Item 7. Management’s Discussion and Analysis
ITEM 7. 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
strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this annual report,
words such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and
similar expressions, as they relate to us or the Company’s management, identify forward-looking statements. Such forward-looking
statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company’s
management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors
detailed in our filings with the SEC.
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial
statements and the notes thereto contained elsewhere in this annual report. Certain information contained in the discussion and analysis
set forth below includes forward-looking statements that involve risks and uncertainties. References herein to “we,” “us”
or the “Company” refers to HeartCore Enterprises, Inc. and its consolidated subsidiaries, including HeartCore Co., Ltd. (“HeartCore
Co.”), HeartCore Capital Advisors, Inc. (“HeartCore Capital Advisors”), HeartCore Financial, Inc. (“HeartCore
Financial”) and its branch office in Japan, HeartCore Luvina Vietnam Company Limited (“HeartCore Luvina”), and Sigmaways,
Inc. (“Sigmaways”) and its subsidiaries. HeartCore Capital Advisors was merged into HeartCore Japan in January 2024. HeartCore
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 15 years. Our CXM Platform includes marketing, sales, service and content
management systems, as well as other tools and integrations, that enable companies to attract and engage customers throughout the customer
experience. We also provide education, services and support to help customers be successful with our CXM Platform.
The second business unit,
our DX division, is a digital transformation business which provides customers with robotics process automation, process mining and task
mining to accelerate the digital transformation of enterprises. We also have an ongoing technology innovation team to develop software
that supports the narrow needs of large enterprise customers.
We have made significant investments
in our sales and marketing efforts globally. As of December 31, 2024, our sales and marketing organization was comprised of 12 employees
including our field sales organization, which maintains a physical sales presence in the Japanese software market. Using our go-to-market
strategy, we believe we have made significant contributions in Japan and have established a diversified revenue and customer base. 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. There is the potential for non-paying customers to become paying customers again if and when they
start utilizing our paid services again.
67
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
corporation, which was established in Japan by Mr. Sumitaka Yamamoto, our CEO, in 2009.
On September 6, 2022, HeartCore
Enterprises, Inc. entered into a share exchange and purchase agreement (“Sigmaways Agreement”) to acquire 51% of the outstanding
shares of Sigmaways, a company incorporated under the laws of the State of California, and its wholly owned subsidiaries. Sigmaways and
its wholly owned subsidiaries are engaged in the business of developing and sales of software in the United States. The acquisition was
closed on February 1, 2023.
In the first quarter of 2023, we formed HeartCore Financial in the
U.S. 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
systems, and creating end-to-end software that provides business automation based on the results of that analysis and further simulating
the numbers. We create end-to-end software that provides business automation. Our customers use our software across their organizations
so that they can run their operations in a more fully automated manner. Our ability to successfully implement the automation in our software
greatly affects our profitability.
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 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
Our business growth is dependent
on our ability to attract and retain qualified and productive employees, identify business opportunities, secure new contracts with customers
and our ability to control costs and expenses to improve our operating efficiency. Our software costs (mostly including purchased software
license, salaries and welfare, and outsourcing expenses) have a direct impact on our profitability. Our success is dependent, in part,
on our ability to reduce our exposure to increase in those costs through a variety of ways, while maintaining and improving margins and
market share. In addition, our staffing costs (including salaries and welfare) and administrative expenses also have a direct impact on
our profitability. Our ability to drive the productivity of our staff and enhance our operating efficiency affects our profitability.
68
Our Ability to Manage and Retain Customer
Renewals
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: (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; 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. Our
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. The
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.
69
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,
2024
2023
Variance
% of
% of
Amount
Revenues
Amount
Revenues
Amount
%
Revenues
$ 30,407,229
100.0 %
$ 21,845,830
100.0 %
$ 8,561,399
39.2 %
Cost of revenues
12,579,359
41.4 %
13,778,416
63.1 %
(1,199,057 )
-8.7 %
Gross profit
17,827,870
58.6 %
8,067,414
36.9 %
9,760,456
121.0 %
Operating expenses:
Selling expenses
1,255,368
4.1 %
1,516,247
6.9 %
(260,879 )
-17.2 %
General and administrative expenses
8,623,587
28.4 %
9,651,381
44.2 %
(1,027,794 )
-10.6 %
Research and development expenses
729,584
2.4 %
1,019,141
4.7 %
(289,557 )
-28.4 %
Impairment of intangible asset
3,878,125
12.8 %
-
-
3,878,125
100.0 %
Impairment of goodwill
3,276,441
10.7 %
-
-
3,276,441
100.0 %
Total operating expenses
17,763,105
58.4 %
12,186,769
55.8 %
5,576,336
45.8 %
Income (loss) from operations
64,765
0.2 %
(4,119,355 )
-18.9 %
4,184,120
-101.6 %
Other expenses
(5,414,487 )
-17.8 %
(891,009 )
-4.0 %
(4,523,478 )
507.7 %
Loss before income tax benefit
(5,349,722 )
-17.6 %
(5,010,364 )
-22.9 %
(339,358 )
6.8 %
Income tax benefit
(136,822 )
-0.5 %
(133,664 )
-0.6 %
(3,158 )
2.4 %
Net loss
(5,212,900 )
-17.1 %
(4,876,700 )
-22.3 %
(336,200 )
6.9 %
Less: net loss attributable to non-controlling interests
(3,731,526 )
-12.2 %
(686,810 )
-3.1 %
(3,044,716 )
443.3 %
Net loss attributable to HeartCore Enterprises, Inc.
$ (1,481,374 )
-4.9 %
$ (4,189,890 )
-19.2 %
$ 2,708,516
-64.6 %
70
For the Years Ended December 31,
2024
2023
Variance
Amount
%
Amount
%
Amount
%
Revenues
Revenues from on-premise software
$ 2,700,769
8.9 %
$ 1,586,218
7.3 %
$ 1,114,551
70.3 %
Revenues from maintenance and support services
2,625,992
8.6 %
2,646,148
12.1 %
(20,156 )
-0.8 %
Revenues from software as a service (“SaaS”)
564,292
1.9 %
635,927
2.9 %
(71,635 )
-11.3 %
Revenues from software development and other miscellaneous services
1,925,117
6.3 %
1,980,979
9.1 %
(55,862 )
-2.8 %
Revenues from customized software development and services
7,854,285
25.8 %
8,784,239
40.2 %
(929,954 )
-10.6 %
Revenues from consulting services
14,736,774
48.5 %
6,212,319
28.4 %
8,524,455
137.2 %
Total revenues
30,407,229
100.0 %
21,845,830
100.0 %
8,561,399
39.2 %
Cost of revenues
Costs of on-premise software
1,608,105
12.8 %
1,485,769
10.8 %
122,336
8.2 %
Costs of maintenance and support services
692,026
5.5 %
1,024,059
7.4 %
(332,033 )
-32.4 %
Costs of software as a service (“SaaS”)
415,835
3.3 %
366,277
2.7 %
49,558
13.5 %
Costs of software development and other miscellaneous services
1,635,953
13.0 %
1,655,461
12.0 %
(19,508 )
-1.2 %
Costs of customized software development and services
7,285,674
57.9 %
7,219,892
52.4 %
65,782
0.9 %
Costs of consulting services
941,766
7.5 %
2,026,958
14.7 %
(1,085,192 )
-53.5 %
Total cost of revenues
12,579,359
100.0 %
13,778,416
100.0 %
(1,199,057 )
-8.7 %
Gross profit
On-premise software
1,092,664
6.2 %
100,449
1.3 %
992,215
987.8 %
Maintenance and support services
1,933,966
10.8 %
1,622,089
20.2 %
311,877
19.2 %
Software as a service (“SaaS”)
148,457
0.8 %
269,650
3.3 %
(121,193 )
-44.9 %
Software development and other miscellaneous services
289,164
1.6 %
325,518
4.0 %
(36,354 )
-11.2 %
Customized software development and services
568,611
3.2 %
1,564,347
19.4 %
(995,736 )
-63.7 %
Consulting services
13,795,008
77.4 %
4,185,361
51.8 %
9,609,647
229.6 %
Total gross profit
$ 17,827,870
100.0 %
$ 8,067,414
100.0 %
$ 9,760,456
121.0 %
71
Revenues
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
year 2024; 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 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.
Gross Profit
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
2023.
72
Operating 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,
2024
2023
Variance
% of
% of
Amount
Revenues
Amount
Revenues
Amount
% of
Total revenues
$ 30,407,229
100.0 %
$ 21,845,830
100.0 %
$ 8,561,399
39.2 %
Operating expenses:
Selling expenses
1,255,368
4.1 %
1,516,247
6.9 %
(260,879 )
-17.2 %
General and administrative expenses
8,623,587
28.4 %
9,651,381
44.2 %
(1,027,794 )
-10.6 %
Research and development expenses
729,584
2.4 %
1,019,141
4.7 %
(289,557 )
-28.4 %
Impairment of intangible asset
3,878,125
12.8 %
-
-
3,878,125
100.0 %
Impairment of goodwill
3,276,441
10.7 %
-
-
3,276,441
100.0 %
Total operating expenses
$ 17,763,105
58.4 %
$ 12,186,769
55.8 %
$ 5,576,336
45.8 %
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,
2024
2023
Variance
Amount
%
Amount
%
Amount
%
Selling expenses
Advertising expenses
$ 473,132
37.7 %
$ 832,491
54.9 %
$ (359,359 )
-43.2 %
Sales salaries, commissions and welfare
584,699
46.6 %
119,736
7.9 %
464,963
388.3 %
Sales promotion expenses
2,924
0.2 %
2,931
0.2 %
(7 )
-0.2 %
Referral expenses
50,000
4.0 %
-
-
50,000
100.0 %
Stock-based compensation
144,613
11.5 %
561,089
37.0 %
(416,476 )
-74.2 %
Total selling expenses
$ 1,255,368
100.0 %
$ 1,516,247
100.0 %
$ (260,879 )
-17.2 %
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) 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.
73
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,
2024
2023
Variance
Amount
%
Amount
%
Amount
%
General and administrative expenses
Salaries and welfare expenses
$ 3,707,501
43.0 %
$ 4,532,749
47.0 %
$ (825,248 )
-18.2 %
Consulting and professional service fees
1,999,844
23.2 %
1,520,176
15.8 %
479,668
31.6 %
Depreciation and amortization expenses
737,541
8.6 %
666,721
6.9 %
70,820
10.6 %
Rent expense
252,330
2.9 %
302,844
3.1 %
(50,514 )
-16.7 %
Office, utility and other expenses
1,434,740
16.6 %
1,505,981
15.6 %
(71,241 )
-4.7 %
Travel and entertainment expenses
285,867
3.3 %
359,105
3.7 %
(73,238 )
-20.4 %
Stock-based compensation
205,764
2.4 %
763,805
7.9 %
(558,041 )
-73.1 %
Total general and administrative expenses
$ 8,623,587
100.0 %
$ 9,651,381
100.0 %
$ (1,027,794 )
-10.6 %
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 primarily consist of employee salaries and welfare expenses, outsourcing expenses, and stock-based compensation.
For the Years Ended December 31,
2024
2023
Variance
Amount
%
Amount
%
Amount
%
Research and development expenses
Salaries and welfare expenses
$ 371,748
51.0 %
$ -
-
$ 371,748
100.0 %
Outsourcing expenses
355,463
48.7 %
958,830
94.1 %
(603,367 )
-62.9 %
Stock-based compensation
2,373
0.3 %
60,311
5.9 %
(57,938 )
-96.1 %
Total research and development expenses
$ 729,584
100.0 %
$ 1,019,141
100.0 %
$ (289,557 )
-28.4 %
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.
74
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 $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.
Net Loss
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
Interests
We
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,
Inc.
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, 2024, we had $2,121,089 in cash and cash equivalents
as compared to $1,012,479 as of December 31, 2023. We also had $1,950,050 in accounts receivable as of December 31, 2024. Our accounts
receivable primarily include balance due from customers for our on-premise software sold and services provided and accepted by customers,
as well as amounts billable to the customers for customized software development and services.
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As of December 31, 2024, our working capital was $1,995,643. 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.
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
December 31,
2024
2023
Net cash used in operating activities
$ (4,774,971 )
$ (4,331,209 )
Net cash provided by (used in) investing activities
6,349,204
(1,780,952 )
Net cash provided by (used in) financing activities
(318,646 )
136,194
Effect of exchange rate changes
(146,977 )
(188,880 )
Net change in cash and cash equivalents
1,108,610
(6,164,847 )
Cash and cash equivalents, beginning of the year
1,012,479
7,177,326
Cash and cash equivalents, end of the year
$ 2,121,089
$ 1,012,479
Operating Activities
Net cash used in operating
activities was $4,774,971 for the year ended December 31, 2024, primarily consisting of the following:
● Net
loss of $5,212,900 for the fiscal year.
● Marketable
securities and warrants received as noncash consideration in total of $13,541,693 as two of our IPO consulting customers completed the
IPO during the current year.
● A deferred income tax benefits of $1,076,600 mainly brought by amortization
and impairment of intangible asset.
● A
gain of $1,657,699 on fair value changes in investment in warrants.
● Offset
by loss of $3,970,628 recognized on sale of warrants to a third party.
● Offset
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.
● Offset
by a loss of $2,412,385 on fair value changes in investments in marketable securities.
● Offset
by depreciation and amortization expenses of $749,639.
● Offset
by an increase of $669,142 in income tax payable.
● Offset
by an increase of $710,001 in other liabilities, mainly because the increase of liability to refund a customer.
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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 . The collected accounts receivable is available cash, which can be used as working capital for our business operation, if necessary.
●
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 .
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.
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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 Lease
Operating Leases
2025
$ 16,640
$ 394,538
2026
16,640
301,182
2027
16,640
259,508
2028
11,093
259,508
2029
-
259,508
Thereafter
-
603,091
Total lease payments
61,013
2,077,335
Less: imputed interest
(1,464 )
(90,388 )
Total lease liabilities
59,549
1,986,947
Less: current portion
(15,956 )
(371,951 )
Non-current lease liabilities
$ 43,593
$ 1,614,996
Debt s
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:
Principal
Year Ended December 31,
Payment
2025
$ 404,827
2026
358,590
2027
384,912
2028
173,900
2029
25,116
Thereafter
304,723
Total
$ 1,652,068
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements
as of December 31, 2024.
Critical Accounting Policies and
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 statements.
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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
services. 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. Noncash
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 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
conditions. 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. The process
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. We believe
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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Reference is made to pages
F-1 through F-29 comprising a portion of this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.