprise customers.
During 2022, we started the GO IPO business, which supports Japanese companies listing on The Nasdaq Stock Market and the New York Stock Exchange in the United States. As of November 14, 2024, we have entered into consulting agreements with 14 companies to assist them in their IPO process, pursuant to which we are entitled to receive from each company a consulting fee that ranges from $380,000 to $900,000 and warrants or stock acquisition rights to purchase 1% to 4% of the fully-diluted share capital of such companies that is exercisable on certain dates at an exercise price of $0.01 or JPY1 per share.
| 3 |
We were incorporated in the State of Delaware on May 18, 2021. We conduct business activities principally through our wholly owned subsidiary, HeartCore Co., Ltd. (“HeartCore Japan”), a Japanese corporation, which was established in Japan by Mr. Sumitaka Yamamoto, our CEO, in 2009.
On September 6, 2022, the Company entered into a share exchange and purchase agreement (“Sigmaways Agreement”) to acquire 51% of the outstanding shares of Sigmaways, a company incorporated under the laws of the State of California, and its wholly owned subsidiaries. Sigmaways and its wholly owned subsidiaries are engaged in the business of developing and sales of software in the United States. The acquisition closed on February 1, 2023.
In the first quarter of 2023, we formed HeartCore Financial, Inc. (“HeartCore Financial”) in the U.S. and HeartCore Capital Advisors, Inc. (“HeartCore Capital Advisors”) in Japan, as a part of our GO IPO consulting business. In the fourth quarter of 2023, we formed HeartCore Luvina Vietnam Company Limited in Vietnam (“HeartCore Luvina”), which is engaged in the business of software development.
On November 17, 2023, HeartCore Japan and HeartCore Capital Advisors entered into a merger agreement to merge the two entities into one with HeartCore Japan being the surviving entity. On January 1, 2024, the merger was completed and HeartCore Capital Advisors transferred all of its assets and liabilities to HeartCore Japan. The merger has been accounted for as a recapitalization between entities under common control since the same controlling shareholders controlled the two entities before and after the transaction.
In April 2024, HeartCore Financial incorporated a branch office, HeartCore Financial, Inc. – Japan Branch Office, in Japan.
Recent Developments
Sale of Warrants
On February 29, 2024, the Company entered into a warrants transfer agreement with a non-related company to sell partial of the warrants it received from a customer (“Consulting Customer”) as noncash consideration from consulting services for $9,000,000 in cash. The warrants to be transferred are exercisable only upon its Consulting Customer’s consummation of the Merger with a special purpose acquisition company or the occurrence of other fundamental events defined in the warrant agreement it had with the Consulting Customer. The Company completed its sale of warrants in September 2024 and recorded $3,970,628 in loss on sale of warrants from this transaction.
Cash Dividends
On March 29, 2024, the Board of Directors of the Company declared a cash dividend of $0.02 per share of the Company’s common shares. The dividend was paid on May 3, 2024 to shareholders of record as of April 26, 2024, resulting in an aggregate of $417,283 in total dividends paid by the Company.
On July 22, 2024, the Board of Directors of the Company declared a cash dividend of $0.02 per share of the Company’s common shares. The dividend was paid on August 26, 2024 to shareholders of record as of August 19, 2024, resulting in an aggregate of $417,283 in total dividends paid by the Company.
| 4 |
The Company may continue to issue quarterly dividends going forward, contingent upon Board of Directors approval, following review of the Company’s then-current financial results. Future dividends, if any, may be less than, equal to or greater than recent dividends.
Noncompliance with Nasdaq’s Minimum Bid Price Requirement
On October 26, 2023, the Company received written notice (the “Bid Price Notice”) from the Nasdaq Listing Qualifications Department (the “Nasdaq Staff”) indicating that the Company was not in compliance with the $1.00 minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”) for continued listing on the Nasdaq Capital Market. The notification of noncompliance had no immediate effect on the listing or trading of the Company’s common stock on the Nasdaq Capital Market under the symbol “HTCR,” and the Company continued to monitor the closing bid price of its common stock and evaluate its alternatives, if appropriate, to resolve the deficiency and regain compliance with this rule.
The Nasdaq Listing Rules require listed securities to maintain a minimum bid price of $1.00 per share and, as of October 26, 2023, based upon the closing bid price for the then-last 30 consecutive business days, the Company no longer met this requirement. The Bid Price Notice indicated that the Company would be provided 180 calendar days, or until April 23, 2024, in which to regain compliance. If at any time during this period the closing bid price of the Company’s common stock is at least $1.00 per share for a minimum of 10 consecutive business days, the Nasdaq Staff would provide the Company with written confirmation of compliance and the matter will be closed.
Alternatively, if the Company failed to regain compliance with Rule 5550(a)(2) prior to the expiration of the 180 calendar day period, but met the continued listing requirement for market value of publicly held shares and all of the other applicable standards for initial listing on the Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement, and provided written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary, then the Company may be granted an additional 180 calendar days to regain compliance with Rule 5550(a)(2).
On April 24, 2024, the Company received written notice (the “April 2024 Nasdaq Letter”) from the Nasdaq Staff indicating that although the Company was not in compliance with the Minimum Bid Price Requirement, the Nasdaq Staff determined that the Company was eligible for an additional 180 calendar day period, or until October 21, 2024, to regain compliance. The Nasdaq Staff indicated that its determination was based on the Company meeting the continued listing requirement for market value of publicly held shares and all of the other applicable requirements for initial listing on the Nasdaq Capital Market, with the exception of the Minimum Bid Requirement, and the Company’s written notice of its intention to cure the deficiency during the second compliance period by effectuating a reverse stock split, if necessary. Accordingly, there was no immediate effect on the listing or trading of the Company’s common stock on the Nasdaq Capital Market under the symbol “HTCR.”
If at any time between April 24, 2024 and October 21, 2024, the closing bid price of the Company’s common stock was at least $1.00 per share for a minimum of 10 consecutive business days, the Nasdaq Staff would provide the Company with written confirmation of compliance and the matter would be closed.
On October 22, 2024, the Company received written notice (the “October 2024 Nasdaq Notice”) from the Nasdaq Staff indicating that the Company was not in compliance with the Minimum Bid Price Requirement. Pursuant to the October 2024 Nasdaq Notice, unless the Company requests an appeal of the determination to delist the Company’s common stock by October 29, 2024, trading of the Company’s common stock will be suspended at the opening of business on October 31, 2024, and a Form 25-NSE will be filed with the SEC which will remove the Company’s securities from listing and registration on Nasdaq.
The Company appealed the determination on October 29, 2024. Submission of the hearing request stayed the suspension of the Company’s securities and the filing of the Form 25-NSE pending the Panel’s decision.
On November 5, 2024, the Company received written notice from the Nasdaq Staff that the Company demonstrated compliance with the $1.00 minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on the Nasdaq Capital Market. As a result, the hearing appealed on October 29, 2024 has now been cancelled as the Company regained compliance with the Nasdaq Capital Market’s listing requirements.
| 5 |
Financial Overview
For the three months ended September 30, 2024 and 2023, we generated revenues of $17,850,411 and $4,688,908, respectively, reported a net income of $10,816,930 and a net loss of $2,541,133, respectively.
For the nine months ended September 30, 2024 and 2023, we generated revenues of $26,963,531 and $18,518,431, respectively, reported a net income of $7,127,810 and a net loss of $1,755,942, respectively, and had cash flows used in operating activities of $3,499,514 and $2,457,661, respectively. As noted in our unaudited consolidated financial statements, as of September 30, 2024, we had an accumulated deficit of $6,990,113.
Results of Operations
Comparison of Results of Operations for the Three Months Ended September 30, 2024 and 2023
The following table summarizes our operating results as reflected in our unaudited statements of operations during the three months ended September 30, 2024 and 2023, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods.
| For the Three Months Ended September 30, | ||||||||||||||||||||||||
| 2024 | 2023 | Variance | ||||||||||||||||||||||
| % of | % of | |||||||||||||||||||||||
| Amount | Revenues | Amount | Revenues | Amount | % | |||||||||||||||||||
| Revenues | $ | 17,850,411 | 100.0 | % | $ | 4,688,908 | 100.0 | % | $ | 13,161,503 | 280.7 | % | ||||||||||||
| Cost of revenues | 3,433,024 | 19.2 | % | 3,860,241 | 82.3 | % | (427,217 | ) | -11.1 | % | ||||||||||||||
| Gross profit | 14,417,387 | 80.8 | % | 828,667 | 17.7 | % | 13,588,720 | 1,639.8 | % | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling expenses | 243,110 | 1.4 | % | 274,043 | 5.9 | % | (30,933 | ) | -11.3 | % | ||||||||||||||
| General and administrative expenses | 1,966,717 | 11.0 | % | 2,172,298 | 46.3 | % | (205,581 | ) | -9.5 | % | ||||||||||||||
| Research and development expenses | 107,529 | 0.6 | % | 170,071 | 3.6 | % | (62,542 | ) | -36.8 | % | ||||||||||||||
| Total operating expenses | 2,317,356 | 13.0 | % | 2,616,412 | 55.8 | % | (299,056 | ) | -11.4 | % | ||||||||||||||
| Income (loss) from operations | 12,100,031 | 67.8 | % | (1,787,745 | ) | -38.1 | % | 13,887,776 | -776.8 | % | ||||||||||||||
| Other expenses | (1,057,826 | ) | -5.9 | % | (733,975 | ) | -15.7 | % | (323,851 | ) | 44.1 | % | ||||||||||||
| Income (loss) before income tax provision | 11,042,205 | 61.9 | % | (2,521,720 | ) | -53.8 | % | 13,563,925 | -537.9 | % | ||||||||||||||
| Income tax expense | 225,275 | 1.3 | % | 19,413 | 0.4 | % | 205,862 | 1,060.4 | % | |||||||||||||||
| Net income (loss) | 10,816,930 | 60.6 | % | (2,541,133 | ) | -54.2 | % | 13,358,063 | -525.7 | % | ||||||||||||||
| Less: net loss attributable to non-controlling interests | (240,876 | ) | -1.3 | % | (233,913 | ) | -5.0 | % | (6,963 | ) | 3.0 | % | ||||||||||||
| Net income (loss) attributable to HeartCore Enterprises, Inc. | $ | 11,057,806 | 61.9 | % | $ | (2,307,220 | ) | -49.2 | % | $ | 13,365,026 | -579.3 | % | |||||||||||
| 6 |
Revenues
Our total revenues increased by $13,161,503, or 280.7%, to $17,850,411 for the three months ended September 30, 2024 from $4,688,908 for the three months ended September 30, 2023, mainly attributable to the increased revenues of $13,272,315 from GO IPO consulting services as two of the Company’s GO IPO customers successfully listed on the Nasdaq in the third quarter of 2024 and the Company recognized revenues from noncash consideration in the form of warrants and ordinary shares from the consulting services customers.
Cost of Revenues
Our total costs of revenues decreased by $427,217, or 11.1%, to $3,433,024 for the three months ended September 30, 2024 from $3,860,241 for the three months ended September 30, 2023, primarily attributable to (i) a decrease of $238,701 in the costs of GO IPO consulting services in line with the decrease in revenues of GO IPO consulting services by excluding the amount recognized from noncash consideration; (ii) a decrease of $219,058 in the costs of customized software development and services in light of the decrease in sales.
Gross Profit
Our total gross profit increased by $13,588,720, or 1,639.8%, to $14,417,387 for the three months ended September 30, 2024 from $828,667 for the three months ended September 30, 2023, mainly attributable to an increase in gross profit of $13,511,016 from GO IPO consulting services as the Company recognized revenues from noncash consideration in the form of warrants and ordinary shares from two of IPO customers upon their IPO effectiveness with no associated costs in the three months ended September 30, 2024, while there was no such event during the three months ended September 30, 2023.
For the reason discussed above, our overall gross profit margin increased by 63.1% to 80.8% for the three months ended September 30, 2024 from 17.7% for the three months ended September 30, 2023.
Selling Expenses
Our selling expenses decreased by $30,933, or 11.3%, to $243,110 for the three months ended September 30, 2024 from $274,043 in the three months ended September 30, 2023, primarily attributable to a decrease of $41,224 in stock-based compensation as the Company granted shares of common stock to employees and service providers of Sigmaways in 2023, and there was no such event in the current period.
As a percentage of revenues, our selling expenses accounted for 1.4% and 5.9% of our total revenues for the three months ended September 30, 2024 and 2023, respectively.
General and Administrative Expenses
Our general and administrative expenses decreased by $205,581, or 9.5%, to $1,966,717 for the three months ended September 30, 2024 from $2,172,298 in the three months ended September 30, 2023, primarily attributable to a decrease of $230,045 in salaries and welfare due to the retirement of certain employees.
As a percentage of revenues, our general and administrative expenses were 11.0% and 46.3% of our total revenues for the three months ended September 30, 2024 and 2023, respectively.
Research and Development Expenses
Our research and development expenses decreased by $62,542, or 36.8%, to $107,529 in the three months ended September 30, 2024 from $170,071 in the three months ended September 30, 2023, primarily attributable to a decrease of $61,986 in outsourcing expenses relating to the development of new CMS management screen features which will be completed soon.
As a percentage of revenues, our research and development expenses were 0.6% and 3.6% of our total revenues for the three months ended September 30, 2024 and 2023, respectively.
| 7 |
Other Income (Expenses), Net
Our other income (expenses) primarily includes changes in fair value of investments in marketable securities, changes in fair value of investment in warrants, loss on sale of warrants, interest income generated from bank deposits, interest expense for bank loans and bond, other income, and other expenses. Other expenses, net, of $733,975 for the three months ended September 30, 2023 increased by $323,851, or 44.1%, to other expenses, net, of $1,057,826 for the three months ended September 30, 2024, primarily attributable to (i) a loss of $3,970,628 on sale of warrants, offset (ii) by an increase of $3,330,079 in changes in fair value of investment in warrants and (iii) an increase of $394,012 in changes in fair value of investments in marketable securities.
Income Tax Expense
Income tax expense was $225,275 in the three months ended September 30, 2024, an increase of $205,862, or 1,060.4%, from income tax expense of $19,413 in the three months ended September 30, 2023, primarily due to a net income before income tax provision in the current period, while we recorded a net loss before income tax provision in the three months ended September 30, 2023.
Net Income (Loss)
As a result of the foregoing, we reported a net income of $10,816,930 for the three months ended September 30, 2024, representing a $13,358,063, or 525.7%, increase from a net loss of $2,541,133 for the three months ended September 30, 2023.
Net Loss Attributable to Non-controlling Interests
We owned 51% equity interest in Sigmaways and its subsidiaries and 51% equity interest in HeartCore Luvina. Accordingly, we recorded net loss attributable to non-controlling interests of $240,876 and $233,913 for the three months ended September 30, 2024 and 2023, respectively.
Net Income (Loss) Attributable to HeartCore Enterprises, Inc.
As a result of the foregoing, we reported a net income attributable to HeartCore Enterprises, Inc. of $11,057,806 for the three months ended September 30, 2024, representing a $13,365,026, or 579.3%, increase from a net loss attributable to HeartCore Enterprises, Inc. of $2,307,220 for the three months ended September 30, 2023.
| 8 |
Comparison of Results of Operations for the Nine Months Ended September 30, 2024 and 2023
The following table summarizes our operating results as reflected in our unaudited statements of operations during the nine months ended September 30, 2024 and 2023, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods.
| For the Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2024 | 2023 | Variance | ||||||||||||||||||||||
| % of | % of | |||||||||||||||||||||||
| Amount | Revenues | Amount | Revenues | Amount | % | |||||||||||||||||||
| Revenues | $ | 26,963,531 | 100.0 | % | $ | 18,518,431 | 100.0 | % | $ | 8,445,100 | 45.6 | % | ||||||||||||
| Cost of revenues | 9,708,074 | 36.0 | % | 10,548,245 | 57.0 | % | (840,171 | ) | -8.0 | % | ||||||||||||||
| Gross profit | 17,255,457 | 64.0 | % | 7,970,186 | 43.0 | % | 9,285,271 | 116.5 | % | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling expenses | 642,225 | 2.4 | % | 1,330,747 | 7.2 | % | (688,522 | ) | -51.7 | % | ||||||||||||||
| General and administrative expenses | 6,395,429 | 23.8 | % | 7,305,392 | 39.4 | % | (909,963 | ) | -12.5 | % | ||||||||||||||
| Research and development expenses | 307,931 | 1.1 | % | 289,303 | 1.6 | % | 18,628 | 6.4 | % | |||||||||||||||
| Total operating expenses | 7,345,585 | 27.3 | % | 8,925,442 | 48.2 | % | (1,579,857 | ) | -17.7 | % | ||||||||||||||
| Income (loss) from operations | 9,909,872 | 36.7 | % | (955,256 | ) | -5.2 | % | 10,865,128 | -1,137.4 | % | ||||||||||||||
| Other expenses | (2,709,117 | ) | -10.0 | % | (741,827 | ) | -4.0 | % | (1,967,290 | ) | 265.2 | % | ||||||||||||
| Income (loss) before income tax provision | 7,200,755 | 26.7 | % | (1,697,083 | ) | -9.2 | % | 8,897,838 | -524.3 | % | ||||||||||||||
| Income tax expense | 72,945 | 0.3 | % | 58,859 | 0.3 | % | 14,086 | 23.9 | % | |||||||||||||||
| Net income (loss) | 7,127,810 | 26.4 | % | (1,755,942 | ) | -9.5 | % | 8,883,752 | -505.9 | % | ||||||||||||||
| Less: net loss attributable to non-controlling interests | (645,546 | ) | -2.4 | % | (419,211 | ) | -2.3 | % | (226,335 | ) | 54.0 | % | ||||||||||||
| Net income (loss) attributable to HeartCore Enterprises, Inc. | $ | 7,773,356 | 28.8 | % | $ | (1,336,731 | ) | -7.2 | % | $ | 9,110,087 | -681.5 | % | |||||||||||
Revenues
Our total revenues increased by $8,445,100, or 45.6%, to $26,963,531 for the nine months ended September 30, 2024 from $18,518,431 for the nine months ended September 30, 2023, mainly attributable to the increased revenues of $8,168,414 from GO IPO consulting services as two of the Company’s GO IPO customers successfully listed on the Nasdaq in the third quarter of 2024 and the Company recognized revenues from noncash consideration in the form of warrants and ordinary shares from the consulting services customers of $13.5 million, while only $4 million of revenue recognized from noncash consideration in the form of warrants in the nine months ended September 30, 2023.
Cost of Revenues
Our total cost of revenues decreased by $840,171, or 8.0%, to $9,708,074 for the nine months ended September 30, 2024 from $10,548,245 for the nine months ended September 30, 2023, mainly attributable to (i) a decrease of $975,454 in the costs of GO IPO consulting services in line with the decrease in revenues of GO IPO consulting services by excluding the amount recognized from noncash consideration, offset by (ii) an increase of $259,917 in customized software development and services as the sales increased.
Gross Profit
Our total gross profit increased by $9,285,271, or 116.5%, to $17,255,457 for the nine months ended September 30, 2024 from $7,970,186 for the nine months ended September 30, 2023, mainly attributable to an increase in gross profit of $9,143,868 from GO IPO consulting services, as the Company recognized greater revenues from noncash consideration from IPO customers upon their IPO effectiveness with no associated costs in the nine months ended September 30, 2024 than that recognized in the same period in 2023.
For the reason discussed above, our overall gross profit margin increased by 21.0% to 64.0% for the nine months ended September 30, 2024 from 43.0% in the nine months ended September 30, 2023.
Selling Expenses
Our selling expenses decreased by $688,522, or 51.7%, to $642,225 for the nine months ended September 30, 2024 from $1,330,747 in the nine months ended September 30, 2023, primarily attributable to (i) a decrease of $380,087 in stock-based compensation, as the Company granted shares of common stock to employees and service providers of Sigmaways in 2023, and there was no such event in the current period; and (ii) a decrease of $337,882 in advertising expense due to less advertising activities in the current period.
As a percentage of revenues, our selling expenses accounted for 2.4% and 7.2% of our total revenues for the nine months ended September 30, 2024 and 2023, respectively.
| 9 |
General and Administrative Expenses
Our general and administrative expenses decreased by $909,963, or 12.5%, to $6,395,429 for the nine months ended September 30, 2024 from $7,305,392 in the nine months ended September 30, 2023, primarily attributable to (i) a decrease of $566,923 in stock-based compensation, as the Company granted shares of common stock to employees and service providers of Sigmaways in 2023, and there was no such event in the current period; and (ii) a decrease of $314,119 in salaries welfare mainly due to the retirement of certain employees.
As a percentage of revenues, our general and administrative expenses were 23.8% and 39.4% of our total revenues for the nine months ended September 30, 2024 and 2023, respectively.
Research and Development Expenses
Our research and development expenses slightly increased by $18,628, or 6.4%, to $307,931 in the nine months ended September 30, 2024 from $289,303 in the nine months ended September 30, 2023, primarily attributable to (i) an increase of $75,981 in outsourcing expenses relating to the development of new CMS management screen features in the current period; offset by (ii) a decrease of $57,353 in stock-based compensation, as the Company granted shares of common stock to employees and service providers of Sigmaways in 2023, and there was no such event in the current period.
As a percentage of revenues, our research and development expenses were 1.1% and 1.6% of our total revenues for the nine months ended September 30, 2024 and 2023, respectively.
Other Income (Expenses), Net
Our other income (expenses) primarily includes changes in fair value of investments in marketable securities, changes in fair value of investment in warrants, loss on sale of warrants, interest income generated from bank deposits, interest expense for bank loans and bond, other income, and other expenses. Other expenses, net, of $741,827 for the nine months ended September 30, 2023 increased by $1,967,290, or 265.2%, to other expenses, net, of $2,709,117 for the nine months ended September 30, 2024, primarily attributable to a loss of $3,970,628 on sale of warrants, offset by an increase of $192,703 in changes in fair value of investments in marketable securities and an increase of $1,926,265 in changes in fair value of investment in warrants.
Income Tax Expense
Income tax expense was $72,945 for the nine months ended September 30, 2024, an increase of $14,086, or 23.9%, from income tax expense of $58,859 in the nine months ended September 30, 2023, primarily due to an income before income tax provision in the current period, while we recorded a loss before income tax provision in the nine months ended September 30, 2023.
Net Income (Loss)
As a result of the foregoing, we reported a net income of $7,127,810 for the nine months ended September 30, 2024, representing a $8,883,752, or 505.9%, increase from a loss of $1,755,942 for the nine months ended September 30, 2023.
Net Loss Attributable to Non-controlling Interests
We owned 51% equity interest in Sigmaways and its subsidiaries and 51% equity interest of HeartCore Luvina. Accordingly, we recorded net loss attributable to non-controlling interests of $645,546 and $419,211 for the nine months ended September 30, 2024 and 2023, respectively.
| 10 |
Net Income (Loss) Attributable to HeartCore Enterprises, Inc.
As a result of the foregoing, we reported a net income attributable to HeartCore Enterprises, Inc. of $7,773,356 for the nine months ended September 30, 2024, representing a $9,110,087, or 681.5%, increase from a net loss attributable to HeartCore Enterprises, Inc. of $1,336,731 for the nine months ended September 30, 2023.
Liquidity and Capital Resources
As of September 30, 2024, we had $1,232,117 in cash and cash equivalents, as compared to $1,012,479 as of December 31, 2023. We also had $2,578,855 in accounts receivable, current as of September 30, 2024. Our accounts receivable primarily include balance due from customers for our on-premise software sold and services provided and accepted by customers, as well as amounts billable to the customers for customized software development and services.
The following table sets forth a summary of our cash flows for the periods indicated:
| For the Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Net cash flows used in operating activities | $ | (3,499,514 | ) | $ | (2,457,661 | ) | ||
| Net cash flows provided by (used in) investing activities | 5,317,323 | (1,781,810 | ) | |||||
| Net cash flows used in financing activities | (1,529,441 | ) | (432,051 | ) | ||||
| Effect of exchange rate changes | (68,730 | ) | (306,239 | ) | ||||
| Net change in cash and cash equivalents | 219,638 | (4,977,761 | ) | |||||
| Cash and cash equivalents, beginning of the period | 1,012,479 | 7,177,326 | ||||||
| Cash and cash equivalents, end of the period | $ | 1,232,117 | $ | 2,199,565 | ||||
Operating Activities
Net cash flows used in operating activities was $3,499,514 for the nine months ended September 30, 2024, primarily consisting of the following:
| ● | Net income of $7,127,810 for the nine months ended September 30, 2024. | |
| ● | Marketable securities and warrants received as noncash consideration in total of $13,541,693 as two of our IPO consulting customers completed the IPO during the current period. | |
| ● | A gain of $1,631,700 on fair value changes in investment in warrants. | |
| ● | An increase of $685,531 in accounts receivable due to increased sale of on-premise software in the current period. | |
| ● | Offset by loss of $3,970,628 recognized on sale of warrants to a third party. | |
| ● | Offset by depreciation and amortization expenses of $561,659. | |
| ● | Offset by an increase of $540,008 in other liabilities, mainly because we terminated the consulting service agreement with a GO IPO customer and will refund $500,000 to the customer. |
Investing Activities
Net cash flows provided by investing activities amounted to $5,317,323 for the nine months ended September 30, 2024, primarily attributable to net proceeds from sale of warrants of $5,640,000, offset by payment of $350,000 to purchase long-term investment in SAFE.
Financing Activities
Net cash flows used in financing activities amounted to $1,529,441 for the nine months ended September 30, 2024, primarily consisting of repayment of $453,048 for short-term and long-term debts, net repayment of $257,295 for factoring arrangement, and dividend distribution of $834,566.
| 11 |
Contractual Obligations
Lease Commitment
The Company has entered into six leases for its office space, one of which was terminated in February 2024, and these leases were classified as operating leases. It has also entered into a lease for office equipment and it was terminated in March 2024, and two leases for vehicles, one of which was terminated in September 2023, and these leases were classified as finance leases.
As of September 30, 2024, future minimum lease payments under the non-cancelable lease agreements are as follows:
| Year Ended December 31, | Finance Leases | Operating Leases | ||||||
| Remaining of 2024 | $ | 4,545 | $ | 107,999 | ||||
| 2025 | 18,179 | 403,889 | ||||||
| 2026 | 18,179 | 329,040 | ||||||
| 2027 | 18,179 | 283,512 | ||||||
| 2028 | 12,119 | 283,512 | ||||||
| Thereafter | - | 942,387 | ||||||
| Total lease payments | 71,201 | 2,350,339 | ||||||
| Less: imputed interest | (1,821 | ) | (107,797 | ) | ||||
| Total lease liabilities | 69,380 | 2,242,542 | ||||||
| Less: current portion | (17,375 | ) | (382,594 | ) | ||||
| Non-current lease liabilities | $ | 52,005 | $ | 1,859,948 | ||||
Debts
The Company’s debts included long-term debts borrowed from banks and financial institutions.
As of September 30, 2024, future minimum principal payments for long-term debts are as follows:
| Principal | ||||
| Year Ended December 31, | Payment | |||
| Remaining of 2024 | $ | 99,325 | ||
| 2025 | 434,474 | |||
| 2026 | 386,063 | |||
| 2027 | 414,474 | |||
| 2028 | 187,152 | |||
| Thereafter | 336,584 | |||
| Total | $ | 1,858,072 | ||
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of September 30, 2024.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements. These financial statements are prepared in accordance with the generally accepted accounting principles in the United States (“U.S. GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenues and expenses, to disclose contingent assets and liabilities on the date of the unaudited consolidated financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. We continue to evaluate the estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed herein reflect the more significant judgments and estimates used in preparation of our unaudited consolidated financial statements.
| 12 |
Revenue Recognition
The Company recognizes revenues under the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”.
To determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. Revenues amount represents the invoiced value, net of a value-added tax (“Consumption Tax”) and applicable local government levies. The Consumption Tax on sales are calculated at 10% of gross sales in Japan and Vietnam, 5% of gross sales in Canada, 21% of gross sales in Netherlands and nil of gross sales in the United States.
The Company currently generates its revenue from the following main sources:
Revenues from On-Premise Software
Licenses for on-premise software provide the customers with a right to use the software as it exists when made available to the customers. The Company provides on-premise software in the form of both perpetual licenses and term-based licenses which grant the customers with the right for a specified term. Revenues from on-premise licenses are recognized upfront at the point in time when the software is made available to the customers. Licenses for on-premise software are typically sold to the customers with maintenance and support services in a bundle. Revenues under the bundled arrangements are allocated based on the relative standalone selling prices (“SSP”) of on-premise software and maintenance and support service. The SSP for maintenance and support services is estimated based upon observable transactions when those services are sold on a standalone basis. The SSP of on-premise software is typically estimated using the residual approach as the Company is unable to establish the SSP for on-premise licenses based on observable prices given the same products are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions or other observable evidence.
Revenues from Maintenance and Support Services
Maintenance and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted by the customers.
Revenues from Software as a Service (“SaaS”)
The Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company’s solution is made available to the customers. The subscription contracts are generally one year or less in length.
Revenues from Software Development and Other Miscellaneous Services
The Company provides customers with software development and support services pursuant to their specific requirements, which are primarily composed of consulting, integration, training, custom application, and workflow development. The Company also provides other miscellaneous services, such as 3D space photography. The Company generally recognizes revenues at a point in time when control is transferred to the customers and the Company is entitled to the payment, which is when the promised services are delivered and accepted by the customers.
| 13 |
Revenues from Customized Software Development and Services
The Company’s customized software development and services revenues primarily include revenues from providing software development solutions and other support services to its customers. The contract pricing is at stated billing rates per hour. These contracts are generally short-term in nature and not longer than one year in duration. For services provided under the contracts that result in the transfer of control over time, the underlying deliverable in the contracts is owned and controlled by the customers and does not create an asset with an alternative use to the Company. The Company recognizes revenues on rate per hour contracts based on the amount billable to the customers, as the Company has the right to invoice the customers in an amount that directly corresponds with the value to the customers of the Company’s performance to date.
Revenues from Consulting Services
The Company provides public listing related consulting services to customers pursuant to the specific requirements prescribed in the contracts, which primarily include communicating with intermediary parties, preparing required documents related to the initial public offering and supporting the listing process. The consulting service contracts normally include both cash and noncash considerations. Cash consideration is paid in installment payments and is recognized in revenues over the period of the contract by reference to progress toward complete satisfaction of that performance obligation. Noncash consideration is in the form of warrants of the customers and is measured at fair value at contract inception. Noncash consideration that is variable for reasons other than only the form of the consideration is included in the transaction price, but is subject to the constraint on variable consideration. The Company assesses the estimated amount of the variable noncash consideration at contract inception and subsequently, to determine when and to what extent it is probable that a significant reversal in the amount of cumulative revenues recognized will not occur once the uncertainty associated with the variable consideration is subsequently resolved. Only when the significant revenues reversal is concluded probable of not occurring can variable consideration be included in revenues. Based on evaluation of likelihood and magnitude of a reversal in applying the constraint, the variable noncash consideration is recognized in revenues until the underlying uncertainties have been resolved.
The Company records reduction to revenues for estimated customer returns and allowances. The Company bases its estimates on historical rates of customer returns and allowances as well as the specific identification of outstanding returns. The actual amount of customer returns and allowances, which is inherently uncertain, may differ from the Company’s estimates. If the Company determines that actual or expected returns or allowances are significantly higher or lower than the reserves it established, it would record a reduction or increase, as appropriate, to revenues in the period in which it makes such a determination. Reserves for customer refunds are included within other current liabilities on the consolidated balance sheets. At a minimum, the Company reviews and refines these estimates on a quarterly basis.
The timing of revenue recognition may differ from the timing of invoicing to the customers. The Company has determined that its contracts do not include a significant financing component. The Company records a contract asset, which is included in accounts receivable, current and non-current, in the consolidated balance sheets, when revenues are recognized prior to invoicing. The Company factors certain accounts receivable upon or after the performance obligation is being met. The Company records deferred revenue in the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred revenue is reported net of related uncollected deferred revenue in the consolidated balance sheets. The amount of revenues recognized during the nine months ended September 30, 2024 and 2023 that were included in the opening deferred revenue balance was approximately $1.8 million and $1.5 million, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s 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 upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2024, the Company’s disclosure controls and procedures were not effective, for the same reason as previously disclosed under Item 9A. “Controls and Procedures” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2023, as filed with the Securities and Exchange Commission on April 9, 2024.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act that occurred during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| 14 |
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in various claims and legal actions arising in the ordinary course of business. To the knowledge of our management, there are no legal proceedings currently pending against us which we believe would have a material effect on our business, financial position or results of operations and, to the best of our knowledge, there are no such legal proceedings contemplated or threatened.
ITEM 1A. RISK FACTORS
As a smaller reporting company, the Company is not required to disclose material changes to the risk factors that were contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as updated from time to time.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There have been no defaults in any material payments during the covered period.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
(a) None.
(b) There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors since the Company last provided disclosure in response to the requirements of Item 407(c)(3) of Regulation S-K.
(c)
During the quarter ended September 30, 2024, no director or officer of the Company
ITEM 6. EXHIBITS
| Exhibit Number |
Description of Document | |
| 31.1* | Rule 13a-14(a) Certification of Principal Executive Officer. | |
| 31.2* | Rule 13a-14(a) Certification of Principal Financial Officer. | |
| 32.1** | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Principal Executive Officer and Principal Financial Officer. | |
| 101.INS* | Inline XBRL Instance Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB* | Inline XBRL Taxonomy Extension Labels Linkbase | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase | |
| 104* | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| * | Filed herewith. |
| ** | Furnished herewith. |
| 15 |
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
| HEARTCORE ENTERPRISES, INC. | ||
| Dated: November 14, 2024 | By: | /s/ Sumitaka Yamamoto |
| Sumitaka Yamamoto | ||
| Chief Executive Officer and President (principal executive officer) | ||
| Dated: November 14, 2024 | By: | /s/ Qizhi Gao |
| Qizhi Gao | ||
| Chief Financial Officer (principal financial officer and principal accounting officer) | ||
| 16 |
Exhibit 31.1
CERTIFICATIONS
I, Sumitaka Yamamoto, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q for the quarter ended September 30, 2024 of HeartCore Enterprises, Inc.; and |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; and |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; | |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: November 14, 2024 | By: | /s/ Sumitaka Yamamoto |
| Sumitaka Yamamoto | ||
| Chief Executive Officer and President (principal executive officer) |
Exhibit 31.2
CERTIFICATIONS
I, Qizhi Gao, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q for the quarter ended September 30, 2024 of HeartCore Enterprises, Inc.; and |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; and |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; | |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: November 14, 2024 | By: | /s/ Qizhi Gao |
| Qizhi Gao | ||
| Chief Financial Officer (principal financial officer) |
Exhibit 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of HeartCore Enterprises, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sumitaka Yamamoto, Chief Executive Officer and President of the Company, and I, Qizhi Gao, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
| Date: November 14, 2024 | /s/ Sumitaka Yamamoto |
| Sumitaka Yamamoto | |
| Chief Executive Officer and President (principal executive officer) | |
| Date: November 14, 2024 | /s/ Qizhi Gao |
Qizhi Gao Chief Financial Officer (principal financial officer) |
This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.