HeartCore Enterprises, Inc.: Form 10-Q for the period ended Mar 31, 2024

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 14 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 Nasdaq and NYSE in the United States. As of May 14, 2024, we have entered into consulting agreements with 14 companies to assist them in their IPO process, whereby 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.

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, HeartCore Enterprises, Inc. (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 was closed on February 1, 2023.

In the first quarter of 2023, we formed HeartCore Financial, Inc. 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, 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.

Recent Developments

Koei Shoji Co., Ltd. Service Agreement

On April 11, 2024 (the “Koei Shoji Effective Date”), the Company entered into a Service Agreement (the “Koei Shoji Agreement”) by and between the Company and Koei Shoji Co., Ltd., a Japanese corporation (“Koei Shoji”). Pursuant to the terms of the Koei Shoji Agreement, Koei Shoji engaged the Company, on an exclusive basis, to assist Koei Shoji in connection with its initial public offering. The following summarized the main services to be provided by the Company (collectively, the “Koei Shoji Services”):

(i) Phase 1:

• Suggesting to hire human resources, if Koei Shoji deems necessary;
• Providing support services to convert financial statements from Japanese tax law basis to Japanese generally accepted accounting principles, if Koei Shoji deems necessary;
• Providing support services to solve accounting issues, if Koei Shoji deems necessary;
• Providing support services to translate accounting documents (i.e., financial statement, general ledger, journal entry) and other documents, if Koei Shoji deems necessary;

(ii) Phase 2:

• Assisting with introduction to law firms, underwriters and auditing firms for Koei Shoji to make its selections at its sole discretion, if Koei Shoji deems necessary;
• Assisting in the preparation of documentation for internal controls required for an initial public offering or de-SPAC transaction by Koei Shoji;
• Providing support services for converting Koei Shoji’s financial statements based on United States generally accounting principles, if Koei Shoji deems necessary;
• Providing support services related to the Nasdaq, the New York Stock Exchange or the NYSE American listing, if Koei Shoji deems necessary ;
• Providing support services related to the preparation of Form S-1 or Form F-1, Form S-4 or Form F-4 filings, if Koei Shoji deems necessary;
• Support for investor relations activities, if Koei Shoji deems necessary; and
• Suggesting for preparing of investor presentation/deck and executive summary of Koei Shoji’s operation, if Koei Shoji deems necessary; and

(iii) Phase 3:

• Support for investor relations activities, if Koei Shoji deems necessary.

4

In providing the Koei Shoji Services, the Company will not render legal advice or perform accounting services, and will not act as an investment advisor or broker/dealer. Pursuant to the terms of the Koei Shoji Agreement, the parties agreed that the Company will not provide the following services, among others: negotiation of the sale of Koei Shoji’s securities; participation in discussions between Koei Shoji and potential investors; assisting in structuring any transactions involving the sale of Koei Shoji’s securities; pre-screening of potential investors; due diligence activities; nor providing advice relating to valuation of or financial advisability of any investments in Koei Shoji.

In exchange for providing the Koei Shoji Services, Koei Shoji will pay to the Company $500,000 (the “Services Fee”) as follows:

• $200,000 of the Services Fee on the Koei Shoji Effective Date;
• $150,000 of the Services Fee three months after the Koei Shoji Effective Date; and
• $150,000 of the Services Fee six months after the Koei Shoji Effective Date.

Koei Shoji Warrant

For Phase 3, in return for the Company’s NADAQ listing, the Company shall issue, and the Conpany shall be entitled to receive, a warrant to acquire a number of shares of capital stock of the entity designated by the Company from among the Company and its affiliated company becoming a publicly traded company, which may be revised by mutual agreement between the Parties to change the issuing entity from Company to another entity. The total amount of such shares shall be an amount equal to 3% of the fully diluted share capital of Koei Shoji as of Effective Date; provided, however, that the number of such shares may be adjusted subject to the Warrant. The right to receive Warrant shall be deemed fully earned and vested as of the Effective Date. The Warrant shall be issued within 15 days upon establishment of a holding entity of Koei Shoji.

PharmaBio Corporation. Service Agreement

On March 18, 2024 (the “PharmaBio Effective Date”), the Company entered into a Service Agreement (the “PharmaBio Agreement”) by and between the Company and PharmaBio Corporation., a Japanese corporation (“PharmaBio”). Pursuant to the terms of the PharmaBio Agreement, PharmaBio engaged the Company, on an exclusive basis, to assist PharmaBio in connection with its initial public offering. The following summarized the main services to be provided by the Company (collectively, the “PharmaBio Services”):

(i) Phase 1:

• Suggesting to hire human resources, if PharmaBio deems necessary;
• Providing support services to convert financial statements from Japanese tax law basis to Japanese generally accepted accounting principles, if PharmaBio deems necessary;
• Providing support services to solve accounting issues, if PharmaBio deems necessary;
• Providing support services to translate accounting documents (i.e., financial statement, general ledger, journal entry) and other documents, if PharmaBio deems necessary;
• Assisting with introduction to law firms, underwriters and auditing firms for PharmaBio to make its selections at its sole discretion, if PharmaBio deems necessary;
• Assisting in the preparation of documentation for internal controls required for an initial public offering or de-SPAC transaction by PharmaBio;
• Providing support services for converting PharmaBio’s financial statements based on United States generally accounting principles, if PharmaBio deems necessary;
• Providing support services related to the Nasdaq, the New York Stock Exchange or the NYSE American listing, if PharmaBio deems necessary ;
• Providing support services related to the preparation of Form S-1 or Form F-1, Form S-4 or Form F-4 filings, if PharmaBio deems necessary;
• Support for investor relations activities, if PharmaBio deems necessary; and
• Suggesting for preparing of investor presentation/deck and executive summary of PharmaBio’s operation, if PharmaBio deems necessary; and

(ii) Phase 2:

• Support for investor relations activities, if PharmaBio deems necessary.

5

In providing the PharmaBio Services, the Company will not render legal advice or perform accounting services, and will not act as an investment advisor or broker/dealer. Pursuant to the terms of the PharmaBio Agreement, the parties agreed that the Company will not provide the following services, among others: negotiation of the sale of PharmaBio’s securities; participation in discussions between PharmaBio and potential investors; assisting in structuring any transactions involving the sale of PharmaBio’s securities; pre-screening of potential investors; due diligence activities; nor providing advice relating to valuation of or financial advisability of any investments in PharmaBio.

In exchange for providing the PharmaBio Services, PharmaBio will pay to the Company $800,000 (the “Services Fee”) as follows:

• $100,000 of the Services Fee on the PharmaBio Effective Date;
• $100,000 of the Services Fee 2 months after the PharmaBio Effective Date;
• $100,000 of the Services Fee 4 months after the PharmaBio Effective Date;
• $100,000 of the Services Fee 6 months after the PharmaBio Effective Date;
• $100,000 of the Services Fee on the PharmaBio IPO Closing Date;
• $300,000 of the Services Fee on the Exercise Date of stock acquisition rights.

PharmaBio Warrant

It is agreed that PharmaBio shall issue stock acquisition rights of Japanese companies, which is equivalent to 3% of outstanding shares one day before public listing in return for and contingent upon its public listing, subject to common practice and procedures prior to the initial public offering for NASDAQ listing. PharmaBio and the Company shall discuss and conclude the separate agreement that shall define specific terms and conditions of stock acquisition rights within six months from the Effective Date.

Jyo Co., Ltd. Service Agreement

On February 23, 2024 (the “Jyo Effective Date”), the Company entered into a Service Agreement (the “Jyo Agreement”) by and between the Company and Jyo Co., Ltd., a Japanese corporation (“Jyo”). Pursuant to the terms of the Jyo Agreement, Jyo engaged the Company, on an exclusive basis, to assist Jyo in connection with its initial public offering. The following summarized the main services to be provided by the Company (collectively, the “Jyo Services”):

(i) Phase 1:

• Suggesting to hire human resources, if Jyo deems necessary;
• Providing support services to convert financial statements from Japanese tax law basis to Japanese generally accepted accounting principles, if Jyo deems necessary;
• Providing support services to solve accounting issues, if Jyo deems necessary;
• Providing support services to translate accounting documents (i.e., financial statement, general ledger, journal entry) and other documents, if Jyo deems necessary;
• Assisting with introduction to law firms, underwriters and auditing firms for Jyo to make its selections at its sole discretion, if Jyo deems necessary;
• Assisting in the preparation of documentation for internal controls required for an initial public offering or de-SPAC transaction by Jyo;
• Providing support services for converting Jyo’s financial statements based on United States generally accounting principles, if Jyo deems necessary;
• Providing support services related to the Nasdaq, the New York Stock Exchange or the NYSE American listing, if Jyo deems necessary ;
• Providing support services related to the preparation of Form S-1 or Form F-1, Form S-4 or Form F-4 filings, if Jyo deems necessary;
• Support for investor relations activities, if Jyo deems necessary; and
• Suggesting for preparing of investor presentation/deck and executive summary of Jyo’s operation, if Jyo deems necessary; and

(ii) Phase 2:

• Support for investor relations activities, if Jyo deems necessary.

In providing the Jyo Services, the Company will not render legal advice or perform accounting services, and will not act as an investment advisor or broker/dealer. Pursuant to the terms of the Jyo Agreement, the parties agreed that the Company will not provide the following services, among others: negotiation of the sale of Jyo’s securities; participation in discussions between Jyo and potential investors; assisting in structuring any transactions involving the sale of Jyo’s securities; pre-screening of potential investors; due diligence activities; nor providing advice relating to valuation of or financial advisability of any investments in Jyo.

In exchange for providing the Jyo Services for Phase 1, Jyo will pay to the Company $750,000 (the “Services Fee”) as follows:

• $250,000 of the Services Fee on the Jyo Effective Date;
• $150,000 of the Services Fee within 45 days after the Jyo Effective Date;
• $200,000 of the Services Fee three months after the Jyo Effective Date; and
• $150,000 of the Services Fee six months after the Jyo Effective Date.

For Phase 2, in return for Jyo’s Nasdaq listing, Jyo will issue and the Company will be entitled to receive, a warrant to acquire a number of shares of capital stock of the entity designated by the Company from Jyo and its affiliated company becoming a publicly traded company. The total amount of such shares will be an amount equal to 2% of the fully diluted share capital of Jyo as of the Jyo Effective Date (subject to adjustment as set forth in the Jyo Agreement).

The term of the Jyo Agreement will continue until the earlier of (i) three years from the Jyo Effective Date; and (ii) two years later from the date on which the stock of Jyo or any successor or resulting entity in the contemplated initial public offering of Jyo’s stock in the U.S. or a merger or other similar transaction with a special purpose acquisition company, or other transaction pursuant to which Jyo or its affiliated company becomes a public traded company in the U.S. The term of the Jyo Agreement may be renewed upon the mutual written agreement of the parties to the Jyo Agreement.

The Jyo Agreement may be terminated by either party upon one month’s written notice to the other party, with the payment set forth in the Jyo Agreement. However, if either party engages in anti-social force activities, the other party will terminate the Jyo Agreement without written notice immediately, and the other party will pay the compensation as set forth in the Jyo Agreement.

Jyo Warrant

On February 23, 2024, Jyo issued to the Company a common stock purchase warrant (the “Jyo Warrant”) to purchase 80 shares of Jyo capital stock, subject to adjustment as set forth in the Jyo Warrant. Pursuant to the terms of the Jyo Warrant, the Company may, at any time (i) on or after the earlier of the date that either (a) Jyo completes its first listing on any tier of the Nasdaq Stock Market, the New York Stock Exchange or the NYSE American; (b) Jyo consummates a merger or other transaction with a special purpose acquisition company (“SPAC”) wherein Jyo becomes a subsidiary of the SPAC; or (c) Jyo consummates any other Jyo Fundamental Transaction (as defined in the Jyo Warrant) (the “Jyo Trigger Date”); and (ii) on or prior to the close of business on the tenth anniversary of the Jyo Trigger Date, exercise the Jyo Warrant to purchase 80 shares of Jyo’s capital stock (subject to adjustment as provided in the Jyo Warrant), which represents 2% of Jyo’s issued and outstanding common stock as of the issuance date of the Jyo Warrant, for an exercise price per share of $0.01, subject to adjustment as provided in the Jyo Warrant. The number of shares for which the Jyo Warrant will be exercisable will be automatically adjusted on the Jyo Trigger Date to be 2% of the fully diluted number and class of shares of capital stock of Jyo as of the Jyo Trigger Date, following completion of the transactions which caused the Jyo Trigger Date to be achieved. The Jyo Warrant contains a 9.99% equity blocker.

Cash Dividend

On April 1, 2024, the Board of Directors of the Company declared a cash dividend of $0.02 per share of the Company’s common shares to be paid on May 3, 2024 to shareholders of record as of April 26, 2024. The Company may issue quarterly dividends going forward, contingent upon the financial results. The four potential annual dividends may be equal to or greater than the April 2024 dividend.

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 Qualification 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.”

The Nasdaq Listing Rules require listed securities to maintain a minimum bid price of $1.00 per share and, based upon the closing bid price for the then-last 30 consecutive business days, the Company did not meet 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 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 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 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 is 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 effecting a reverse stock split, if necessary. Accordingly, there is 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 during this additional time 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 will provide the Company with written confirmation of compliance and the matter will be closed.

There can be no assurance that the Company will be able to regain compliance with the Minimum Bid Price Requirement, even if it maintains compliance with the other listing requirements. The Company is currently monitoring the closing bid price of its common stock and evaluating its alternatives, if appropriate, to resolve the deficiency and regain compliance with Minimum Bid Price Requirement.

Financial Overview

For the three months ended March 31, 2024 and 2023, we generated revenues of $5,046,732 and $8,734,150, respectively, and reported net loss of $1,478,002 and net income of $1,808,037, respectively, and cash flows provided by operating activities of $741,381 and cash flows used in operating activities of $1,048,059, respectively. As noted in our unaudited consolidated financial statements, as of March 31, 2024, we had an accumulated deficit of $16,096,819.

Results of Operations

Comparison of Results of Operations for the Three Months Ended March 31, 2024 and 2023

The following table summarizes our operating results as reflected in our unaudited statements of operations during the three months ended March 31, 2024 and 2023, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods.

10

Revenues

Our total revenues decreased by $3,687,418, or 42.2%, to $5,046,732 for the three months ended March 31, 2024 from $8,734,150 for the three months ended March 31, 2023, mainly attributable to (i) the decreased revenues of $4,617,270 from GO IPO consulting services as the Company’s two IPO consulting customers successfully listed on the Nasdaq in the three months ended March 31, 2023 and the Company received warrants from its customers as noncash consideration from consulting services, while no such revenue in the three months ended March 31, 2024; offset by (ii) an increase of $721,815 in revenues from sale of on-premise software, primarily due to the Company newly obtained two large orders from two customers during three months ended March 31, 2024.

Cost of Revenues

Our total costs of revenues slightly decreased by $86,523, or 2.8%, to $3,014,543 for the three months ended March 31, 2024 from $3,101,066 for the three months ended March 31, 2023, in light of the decrease in sales in GO IPO consulting services and software development and other miscellaneous services, offset by the increase in the costs related to customized software development and services and maintenance and support services.

Gross Profit

Our total gross profit decreased by $3,600,895, or 63.9%, to $2,032,189 for the three months ended March 31, 2024 from $5,633,084 for the three months ended March 31, 2023, mainly attributable to (i) a decrease in gross profit of $4,248,772 from GO IPO consulting services, as we recognized revenues from the warrants of the customers upon customers’ IPO effectiveness in the three months ended March 31, 2023, while no such revenue was recognized in the current period; offset by (ii) an increase in gross profit of $728,871 in sale of on-premise software, as the sale of CMS license increased significantly, while there was not much change in the corresponding costs as the product was developed by ourself, instead of purchasing from outsiders.

For the reasons discussed above, our overall gross profit margin decreased by 24.2% to 40.3% for the three months ended March 31, 2024 from 64.5% in the three months ended March 31, 2023.

Selling Expenses

Our selling expenses decreased by $348,935, or 61.4%, to $219,707 for the three months ended March 31, 2024 from $568,642 in the three months ended March 31, 2023, primarily attributable to a decrease of $280,819 in stock-based compensation, as the Company granted common stocks to the employees of Sigmaways in 2023, and no such event in the current period.

As a percentage of revenues, our selling expenses accounted for 4.4% and 6.5% of our total revenues for the three months ended March 31, 2024 and 2023, respectively.

General and Administrative Expenses

Our general and administrative expenses decreased by $278,904 or 10.4%, to $2,406,303 for the three months ended March 31, 2024 from $2,685,207 in the three months ended March 31, 2023, primarily attributable to (i) a decrease of $479,527 in stock-based compensation, as the Company granted common stocks to the employees of Sigmaways during three months ended March 31, 2024, and no such event in the current period; offset by (ii) an increase of $146,044 in salaries and welfare expenses, as certain sales staff were promoted to executive management, and their compensation was reclassified from selling expenses in 2023 to general and administrative expenses in 2024, and (iii) an increase of $129,677 in office, utility and other expenses, as continuous expansion of our business and establishment of new subsidiary.

As a percentage of revenues, general and administrative expenses were 47.7% and 30.7% of our revenues for the three months ended March 31, 2024 and 2023, respectively.

Research and Development Expenses

Our research and development expenses slightly increased by $9,510 or 11.9%, to $89,134 in the three months ended March 31, 2024 from $79,624 in the three months ended March 31, 2023, primarily attributable to an increase of $65,408 in outsourcing expenses relating to the development of new CMS management screen features in the current period; offset by (ii) a decrease of $55,898 in stock-based compensation, as we granted common stock to the employees of Sigmaways during three months ended March 31, 2023, and no such event in the current period.

As a percentage of revenues, research and development expenses were 1.8% and 0.9% of our revenues for the three months ended March 31, 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, interest income generated from bank deposits, interest expense for bank loans and bond, other income, and other expenses. Total other income, net, of $169,874 for the three months ended March 31, 2023 decreased by $1,045,088 or 615.2% to other expenses, net, of $875,214 for the three months ended March 31, 2024, primarily attributable to an increase of $234,082 in loss on fair value changes in investments in marketable securities and an increase of $872,252 in loss on fair value changes in investment in warrants.

Income Tax Expense (Benefit)

Income tax benefit was $80,167 for the three months ended March 31, 2024, a decrease of $741,615, or 112.1% from income tax expense of $661,448 in the three months ended March 31, 2023, primarily due to a net loss in the current period, while we recorded a net income in the three months ended March 31, 2023.

Net Income (Loss)

As a result of the foregoing, we reported a net loss of $1,478,002 for the three months ended March 31, 2024, representing a $3,286,039 or 181.7% decrease from a net income of $1,808,037 for the three months ended March 31, 2023.

Net Loss Attributable to Non-controlling Interests

We owned 51% equity interest of Sigmaways and its subsidiaries and 51% equity interest of HeartCore Luvina. Accordingly, we recorded net loss attributable to the non-controlling interests of $144,652 and $74,252 in the three months ended March 31, 2024 and 2023, respectively.

Net Income (Loss) Attributable to HeartCore Enterprises, Inc.

As a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $1,333,350 for the three months ended March 31, 2024, representing a $3,215,639 or 170.8% decrease from a net income of $1,882,289 for the three months ended March 31, 2023.

Liquidity and Capital Resources

As of March 31, 2024, we had $1,219,251 in cash as compared to $1,012,479 as of December 31, 2023. We also had $3,086,203 in accounts receivable as of March 31, 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 summary of our cash flows for the periods indicated:

Operating Activities

Net cash provided by operating activities was $741,381 for the three months ended March 31, 2024, primarily consisting of the following:

• Net loss of $1,478,002 for the three months ended March 31, 2024.
• An increase of $5,060,658 in other liabilities, as we received advance payment of $5,000,000 for the sale of a portion of the warrants we received from one of our GO IPO customers that are exercisable upon the customer’s successful listing.
• An increase of $295,799 in accounts payable and accrued expenses.
• A decrease of $234,082 in fair value of investments in marketable shares.
• A decrease of $678,887 in fair value of investment in warrants.
• Offset by an increase of $3,257,972 in prepaid expenses, as we made advance payment of $3,360,000 for referral fee.
• Offset by an increase of $523,110 in accounts receivable due to increased sale of on-premise software in the current period.
• Offset by a decrease of $300,011 in deferred revenue, due to the decreased upfront payment received for IPO consulting services while we had fewer new customers.

Investing Activities

Net cash provided by investing activities amounted to $10,814 for the three months ended March 31, 2024, primarily consisting of repayment of $10,814 of loan provided to related party.

Financing Activities

Net cash used in financing activities amounted to $474,752 for the three months ended March 31, 2024, primarily consisting of repayment of $207,486 for short-term and long-term debts, and net repayment of $383,353 for factoring arrangement, offset by the proceeds of $68,138 from short-term debt and capital contribution of $67,195 from non-controlling shareholder.

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 two leases for vehicles, one of which was terminated in September 2023, and these leases were classified as finance leases.

As of March 31, 2024, future minimum lease payments under the non-cancelable lease agreements are as follows:

Debts

The Company’s debts included short-term debt and long-term debts borrowed from banks and financial institutions.

As of March 31, 2024, future minimum principal payments for long-term debts are as follows:

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 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.

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. 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 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.

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 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 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 three months ended March 31, 2024 and 2023 that were included in the opening deferred revenue balance was approximately $1.0 million and $0.9 million, respectively.

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 March 31, 2024. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 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 March 31, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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.