HeartCore Enterprises, Inc.: Form 10-Q for the period ended Jun 30, 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 August 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 .

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 Company received $9,000,000 during the six months ended June 30, 2024 and recorded it in other current liabilities as the warrants to be transferred are exercisable 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.

In July 2024, BloomZ Inc. (“BloomZ”), one of our Go IPO clients, successfully began trading on The Nasdaq Capital Market. We hope that this marks the beginning of a second wave of initial public offerings for our Go IPO clients, as we are optimistic regarding the backlog of Go IPO deals.

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 an unrelated third party to sell a warrant it received from a Go IPO client as non-cash consideration from consulting services for $9,000,000 in cash. The Company received $9,000,000 during the six months ended June 30, 2024 and recorded it in other current liabilities as the warrants were exercisable upon the Go IPO’s client’s consummation of a merger with a special purpose acquisition company or the occurrence of other fundamental events, as described in the warrant agreement between the Company and the Go IPO client.

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 will be paid on August 26, 2024 to shareholders of record as of August 19, 2024, resulting in an aggregate of $417,283 in total dividends to be paid by the Company.

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 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 June 30, 2024 and 2023, we generated revenues of $4,066,388 and $5,095,373, respectively, reported a net loss of $2,211,118 and $1,022,846, respectively.

For the six months ended June 30, 2024 and 2023, we generated revenues of $9,113,120 and $13,829,523, respectively, reported a net loss of $3,689,120 and net income of $785,191, respectively, and had cash flows used in operating activities of $1,460,744 and 1,368,562, respectively. As noted in our unaudited consolidated financial statements, as of June 30, 2024, we had an accumulated deficit of $18,047,919.

Results of Operations

Comparison of Results of Operations for the Three Months Ended June 30, 2024 and 2023

The following table summarizes our operating results as reflected in our unaudited statements of operations during the three months ended June 30, 2024 and 2023, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods.

Revenues

Our total revenues decreased by $1,028,985, or 20.2%, to $4,066,388 for the three months ended June 30, 2024 from $5,095,373 for the three months ended June 30, 2023, mainly attributable to (i) the decreased revenues of $486,631 from GO IPO consulting services as in the three months ended June 30, 2024, the Company entered into a settlement agreement with a customer, pursuant to which the consulting service agreement with the customer was terminated and the Company will refund $500,000 to the customer; (ii) the decreased revenues of $325,441 in maintenance and supporting services, as we entered into a significant maintenance service contract with a customer in the three months ended June 30, 2023 while there was no such contract in the current period ; and (iii) the decreased revenues of $172,894 in customized software development and services due to intense competition in software industry.

Cost of Revenues

Our total costs of revenues decreased by $326,431, or 9.1%, to $3,260,507 for the three months ended June 30, 2024 from $3,586,938 for the three months ended June 30, 2023, in light of the decrease in sales in GO IPO consulting services and on-premise software, offset by the increase in the costs related to customized software development and services and software as a service.

Gross Profit

Our total gross profit decreased by $702,554, or 46.6%, to $805,881 for the three months ended June 30, 2024 from $1,508,435 for the three months ended June 30, 2023, mainly attributable to (i) a decrease in gross profit of $118,376 from GO IPO consulting services due to the consulting service agreement termination with a customer that resulted in reduction of consulting service revenues in the three months ended June 30, 2024; (ii) a decrease in gross profit of $346,136 in maintenance and support services in light of the decrease in sales; and (iii) a decrease in gross profit of $289,934 in customized software development and services in light of the increase in costs due to intense market competition.

For the reasons discussed above, our overall gross profit margin decreased by 9.8% to 19.8% for the three months ended June 30, 2024 from 29.6% in the three months ended June 30, 2023.

Selling Expenses

Our selling expenses decreased by $308,654, or 63.2%, to $179,408 for the three months ended June 30, 2024 from $488,062 in the three months ended June 30, 2023, primarily attributable to (i) a decrease of $222,924 in advertising expenses due to less advertising activities in the current period; and (ii) a decrease of $77,580 in sales commission in light of the decrease in revenues.

As a percentage of revenues, our selling expenses accounted for 4.4% and 9.6% of our total revenues for the three months ended June 30, 2024 and 2023, respectively.

General and Administrative Expenses

Our general and administrative expenses decreased by $425,478, or 17.4%, to $2,022,409 for the three months ended June 30, 2024 from $2,447,887 in the three months ended June 30, 2023, primarily attributable to (i) a decrease of $230,118 in salaries and welfare due to the retirement of certain senior employees; and (ii) a decrease of $243,627 in office, utility, and other expenses due to our effort to reduce operating costs.

As a percentage of revenues, our general and administrative expenses were 49.7% and 48.0% of our total revenues for the three months ended June 30, 2024 and 2023, respectively.

Research and Development Expenses

Our research and development expenses slightly increased by $71,660, or 180.9%, to $111,268 in the three months ended June 30, 2024 from $39,608 in the three months ended June 30, 2023, primarily attributable to an increase of $72,559 in outsourcing expenses relating to the development of new CMS management screen features in the current period.

As a percentage of revenues, our research and development expenses were 2.7% and 0.8% of our total revenues for the three months ended June 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, interest income generated from bank deposits, interest expense for bank loans and bond, other income, and other expenses. Other expenses, net, of $177,726 for the three months ended June 30, 2023 increased by $598,351, or 336.7%, to other expenses, net, of $776,077 for the three months ended June 30, 2024, primarily attributable to an increase of $531,562 in loss on fair value changes in investment in warrants.

Income Tax Benefit

Income tax benefit was $72,163 in the three months ended June 30, 2024, a decrease of $549,839, or 88.4%, from income tax benefit of $622,002 in the three months ended June 30, 2023, primarily due to a net loss before income tax provision in the current period, while we recorded a net income before income tax provision in the three months ended March 31, 2023 and the Company started to consider net operating losses carried forward from previous years in income tax calculation and recognized an income tax benefit in the three months ended June 30, 2023 to offset the income tax expense recognized in the prior quarter.

Net Loss

As a result of the foregoing, we reported a net loss of $2,211,118 for the three months ended June 30, 2024, representing a $1,188,272, or 116.2%, increase from a net loss of $1,022,846 for the three months ended June 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 $260,018 and $111,046 for the three months ended June 30, 2024 and 2023, respectively.

Net Loss Attributable to HeartCore Enterprises, Inc.

As a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $1,951,100 for the three months ended June 30, 2024, representing a $1,039,300, or 114.0%, increase from a net loss attributable to HeartCore Enterprises, Inc. of $911,800 for the three months ended June 30, 2023.

Comparison of Results of Operations for the Six Months Ended June 30, 2024 and 2023

The following table summarizes our operating results as reflected in our unaudited statements of operations during the six months ended June 30, 2024 and 2023, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods.

8

Revenues

Our total revenues decreased by $4,716,403, or 34.1%, to $9,113,120 for the six months ended June 30, 2024 from $13,829,523 for the six months ended June 30, 2023, mainly attributable to (i) the decreased revenues of $5,103,901 from GO IPO consulting services as the Company’s two IPO consulting customers successfully listed on the Nasdaq in the six months ended June 30, 2023 and the Company received warrants from its customers as non-cash consideration from consulting services, while there was no such activity in the six months ended June 30, 2024; (ii) the decreased revenues of $399,151 from maintenance and support services, as we entered into a significant maintenance service contract with a customer in the six months ended June 30, 2023 while there was no such contract in the current period; offset by (iii) an increase of $592,971 in revenues from sale of on-premise software, primarily due to the Company newly obtained two large orders from two customers during the six months ended June 30, 2024.

Cost of Revenues

Our total costs of revenues slightly decreased by $412,954, or 6.2%, to $6,275,050 for the six months ended June 30, 2024 from $6,688,004 for the six months ended June 30, 2023, mainly in light of the decrease in sales in GO IPO consulting services.

Gross Profit

Our total gross profit decreased by $4,303,449, or 60.3%, to $2,838,070 for the six months ended June 30, 2024 from $7,141,519 for the six months ended June 30, 2023, mainly attributable to (i) a decrease in gross profit of $4,367,148 from GO IPO consulting services, as we recognized revenues from the warrants of the customers upon customers’ IPO effectiveness in the six months ended June 30, 2023, while there was no such activity in the current period; (ii) a decrease in gross profit of $483,044 in maintenance and support services in light of the decrease in sales; offset by (iii) an increase in gross profit of $759,015 in sales of on-premise software, as the sales 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 20.5% to 31.1% for the six months ended June 30, 2024 from 51.6% in the six months ended June 30, 2023.

Selling Expenses

Our selling expenses decreased by $657,589, or 62.2%, to $399,115 for the six months ended June 30, 2024 from $1,056,704 in the six months ended June 30, 2023, primarily attributable to a decrease of $338,863 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 $322,142 in advertising expense due to less advertising activities in the current period.

As a percentage of revenues, our selling expenses accounted for 4.4% and 7.6% of our total revenues for the six months ended June 30, 2024 and 2023, respectively.

General and Administrative Expenses

Our general and administrative expenses decreased by $704,382, or 13.7%, to $4,428,712 for the six months ended June 30, 2024 from $5,133,094 in the six months ended June 30, 2023, primarily attributable to (i) a decrease of $532,207 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 $113,950 in office, utility, and other expenses due to our effort to reduce operating costs.

As a percentage of revenues, our general and administrative expenses were 48.6% and 37.1% of our total revenues for the six months ended June 30, 2024 and 2023, respectively.

Research and Development Expenses

Our research and development expenses slightly increased by $81,170, or 68.1%, to $200,402 in the six months ended June 30, 2024 from $119,232 in the six months ended June 30, 2023, primarily attributable to an increase of $137,967 in outsourcing expenses relating to the development of new CMS management screen features in the current period; offset by (ii) a decrease of $56,797 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 2.2% and 0.9% of our total revenues for the six months ended June 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, interest income generated from bank deposits, interest expense for bank loans and bond, other income, and other expenses. Other expenses, net, of $7,852 for the six months ended June 30, 2023 increased by $1,643,439, or 20,930.2%, to other expenses, net, of $1,651,291 for the six months ended June 30, 2024, primarily attributable to an increase of $201,309 in loss on fair value changes in investments in marketable securities and an increase of $1,403,814 in loss on fair value changes in investment in warrants.

Income Tax Expense (Benefit)

Income tax benefit was $152,330 for the six months ended June 30, 2024, a decrease of $191,776, or 486.2%, from income tax expense of $39,446 in the six months ended June 30, 2023, primarily due to a net loss before income tax provision in the current period, while we recorded a net income before income tax provision in the six months ended June 30, 2023.

Net Income (Loss)

As a result of the foregoing, we reported a net loss of $3,689,120 for the six months ended June 30, 2024, representing a $4,474,311, or 569.8%, decrease from a net income of $785,191 for the six months ended June 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 $404,670 and $185,298 for the six months ended June 30, 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 $3,284,450 for the six months ended June 30, 2024, representing a $4,254,939, or 438.4%, decrease from a net income attributable to HeartCore Enterprises, Inc. of $970,489 for the six months ended June 30, 2023.

Liquidity and Capital Resources

As of June 30, 2024, we had $3,806,349 in cash and cash equivalents, as compared to $1,012,479 as of December 31, 2023. We also had $2,440,872 in accounts receivable, current as of June 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 summary of our cash flows for the periods indicated:

Operating Activities

Net cash flows used in operating activities was $1,460,744 for the six months ended June 30, 2024, primarily consisting of the following:

• Net loss of $3,689,120 for the six months ended June 30, 2024.
• Depreciation and amortization expenses of $374,946.
• Non-cash lease expense of $182,546.
• A loss of $430,331 on fair value changes in investments in marketable shares.
• A loss of $1,237,707 on fair value changes in investment in warrants.
• An increase of $548,402 in accounts receivable due to increased sale of on-premise software in the current period.
• Offset by an increase of $558,667 in other liabilities, mainly because we terminated the consulting service agreement with a customer and will refund $500,000 to the customer.

Investing Activities

Net cash flows provided by investing activities amounted to $5,271,823 for the six months ended June 30, 2024, primarily attributable to net proceeds from sale of unearned warrants of $5,640,000, offset by payment of $350,000 to purchase long-term investment in SAFE and prepayment of $35,209 for property and equipment.

Financing Activities

Net cash flows used in financing activities amounted to $874,136 for the six months ended June 30, 2024, primarily consisting of repayment of $281,451 for short-term and long-term debts, and net repayment of $242,008 for factoring arrangement, and dividend distribution of $417,283.

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 June 30, 2024, future minimum lease payments under the non-cancelable lease agreements are as follows:

11

Debts

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

As of June 30, 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 June 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.

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 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 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 or other non-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 six months ended June 30, 2024 and 2023 that were included in the opening deferred revenue balance was approximately $1.5 million and $1.3 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 June 30, 2024. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 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 June 30, 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.