What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-31 compared with 2024-04-09 · 452 added, 409 removed, 96 unchanged (90% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Note Regarding Forward-Looking Statements

statements other than statements of historical fact included in this annual report, including, without limitation, statements under “Management’s

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note Regarding Forward-Looking Statements

All statements other than

statements of historical fact included in this annual report, including, without limitation, statements under “Management’s

Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business

13 unchanged sentences

or the “Company” refers to HeartCore Enterprises, Inc.

and its consolidated subsidiaries, including, but not limited to,

HeartCore Co., Ltd.

(“HeartCore Co.”) and its subsidiary, HeartCore Capital Advisors, Inc.

(“HeartCore Capital Advisors”),

HeartCore Financial, Inc.

(“HeartCore Financial”), and Sigmaways, Inc.

and its consolidated subsidiaries, including HeartCore Co., Ltd.

Co.”), HeartCore Capital Advisors, Inc.

(“HeartCore Capital Advisors”), HeartCore Financial, Inc.

Financial”) and its branch office in Japan, HeartCore Luvina Vietnam Company Limited (“HeartCore Luvina”), and Sigmaways,

(“Sigmaways”) and its subsidiaries.

Financial was incorporated in January 2023.

HeartCore Capital Advisors was incorporated in February 2023.

The acquisition of Sigmaways

and its subsidiaries was closed in February 2023.

We are a leading software development

company based in Tokyo, Japan.

HeartCore Capital Advisors was merged into HeartCore Japan in January 2024.

Luvina was incorporated in the fourth quarter 2023 and started to operate in February 2024.

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.

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

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.

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.

We have made significant investments

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start utilizing our paid services again.

During 2022, we started the GO

IPO business, which supports Japanese companies listing on Nasdaq and NYSE in the United States.

As of December 31, 2023, we have entered

into consulting agreements with eleven 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 one to four percent 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.

revenue in the GO IPO business helped to offset the decline in sales in the CX and DX divisions in Japan.

We were incorporated in the State

of Delaware on May 18, 2021.

During 2022, we started the GO IPO business, which supports Japanese

companies listing on Nasdaq and NYSE in the United States.

As of December 31, 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., a Japanese

9 unchanged sentences

closed on February 1, 2023.

In the first quarter of 2023,

we formed HeartCore Financial in the U.S.

and HeartCore Capital Advisors in Japan, as a part of our Go IPO consulting business.

fourth quarter of 2023, we formed HeartCore Luvina Vietnam Company Limited in Vietnam, which is engaged in the business of software development.

For the fiscal years ended December

31, 2023 and 2022, we generated revenues of $21,845,830 and $8,818,312, respectively, and reported net loss of $4,876,700 and $6,677,466,

respectively, and cash flows used in operating activities of $4,331,209 and $4,808,547, respectively.

As noted in our consolidated financial

statements, as of December 31, 2023, we had an accumulated deficit of $14,763,469.

In the first quarter of 2023, we formed HeartCore Financial in the

and HeartCore Capital Advisors as part of our Go IPO consulting business.

In the fourth quarter of 2023, we formed HeartCore Luvina

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.

In April 2024, HeartCore Financial incorporated a branch office, HeartCore

Financial, Inc.

– Japan Branch Office, in Japan.

For the fiscal years ended December 31, 2024 and 2023, we generated

revenues of $30,407,229 and $21,845,830, respectively, and reported net loss of $5,212,900 and $4,876,700, respectively, and cash flows

used in operating activities of $4,774,971 and $4,331,209, respectively.

As noted in our consolidated financial statements, as of December

31, 2024, we had an accumulated deficit of $16,244,843.

Key Factors that Affect Our Results of Operations

We believe the following key factors

may affect our financial condition and results of operations:

Our Ability to Strength Our Competitive Advantages

Our mission is to be at the forefront

of innovation and thought leadership in enterprise business automation, analyzing enterprise users’ desktops and mission-critical

We believe the following key

factors may affect our financial condition and results of operations:

Our Ability to Strength Our Competitive

Our mission is to be at the

forefront of innovation and thought leadership in enterprise business automation, analyzing enterprise users’ desktops and mission-critical

systems, and creating end-to-end software that provides business automation based on the results of that analysis and further simulating

5 unchanged sentences

Our Ability to Expand International Market

We maintain a physical sales presence

in the Japanese software market.

Using our global go-to-market strategy we believe we have established a diversified revenue and customer

We maintain a physical sales

presence in the Japanese software market.

Using our global go-to-market strategy we believe we have established a diversified revenue

and customer base.

We will continue to develop our global operation.

International expansion over the long term represents a significant opportunity

and we plan to continue to invest in growing our presence internationally, both through expanding our sales and marketing efforts and

leveraging channel and other ecosystem partners.

Our Ability to Control Costs and Expenses and

Improve Our Operating Efficiency

International expansion over the long term represents a significant

opportunity and we plan to continue to invest in growing our presence internationally, both through expanding our sales and marketing

efforts and leveraging channel and other ecosystem partners.

Our Ability to Control Costs and Expenses

and Improve Our Operating Efficiency

Our business growth is dependent

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Our ability to drive the productivity of our staff and enhance our operating efficiency affects our profitability.

Ability to Manage and Retain Customer Renewals

ability to manage and retain customer renewals is vital to our expansion of renewals in our customer base and continuous and growing

By achieving and maintaining high retention of customer renewals, we are able to cover most of our expenses from the revenue

generated from such retained customer renewals.

In order to achieve and maintain a high retention of customer renewals, we engage in

the following actions:

(i) we conduct annual surveys of existing customers;

(ii) we conduct Net Promoter Scoring (NPS), whereby we measure

customer loyalty and satisfaction by asking our customers how likely they are to recommend our product and service to others;

we have sales representatives visit important customers to increase customer retention.

Our ability to expand within our customer base

is demonstrated by our net retention rate, which represents the rate of net expansion of annualized renewal run-rate from existing customers

over the last 12 months.

of December 31, 2023, our combined business units (customer experience management business unit and digital transformation business unit)

had 949 total customers in Japan, of which 691, or 72.8%, were paying customers and 24 total customers outside Japan, of which 1, or

0.1%, was a paying customer.

Our 280 non-paying customers were originally paying customers that utilized our paid services but now use

a free version of the CXM Platform.

Our net retention rate for our paying customers of our customer experience management

business unit (CMS business) was 88%, 92%, and 95% as of December 31, 2023, 2022, and 2021, respectively.

There is an insignificant

impact (below 10%) on our net retention rate as to former paying customers of our CMS business utilizing the free version of your CXM

Affecting Our Results of Operations

March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic.

The pandemic has resulted in the implementation

of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of

Companies are also taking precautions, such as requiring employees to work remotely, imposing travel restrictions, and temporarily

closing businesses.

The effects of the COVID-19 pandemic are still impacting the global economy as well as our operations.

and extent of this impact depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness

of containment actions.

The lasting effects of the pandemic continue to be unknown.

As of the filing date of this Annual Report on Form

10-K, the extent of the future impact of COVID-19 is still highly uncertain and cannot be predicted.

Severe or Prolonged Slowdown in the Global and Japan Economy Could Materially and Adversely Affect Our Business and Our Financial Condition

recent years, the economic indicators in Japan have shown mixed signs, and future growth of the Japanese economy is subject to many factors

beyond our control.

The current administration of Prime Minster Fumio Kishida and the former administration of Prime Minister Yoshihide

Suga have introduced policies to combat deflation and promote economic growth.

In addition, the Bank of Japan introduced a plan for quantitative

and qualitative monetary easing in April 2013 and announced a negative interest rate policy in January 2016.

However, the long-term impact

of these policy initiatives on Japan’s economy remains uncertain.

The impact of Brexit on the Japanese economy and on the value

of the Japanese yen against currencies of other countries in which we generate revenue, in both the short and long term, is also uncertain.

In addition, an increase in the consumption tax rate, which took place in April 2014 with a further increase in October 2019, may also

adversely impact the Japanese economy, potentially impacting consumer spending, and advertising spending by businesses.

Any future deterioration

of the Japanese or global economy may result in a decline in consumption that would have a negative impact on demand for our products

and their prices.

IPO consulting services business may experience a decrease in clients due to external factors such as the slowdown of the Japanese economy.

In addition, an increase in the number of competitors may have an impact on the business.

of Operations

of Results of Operations for the Fiscal Years Ended December 31, 2023 and 2022

following table summarizes our operating results as reflected in our statements of operations during the fiscal years ended December

31, 2023 and 2022, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

the Years Ended December 31,

and administrative expenses

and development expenses

Our Ability to Manage and Retain Customer

Our ability to manage and

retain customer renewals is vital to our expansion of renewals in our customer base and continuous and growing revenue.

By achieving and

maintaining high retention of customer renewals, we are able to cover most of our expenses from the revenue generated from such retained

customer renewals.

In order to achieve and maintain a high retention of customer renewals, we engage in the following actions:

conduct annual surveys of existing customers;

(ii) we conduct Net Promoter Scoring (NPS), whereby we measure customer loyalty and satisfaction

by asking our customers how likely they are to recommend our product and service to others;

and (iii) we have sales representatives visit

important customers to increase customer retention.

Our ability to expand within our customer base is demonstrated by our net retention

rate, which represents the rate of net expansion of annualized renewal run-rate from existing customers over the last 12 months.

As of December 31, 2024, our

combined business units (customer experience management business unit and digital transformation business unit) had 982 total customers

in Japan, of which 724, or 73.7%, were paying customers and 26 total customers outside Japan, of which 1, or 0.1%, was a paying customer.

Our 280 non-paying customers were originally paying customers that utilized our paid services but now use a free version of the CXM Platform.

net retention rate for our paying customers of our customer experience management business unit (CMS business) was 95%, 88%, and 92% as

of December 31, 2024, 2023, and 2022, respectively.

There is an insignificant impact (below 10%) on our net retention rate as to former

paying customers of our CMS business utilizing the free version of your CXM Platform.

A Severe or Prolonged Slowdown in the Global

and Japan Economy Could Materially and Adversely Affect Our Business and Our Financial Condition

In recent years, the economic

indicators in Japan have shown mixed signs, and future growth of the Japanese economy is subject to many factors beyond our control.

current administration of Prime Minster Shigeru Ishiba and the former administration of Prime Minister Fumio Kishida have introduced policies

to combat deflation and promote economic growth.

In addition, the Bank of Japan introduced a plan for quantitative and qualitative monetary

easing in April 2013 and announced a negative interest rate policy in January 2016.

However, the long-term impact of these policy initiatives

on Japan’s economy remains uncertain.

The impact of Brexit on the Japanese economy and on the value of the Japanese yen against

currencies of other countries in which we generate revenue, in both the short and long term, is also uncertain.

In addition, an increase

in the consumption tax rate, which took place in April 2014 with a further increase in October 2019, may also adversely impact the Japanese

economy, potentially impacting consumer spending, and advertising spending by businesses.

Any future deterioration of the Japanese or

global economy may result in a decline in consumption that would have a negative impact on demand for our products and their prices.

GO IPO consulting services

business may experience a decrease in clients due to external factors such as the slowdown of the Japanese economy.

In addition, an increase

in the number of competitors may have an impact on the business.

Results of Operations

Comparison of Results of Operations for the

Fiscal Years Ended December 31, 2024 and 2023

The following table summarizes

our operating results as reflected in our statements of operations for the fiscal years ended December 31, 2024 and 2023, respectively,

and provides information regarding the dollar and percentage increase or (decrease) during such periods.

For the Years Ended December 31,

Cost of revenues

Operating expenses:

Loss from operations

income (expenses)

Selling expenses

General and administrative expenses

Research and development expenses

Impairment of intangible asset

Impairment of goodwill

Total operating expenses

Income (loss) from operations

Other expenses

Loss before income tax benefit

net loss attributable to non-controlling interest

loss attributable to HeartCore Enterprises, Inc.

Income tax benefit

net loss attributable to non-controlling interests

Net loss attributable to HeartCore Enterprises, Inc.

$ (1,481,374 )

$ (4,189,890 )

the Years Ended December 31,

from on-premise software

from maintenance and support services

from software as a service (“SaaS”)

from software development and other miscellaneous services

from customized software development and services

from consulting services

of on-premise software

of maintenance and support services

of software as a service (“SaaS”)

For the Years Ended December 31,

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

Cost of revenues

Costs of on-premise software

Costs of maintenance and support services

Costs of software as a service (“SaaS”)

Costs of software development and other miscellaneous services

Costs of customized software development and services

of consulting services

cost of revenues

and support services

as a service (“SaaS”)

Software development and other miscellaneous

Costs of consulting services

Total cost of revenues

On-premise software

Maintenance and support services

Software as a service (“SaaS”)

Software development and other miscellaneous services

Customized software development and services

Our total revenues increased by $13,027,518, or 147.7%,

to $21,845,830 for the year ended December 31, 2023 from $8,818,312 for the year ended December 31, 2022, mainly

attributable to (i) the increased revenue of $4,763,954 from GO IPO consulting services as the Company obtained more IPO consulting customers

in 2023 and received warrants from its customers as noncash consideration from consulting services;

(ii) the increased revenue of $8,784,239

from customized software development and services as a result of acquisition of Sigmaways and its subsidiaries on February 1, 2023;

by (iii) the decrease of $274,355 in revenue from sales of on-premise software, primarily due to the weak performance of a significant

distributor and approximately 8% depreciation of Yen in the current period;

decrease of $316,177 in revenue from maintenance and support services, as some clients canceled their maintenance service contracts,

and approximately 8% depreciation of Yen.

Consulting services

Total gross profit

Our total revenues increased by $8,561,399, or 39.2%, to $30,407,229

for the year ended December 31, 2024 from $21,845,830 for the year ended December 31, 2023, mainly

attributable to (i) the increased revenue of $8,524,455 from GO IPO consulting services as two of the Company’s GO IPO consulting

customers successfully listed on the Nasdaq in the fiscal year 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 $3.8 million of revenue recognized

from noncash consideration in the form of warrants in the fiscal year 2023;

and (ii) an increase of $1,114,551 in on-premise software

revenue as we entered into multiple long-term license contracts with relatively large contract price and revenue amount in the fiscal

and offset by (iii) a decrease of $929,954 in revenue from customized software development and services due to intense market

competition and we obtained fewer customer orders in the fiscal year 2024.

Cost of Revenues

Our total costs of revenues increased by $8,311,399,

or 152.0%, to $13,778,416 for the year ended December 31, 2023 from $5,467,017 for the year ended December 31, 2022, in

light of the increase in sales in GO IPO consulting services and customized software development and services, offset by the overall decrease

in software development and other services, because the Company conducted several complex software development projects to meet customer

requirements in 2022, while no such projects in 2023.

The decrease was also caused by approximately 8% depreciation of Yen.

Our total gross profit increased by $4,716,119, or

140.7%, to $8,067,414 for the year ended December 31, 2023 from $3,351,295 for the year ended December 31, 2022, mainly

attributable to (i) an increased gross profit of $1,564,347 from customized software development and services as a result of acquisition

of Sigmaways and its subsidiaries on February 1, 2023;

(ii) an increased gross profit of $3,661,179 from GO IPO consulting services, as

we recognized revenue from the warrants of the customers upon customers’ IPO effectiveness in current year, while no corresponding

cost for such revenue recognized;

offset by (iii) a decrease of $621,591 in sale of on-premises software due to lower volume in sale and

higher costs to purchase valuable licenses in the current period.

the reasons discussed above, our overall gross profit margin decreased by 1.1% to 36.9% for the year ended December 31, 2023 from 38.0%

in the fiscal year 2022.

following table sets forth the breakdown of our operating expenses for the fiscal years ended December 31, 2023 and 2022:

the Years Ended December 31,

and administrative expenses

and development expenses

Our total costs of revenues decreased by $1,199,057, or 8.7%, to $12,579,359

for the year ended December 31, 2024 from $13,778,416 for the year ended December 31, 2023, mainly

attributable to (i) a decrease of $1,085,192 in the cost 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;

and (ii) a decrease of $332,033 in cost of maintenance

and support services as we gradually used internal resources to provide the services in 2024, which

was less costly when compared with using outsourcing resources.

Our total gross profit

increased by $9,760,456, or 121.0%, to $17,827,870 for the year ended December 31, 2024 from $8,067,414 for the year ended December

31, 2023, mainly attributable to an increase in gross profit of $9,609,647 from GO IPO

consulting services, as we recognized greater revenues from noncash consideration from IPO customers upon their IPO effectiveness

with no associated costs in the fiscal year 2024 than that recognized in 2023.

For the reasons discussed

above, our overall gross profit margin increased by 21.7% to 58.6% for the year ended December 31, 2024 from 36.9% in the fiscal year

Operating Expenses

selling expenses primarily include advertising expenses, sales commissions, sales promotion expenses, and stock-based compensation.

the Years Ended December 31,

promotion expenses

The following table sets forth

the breakdown of our operating expenses for the fiscal years ended December 31, 2024 and 2023:

For the Years Ended December 31,

Total revenues

Operating expenses:

Selling expenses

Our selling expenses decreased by $1,310,368, or 46.4%,

to $1,516,247 for the year ended December 31, 2023 from $2,826,615 in the fiscal year 2022, primarily attributable to

a decrease of $1,070,451 in advertising expenses, as the Company spent heavily on investor relations and public relations in the U.S.

immediately after listing in Nasdaq in early 2022, and a decrease of $223,770 in stock-based compensation, as the Company granted stock

options to certain sales staff in 2022, who were promoted to executive management in 2023, therefore the corresponding stock-based compensation

was classified to general and administrative expenses.

a percentage of revenues, our selling expenses accounted for 6.9% and 32.0% of our total revenues for the years ended December 31, 2023

and 2022, respectively.

and Administrative Expenses

Our general and administrative expenses primarily

consist of employee salaries and welfare expenses, consulting and professional service fees, depreciation and amortization expenses, rent

expense, office, utility and other expenses, travel and entertainment expenses, and stock-based compensation.

the Years Ended December 31,

and administrative expenses

and welfare expenses

and professional service fees

and amortization expenses

utility and other expenses

and entertainment expenses

General and administrative expenses

Our general and administrative expenses increased

Research and development expenses

Impairment of intangible asset

Impairment of goodwill

Total operating expenses

Selling Expenses

Our selling expenses primarily include advertising expenses, sales

salaries, commissions, and welfare, sales promotion expenses, referral expense, and stock-based compensation.

For the Years Ended December 31,

Selling expenses

Advertising expenses

Sales salaries, commissions and welfare

Sales promotion expenses

Referral expenses

Stock-based compensation

Total selling expenses

Our selling expenses decreased

by $260,879, or 17.2%, to $1,255,368 for the year ended December 31, 2024 from $1,516,247 in the fiscal year 2023, primarily attributable

to (i) an increase of $1,608,202 in salaries and welfare expenses due to increased remuneration

for executive officers and additional staff employed by Sigmaways and its subsidiaries;

(ii) an increase of $589,797 in depreciation and

amortization expenses, an increase of 669,372 in office, utility and other expenses, and an increase of $118,665 in rent expense, mostly

due to the acquisition of Sigmaways and its subsidiaries as well as the overall business expansion;

and (iii) an increase of $135,607

in stock-based compensation, as certain sales staff were promoted to executive management, and their stock-based compensation was reclassified

from selling expenses in 2022 to general and administrative expenses in 2023.

a percentage of revenues, general and administrative expenses were 44.2% and 74.6% of our revenues for the fiscal years ended December

31, 2023 and 2022, respectively.

and Development Expenses

research and development expenses primarily consist of employee salaries and welfare expenses, outsourcing expenses, and stock-based

compensation.

the Years Ended December 31,

and development expenses

and welfare expenses

to (i) a decrease of $359,359 in advertising expenses due to less advertising activities in the current year, (ii) a decrease of $416,476

in stock-based compensation, as the Company granted restricted common stocks which immediately vested upon issuance and stock options

to employees of Sigmaways in 2023, and there was no such amount restricted common stocks and stock options granted in the current year,

the decrease is also contributed by the graded vesting method of stock options for those issued in previous years, which generally more

stock-based compensation will recognize in the early stage, offset by (iii) the increase of $464,963 in sales salaries, commissions and

welfare as the Company shifted marketing strategy in the fiscal year 2024.

As a percentage of revenues,

our selling expenses accounted for 4.1% and 6.9% of our total revenues for the years ended December 31, 2024 and 2023, respectively.

General and Administrative Expenses

Our general and administrative expenses primarily consist of employee

salaries and welfare expenses, consulting and professional service fees, depreciation and amortization expenses, rent expense, office,

utility and other expenses, travel and entertainment expenses, and stock-based compensation.

For the Years Ended December 31,

General and administrative expenses

Salaries and welfare expenses

Consulting and professional service fees

Depreciation and amortization expenses

Office, utility and other expenses

Travel and entertainment expenses

Stock-based compensation

Total general and administrative expenses

$ (1,027,794 )

Our general and administrative expenses decreased by $1,027,794 or

10.6%, to $8,628,587 for the year ended December 31, 2024 from $9,651,381 in the fiscal year 2023, primarily attributable to (i) a decrease

of $825,248 in salaries and welfare expenses due decrease in numbers of directors, change in bonus structures, and dissolution of HeartCore

Capital Advisors in the fiscal year 2024;

(ii) a decrease of $558,041 in stock-based compensation, as the Company granted restricted common

stocks which immediately vested upon issuance and stock options to employees of Sigmaways in 2023, and there was no such amount restricted

common stocks and stock options granted in the current year, the decrease is also contributed by the graded vesting method of stock options

for those issued in previous years, which generally more stock-based compensation will recognize in the early stage;

offset by (iii) an

increase of $479,668 in consulting and professional service fees, primarily because the Company newly engaged public relations related

activities in 2024 to enhance compliance and regulation information, while no such activities occurred in previous year.

As a percentage of revenues,

general and administrative expenses were 28.4% and 44.2% of our revenues for the fiscal years ended December 31, 2024 and 2023, respectively.

Research and Development Expenses

Our research and development expenses increased by

$378,116 or 59.0%, to $1,019,141 in the fiscal year ended December 31, 2023 from $641,025 in the fiscal year ended December 31, 2022,

primarily attributable to an increase of $357,247 in outsourcing expenses relating to the development

of new CMS management screen features in the current period and additional R&D expenses incurred by Sigmaways to support its customized

software development and services .

a percentage of revenues, research and development expenses were 4.7% and 7.3% of our revenues for the fiscal years ended December 31,

2023 and 2022, respectively.

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, bonds, and leases, government grants, other income, and other expenses.

Total other expenses,

net, increased by $903,704 or 7,118.6%, from other income, net, of $12,695 for the year ended December 31, 2022 to other expenses, net,

of $891,009 for the year ended December 31, 2023, primarily attributable to an increase of $615,520

in loss on fair value changes in investments in marketable securities and an increase of $501,445 in loss on fair value changes in investment

in warrants, offset by an increase of $309,015 in other income, primarily due to the penalty payment that we received from certain customers

in the current period.

Our research and development

expenses primarily consist of employee salaries and welfare expenses, outsourcing expenses, and stock-based compensation.

For the Years Ended December 31,

Research and development expenses

Salaries and welfare expenses

Outsourcing expenses

Stock-based compensation

Total research and development expenses

Our research and development

expenses decreased by $289,557 or 28.4%, to $729,584 in the year ended December 31, 2024 from $1,019,141 in the year ended December 31,

2023, primarily attributable to a decrease of $603,367 in outsourcing expenses relating to the development

of new CMS management screen features, which stared in 2023 and about to completed in the current year;

and offset by an increase of $371,748

in salaries and welfare expenses for the employees assigned to the development of a new product, Global CMS, started in 2024.

As a percentage of revenues,

research and development expenses were 2.4% and 4.7% of our revenues for the fiscal years ended December 31, 2024 and 2023, respectively.

Impairment of Intangible Asset

Our intangible asset represents

the customer relationship acquired from business acquisition of Sigmaways and its subsidiaries.

As of December 31, 2024, we accessed the

value of such intangible asset become zero by engaging a third-party valuation appraiser, accordingly, we recorded an impairment of intangible

asset of $3,878,125, excluding an amortization expense of $637,500 in the year ended December 31, 2024.

Impairment of Goodwill

Our goodwill represents the

excess of the purchase price over the fair value of the net identifiable assets acquired in business acquisition of Sigmaways and its

subsidiaries.

As of December 31, 2024, we evaluated the fair value of the reporting unit of Sigmaways and its subsidiaries and estimated

the value of goodwill become zero by engaging a third-party valuation appraiser, accordingly, we recorded an impairment of goodwill of

$3,276,441 in the year ended December 31, 2024.

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 expenses for bank loans and bonds, government grants, impairment of investment in equity securities, loss

on forgiveness of note receivable, other income, and other expenses.

Total other expenses, net, increased by $4,523,478 or 507.7%, from

other expenses, net, of $891,009 for the year ended December 31, 2023 to other expenses, net, of $5,414,487 for the year ended December

31, 2024, primarily attributable to an increase of $1,796,865 in loss on fair value changes in investments

in marketable securities, an increase of $3,970,628 in loss on sale of warrants, and an increase of $300,000 in impairment of investment

in equity securities, offset by an increase of $2,159,144 in gain on fair value changes in investment in warrants.

Income Tax Benefit

Income tax benefit was $133,664 for the year ended

December 31, 2023, an increase of $127,746, or 2,158.6% from income tax benefit of $5,918 in the fiscal year 2022, primarily due to the

increase in deferred income tax benefit brought by the amortization of intangible asset acquired as a result

of Sigmaways during the current year.

As a result of the foregoing, we reported a net loss

of $4,876,700 for the fiscal year ended December 31, 2023, representing a $1,800,766 or 27.0% decrease from a net loss of $6,677,466 for

the fiscal year ended December 31, 2022.

Net Loss Attributable to Non-controlling Interest

owned 51% equity ownership interest of Sigmaways and its subsidiaries as of December 31, 2023.

Accordingly, we recorded net loss attributable

to the non-controlling interest of $686,810 in the year ended December 31, 2023 .

Income tax benefit was $136,822

for the year ended December 31, 2024, a slight increase of $3,158, or 2.4% from income tax benefit of $133,664 in the fiscal year 2023.

As a result of the foregoing,

we reported a net loss of $5,212,900 for the fiscal year ended December 31, 2024, representing a $336,200 or 6.9% increase from a net

loss of $4,876,700 for the fiscal year ended December 31, 2023.

Net Loss Attributable to Non-controlling

owned 51% equity interest of Sigmaways and its subsidiaries and 51% equity interest of HeartCore Luvina as of December 31, 2024.

Accordingly, we recorded net loss attributable to the non-controlling interests of $3,731,526 and $686,810 in the year ended

December 31, 2024 and 2023, respectively .

Net Loss Attributable to HeartCore Enterprises,

As a result of the foregoing, we reported a net loss

attributable to HeartCore Enterprises, Inc.

of $4,189,890 for the fiscal year ended December 31, 2023, representing a $2,487,576 or 37.3%

decrease from a net loss of $6,677,466 for the fiscal year ended December 31, 2022.

As a result of the foregoing, we reported a net loss attributable to

HeartCore Enterprises, Inc.

of $1,481,374 for the fiscal year ended December 31, 2024, representing a $2,708,516 or 64.6% decrease from

a net loss attributable to HeartCore Enterprise, Inc.

of $4,189,890 for the fiscal year ended December 31, 2023.

Liquidity and Capital Resources

As of December 31, 2023, we had $1,012,479 in cash

As of December 31, 2024, we had $2,121,089 in cash and cash equivalents

as compared to $1,012,479 as of December 31, 2023.

2 unchanged sentences

as well as amounts billable to the customers for customized software development and services.

of December 31, 2023, our working capital deficit was $1,016,662.

In assessing our liquidity, management monitors and analyzes our cash,

our ability to generate sufficient revenues in the future, and our operating and capital expenditure commitments.

Flows for the Years Ended December 31, 2023 and 2022

following table sets forth summary of our cash flows for the periods indicated:

the Years Ended

cash used in operating activities

As of December 31, 2024, our working capital was $1,995,643.

our liquidity, management monitors and analyzes our cash, our ability to generate sufficient revenues in the future, and our operating

and capital expenditure commitments.

Cash Flows for the Years Ended December

31, 2024 and 2023

The following table sets forth summary of our

cash flows for the periods indicated:

For the Years Ended

Net cash used in operating activities

$ (4,774,971 )

$ (4,331,209 )

cash used in investing activities

cash provided by financing activities

of exchange rate changes

change in cash and cash equivalents

and cash equivalents, beginning of the year

and cash equivalents, end of the year

cash used in operating activities was $4,331,209 for the year ended December 31, 2023, primarily consisting of the following:

Net cash provided by (used in) investing activities

Net cash provided by (used in) financing activities

Effect of exchange rate changes

Net change in cash and cash equivalents

Cash and cash equivalents, beginning of the year

Cash and cash equivalents, end of the year

Operating Activities

Net cash used in operating

activities was $4,774,971 for the year ended December 31, 2024, primarily consisting of the following:

loss of $5,212,900 for the fiscal year.

Warrants received as non-cash consideration of $3,763,621 as our IPO consulting customers completed the IPO during the current period.

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 year.

● A deferred income tax benefits of $1,076,600 mainly brought by amortization

and impairment of intangible asset.

gain of $1,657,699 on fair value changes in investment in warrants.

by loss of $3,970,628 recognized on sale of warrants to a third party.

by a total of $7,154,566 loss recognized on impairment of goodwill and intangible asset acquired from business acquisition of Sigmaways

and its subsidiaries.

by a loss of $2,412,385 on fair value changes in investments in marketable securities.

by depreciation and amortization expenses of $749,639.

by an increase of $669,142 in income tax payable.

by an increase of $710,001 in other liabilities, mainly because the increase of liability to refund a customer.

Net cash used in operating

activities was $4,331,209 for the year ended December 31, 2023, primarily consisting of the following:

Net loss of $4,876,700 for the fiscal year.

Warrants received as non-cash consideration of $3,763,621 as our IPO consulting customers completed the IPO during the current year.

An increase in accounts receivable of $338,312.

The increase was primarily

due to the increase in our sales generated by our newly acquired subsidiary, Sigmaways .

collected accounts receivable is available cash, which can be used as working capital for our business operation, if necessary.

decrease of $327,877 in operating lease liabilities, due to the rent payment made.

by stock-based compensation of $1,430,513, as we granted equity rewards to our employees and service providers in 2023.

Offset by a loss of $615,520 from the changes in fair value of investments

in marketable securities.

Offset by a loss of $501,445 from

the changes in fair value of investment in warrants.

by depreciation and amortization expenses of $683,019, mainly because we acquired Sigmaways

and its subsidiaries on February 1, 2023, and recognized amortization expense for the intangible asset identified through the acquisition .

by an increase of $532,790 in accounts payable and accrued expenses as we incurred more operating

expenses due to the expansion of our business .

Offset by an increase in deferred revenue of $553,130, due to the upfront payment received for IPO consulting

services while most IPO customer were not declared IPO effective as of the balance sheet date.

by non-cash lease expense of $346,070.

cash used in operating activities was $4,808,547 for the year ended December 31, 2022, primarily consisting of the following:

loss of $6,677,466 for the fiscal year.

decrease of $283,921 in operating lease liabilities, due to the rent payment made .

by non-cash lease expense of $273,836.

by stock-based compensation of $1,519,743, as we granted equity rewards to our employees

by a decrease in accounts receivable of $296,835.

The decrease was primarily due to the decrease in our sales in the current fiscal

The increase was primarily due to the increase in our sales generated by our newly acquired subsidiary, Sigmaways .

The collected accounts receivable is available cash, which can be used as working capital for our business operation, if necessary.

by an increase in deferred revenue of $239,129.

We request upfront payment for service provided over a period of time.

revenue increased as a result of newly established consultant services in 2022 .

cash used in investing activities amounted to $1,780,952 for the year ended December 31, 2023, primarily

consisted of (i) payment for acquisition of Sigmaways and its subsidiaries, net of cash acquired, of $724,910;

(ii) advances on notes

receivable of $600,000;

A decrease of $327,877 in operating lease liabilities, due to the rent payment made.

Offset by stock-based compensation of $1,430,513, as we granted equity rewards to our employees and service providers in 2023.

Offset by a loss of $615,520 from the changes in fair value of investments in marketable securities.

Offset by a loss of $501,445 from the changes in fair value of investment in warrants.

Offset by depreciation and amortization expenses of $683,019, mainly because we acquired Sigmaways and its subsidiaries on February 1, 2023, and recognized amortization expense for the intangible asset identified through the acquisition .

Offset by an increase of $532,790 in accounts payable and accrued expenses as we incurred more operating expenses due to the expansion of our business .

Offset by an increase in deferred revenue of $553,130, due to the upfront payment received for IPO consulting services while most IPO customer were not declared IPO effective as of the balance sheet date.

Offset by non-cash lease expense of $346,070.

Investing Activities

Net cash provided by investing activities amounted to $6,349,204 for

the year ended December 31, 2024, primarily consisted of (i) net proceeds of $5,640,000 from sale

of warrants, and (ii) net proceeds of $749,546 from sale of marketable securities.

Net cash used in investing

activities amounted to $1,780,952 for the year ended December 31, 2023, primarily consisted of (i)

payment for acquisition of Sigmaways and its subsidiaries, net of cash acquired, of $724,910;

(ii) advances on notes receivable of $600,000;

and (iii) purchases of property and equipment of $526,260 .

cash used in investing activities amounted to $12,200 for the year ended December 31, 2022, primarily consisted of the purchases of fixed

assets of $57,071, offset by the repayment of $44,871 of loan provided to related party .

cash provided by financing activities amounted to $136,194 for the fiscal year ended December 31, 2023, primarily

consisted of proceeds of $710,107 from short-term and long-term debts, and net proceeds of $562,767 from factoring arrangement,

offset by repayment of $711,395 for long-term debts, and repayment of 389,035 for insurance premium financing.

cash provided by financing activities amounted to $8,915,341 for the fiscal year ended December 31, 2022, primarily consisting of proceeds

of $13,823,126 from the initial public offering and issuance of common shares prior to the initial public offering, proceeds of $258,087

from long-term debt, offset by payment for mandatorily redeemable financial interest of $430,489, payment for repurchase of common shares

of $3,500,000, repayment of long-term debts of $810,750, and repayment of insurance premium financing of $388,538.

Company has entered into four leases for its office space, which

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.

of December 31, 2023, future minimum lease payments under the non-cancelable lease agreements are as follows:

Financing Activities

Net cash used in financing

activities amounted to $318,646 for the year ended December 31, 2024, primarily consisted of (i)

dividends distribution of $834,566;

(ii) repayment of $554,553 for short-term and long-term debts;

(iii) net repayment of $390,373 for

factoring arrangement, and (iv) proceeds of $1,423,342 from issuance of common stocks.

Net cash provided by financing

activities amounted to $136,194 for the fiscal year ended December 31, 2023, primarily consisted

of proceeds of $710,107 from short-term and long-term debts, and net proceeds of $562,767 from factoring arrangement, offset by repayment

of $711,395 for long-term debts, and repayment of 389,035 for insurance premium financing.

Contractual Obligations

Lease Commitment

The Company has entered into

operating leases for office space with terms ranging from two to fifteen years, and finance leases for office equipment and vehicle with

terms of five years.

As of December 31, 2024, future

minimum lease payments under the non-cancelable lease agreements are as follows:

Year Ended December 31,

Finance Leases

Finance Lease

Operating Leases

4 unchanged sentences

Non-current lease liabilities

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

of December 31, 2023, future minimum payments for long-term debts are as follows:

Ended December 31,

December 2019, a novel coronavirus disease (“COVID-19”) was reported to have surfaced in Wuhan, China, and on March 11, 2020,

the World Health Organization characterized COVID-19 as a pandemic.

The pandemic, which has continued to spread, and the related adverse

public health developments, including orders to shelter-in-place, travel restrictions, and mandated business closures, have adversely

affected workforces, organizations, customers, economies, and financial markets globally, leading to an economic downturn and increased

market volatility.

It has also disrupted the normal operations of many businesses, including ours.

example, many cities, counties, states, and even countries have imposed or may impose a wide range of restrictions on the physical movement

of our employees, partners and customers to limit the spread of the pandemic, including physical distancing, travel bans and restrictions,

closure of non-essential business, quarantines, work-from-home directives, shelter-in-place orders, and limitations on public gatherings.

These measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide.

In March 2020, we temporarily closed our offices, including our corporate headquarters, suspended all company-related travel, and all

HeartCore Co.

employees were required to work from home for several months during the height of the pandemic.

We cancelled or shifted

our customer and industry events to virtual-only experiences.

Although we have begun to slowly re-open our offices on a staggered, region-by-region

basis in accordance with local authority guidelines, we may deem it advisable to similarly alter, postpone or cancel entirely additional

customer, employee or industry events in the future.

All of these changes may disrupt the way we operate our business.

In addition, our

management team has, and will likely continue, to spend significant time, attention and resources monitoring the pandemic and seeking

to minimize the risk of the virus and manage its effects on our business and workforce.

Although our company has been

in existence for less than three years, our wholly owned operating subsidiary, HeartCore Co.

operated throughout the pandemic and continues

to operate after the pandemic.

HeartCore Co.’s business is affected by a variety of external factors related to the pandemic and

post-pandemic that are beyond our control.

For existing customers, the pandemic had no impact on the use of our software;

for new customers

in the travel, hotel, airline, rail, and food service industries in the CX division, the pandemic resulted in a decrease in new orders.

Although the effects of the pandemic are decreasing, we feel it will take additional time before the economy is fully normalized.

the Japanese yen was weakening, so that sales in dollar terms in 2023 were slightly lower than in 2022.

Regarding the impact

of the pandemic on the DX sector, demand for our DX software increased as large companies were forced to change their work patterns, forcing

employees to work remotely.

During 2022, we started the GO IPO business, which supports Japanese companies to list on Nasdaq and NYSE

in the United States.

As of December 31, 2023, we have entered into consulting agreements with eleven 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 one to four percent 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.

The revenue in the GO IPO business helped to offset the decline in sales

in the CX and DX divisions in Japan.

duration and extent of the impact from the pandemic depends on future developments that cannot be accurately predicted at this time,

such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the disruption caused

by such actions, the effectiveness of vaccines and other treatments for COVID-19, and the impact of these and other factors on our employees,

customers, partners and vendors.

If we are not able to respond to and manage the impact of such events effectively, our business will

the extent the pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the

other risks described in the “Risk Factors” section, including, in particular, risks related to our dependence on customer

renewals, the addition of new customers and increased revenue from existing customer, risks that our operating results could be negatively

affected by changes in the sizes or types of businesses that purchase our platform and the risk that weakened global economic conditions

may harm our industry, business and results of operations.

Sheet Arrangements

did not have any off-balance sheet arrangements as of December 31, 2023.

Accounting Estimates

Our discussion and analysis of our financial condition

and results of operations are based upon our 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 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 reflect the more significant judgments and estimates used in preparation of our consolidated financial

Our accounting

policies are discussed in detail in the footnotes to our consolidated financial statements included in this Annual Report on Form 10-K

for the year ended December 31, 2023.

However, we consider our critical accounting policies to be those related to revenue recognition and business combination.

accounting estimates include the estimates used in the purchase price allocation of the Company’s business combination.

account for business combination using the acquisition method, which requires management to estimate the fair value of the tangible

assets, liabilities, identifiable intangible asset and non-controlling interest, and to properly allocate purchase price

consideration to the individual assets acquired, liabilities assumed and non-controlling interest.

Goodwill is measured as the

excess amount of consideration transferred.

The allocation of the purchase price utilizes significant estimates and assumptions in

determining the fair values of identifiable assets acquired, liabilities assumed and non-controlling interest, especially with

respect to intangible asset acquired.

These estimates are based on all available information and in some cases assumptions with respect to

the timing and amount of future revenues and expenses associated with an asset and are reviewed by consulting with third-party

The Company’s debts included long-term debts borrowed from banks

and financial institutions.

As of December 31, 2024, future

minimum payments for long-term debts are as follows:

Year Ended December 31,

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements

as of December 31, 2024.

Critical Accounting Policies and

Our discussion and analysis

of our financial condition and results of operations are based upon our 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 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 reflect the more significant judgments and estimates used in

preparation of our consolidated financial statements.

Revenue Recognition

We generate revenues from the following main sources:

on-premise software sales, maintenance and support services, software as a service (“SaaS”), software development and other

miscellaneous services, customized software development and services and consulting

A single contract could include one or multiple performance obligations.

For those contracts that have multiple performance

obligations, we allocate the total transaction price to each performance obligation based on its relative standalone selling price.

Revenue is recognized when control of the goods

and services provided are transferred to our customers and in an amount that reflects the consideration we expect to be entitled to in

exchange for those goods and services using the following steps:

1) identify the contract, 2) identify the performance obligations, 3)

determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue

as or when we satisfy the performance obligations.

We satisfy our performance obligations for maintenance

and support services, software as a service (“SaaS”), customized software development and services and consulting services

over time as the related services are provided.

We satisfy our performance obligations for on-premise software sales and software development

and other miscellaneous services at point in time.

We provide 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.

consideration is primarily 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.

We assess 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 valuation of noncash

consideration in the form of warrants of the customers are estimates are based on all available information and in some cases

assumptions with respect to the timing and amount of future revenues and expenses and are reviewed by consulting with third-party

valuation appraisers.

The purchase price allocation for business acquisitions contains uncertainties because it requires

management’s judgment.

fair value of the intangible asset is estimated using the income approach using the multi-period excess earnings method.

Management applies

significant judgement related to this fair value method, which includes the selection of an expected EBITDA margin assumption for the

forecast period, and discount rate assumptions.

These significant assumptions are based on company specific information and projections,

which are not observable in the market (except for the discount rate assumption) and, therefore, are considered Level 2 and Level 3 measurements.

These significant assumptions are forward-looking and could be affected by future changes in economic and market conditions.

The accounting

for business combination is a critical accounting estimate because it requires estimates and judgement as to expectations for

future cash flows of the Company;

future cash flows of the acquired business, and the allocation of those cash flows to

identifiable intangible asset, in determining the fair value for assets and liabilities.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

is made to pages F-1 through F-24 comprising a portion of this annual report.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

The fair value of the warrants received from the customers are estimated using the Black-Scholes model and

binomial model.

In connection with assessing the stock price as one of the inputs to the valuation model, income approach, through

the discounted cash flow method, and market approach, through the guideline company method, are used in the valuation process.

Management applies significant judgement related to these valuation models and approaches, such as future cash flows estimate,

discount rate assumption, selection of comparable companies, and etc.

These significant assumptions are based on company specific

information and projections, which may not be observable in the market, and, therefore, are considered Level 2 and Level 3

measurements.

These significant assumptions are forward-looking and could be affected by future changes in economic and market

We believe the accounting estimate for revenue recognition in connection with the valuation of the warrants received by

the Company as part of the consideration for consulting services is a critical accounting estimate because it requires estimates and

judgement as to expectations that are highly subjective, but which are inherently uncertain and, as a result, actual results may

differ from estimates.

Impairment of Intangible Asset and Goodwill

We review our intangible asset

for impairment and perform a goodwill impairment assessment on an annual basis through a qualitative or quantitative assessment and when

events and circumstances indicate that the estimated fair value of a reporting unit may no longer exceed its carrying value.

of evaluating the potential impairment of intangible asset and goodwill is subjective because it requires the use of estimates and assumptions

in determining a reporting unit’s fair value, as well as the fair value of the intangible asset.

We calculate the fair values by

using the income approach, through the discounted cash flow method and multi-period excess earnings method, based on the present value

of future discounted cash flows, which requires us to use estimates and judgments about the future cash flows of the reporting unit, primarily

including forecasted revenue and revenue growth rates, weighted average cost of capital, and forecasted operating cash flows.

the accounting estimate for impairment of intangible asset and reporting unit are critical accounting estimates because our estimates

of fair values of intangible asset and reporting unit are based upon assumptions that are highly subjective, but which are inherently

uncertain and, as a result, actual results may differ from estimates.

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

Not applicable.

FINANCIAL STATEMENTS AND SUPPLEMENTARY

Reference is made to pages

F-1 through F-29 comprising a portion of this annual report.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis