HeartCore Enterprises, Inc. 10-Q

Item 1. Financial Statements. HEARTCORE ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS September 30, December 31, 2023 2022 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 2,199,565 $ 7,177,326 Accounts receivable 2,562,239 551,064 Investments in marketable securities 757,106 - Prepaid expenses 683,327 538,230 Note receivable 300,000 - Current portion of long-term note receivable 100,000 - Due from related party 42,439 48,447 Other current assets 111,326 220,070 Total current assets 6,756,002 8,535,137 Non-current assets: Property and equipment, net 752,940 203,627 Operating lease right-of-use assets 2,413,814 2,644,957 Intangible asset, net 4,675,000 - Goodwill 3,276,441 - Long-term investments in warrants 2,456,902 - Long-term note receivable 200,000 - Deferred tax assets 222,172 263,339 Security deposits 338,220 244,395 Long-term loan receivable from related party 184,076 246,472 Other non-current assets 67 661 Total non-current assets 14,519,632 3,603,451 Total assets $ 21,275,634 $ 12,138,588 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 1,779,953 $ 497,742 Accrued payroll and other employee costs 558,394 360,222 Due to related party 7,859 402 Current portion of long-term debts 525,440 697,877 Insurance premium financing 122,279 - Factoring liability 217,250 - Operating lease liabilities, current 365,241 291,863 Finance lease liabilities, current 17,076 19,294 Income tax payables 103,935 2,747 Deferred revenue 1,740,877 1,724,519 Other current liabilities 222,089 53,027 Total current liabilities 5,660,393 3,647,693 Non-current liabilities: Long-term debts 1,351,830 1,123,735 Operating lease liabilities, non-current 2,113,917 2,421,054 Finance lease liabilities, non-current 68,535 459 Deferred tax liabilities 1,309,000 - Other non-current liabilities 197,817 138,018 Total non-current liabilities 5,041,099 3,683,266 Total liabilities 10,701,492 7,330,959 Shareholders’ equity: Preferred shares ($ 0.0001 par value, 20,000,000 shares authorized, no shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively) - - Common shares ($ 0.0001 par value, 200,000,000 shares authorized; 20,842,690 and 17,649,886 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively) 2,083 1,764 Additional paid-in capital 19,431,987 15,014,607 Accumulated deficit ( 11,910,310 ) ( 10,573,579 ) Accumulated other comprehensive income 282,734 364,837 Total HeartCore Enterprises, Inc. shareholders’ equity 7,806,494 4,807,629 Non-controlling interest 2,767,648 - Total shareholders’ equity 10,574,142 4,807,629 Total liabilities and shareholders’ equity $ 21,275,634 $ 12,138,588 The accompanying notes are an integral part of these unaudited consolidated financial statements. F- 1 HEARTCORE ENTERPRISES, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 Revenues $ 4,688,908 $ 1,872,476 $ 18,518,431 $ 6,818,774 Cost of revenues 3,860,241 1,543,256 10,548,245 3,935,908 Gross profit 828,667 329,220 7,970,186 2,882,866 Operating expenses: Selling expenses 274,043 771,496 1,330,747 1,706,250 General and administrative expenses 2,172,298 1,513,028 7,305,392 5,832,276 Research and development expenses 170,071 58,275 289,303 583,762 Total operating expenses 2,616,412 2,342,799 8,925,442 8,122,288 Loss from operations ( 1,787,745 ) ( 2,013,579 ) ( 955,256 ) ( 5,239,422 ) Other income (expenses): Changes in fair value of investments in marketable securities ( 271,740 ) - ( 500,762 ) - Changes in fair value of investments in warrants ( 460,672 ) - ( 294,565 ) - Interest income 14,363 21,707 64,633 32,256 Interest expenses ( 42,619 ) ( 10,500 ) ( 125,073 ) ( 39,361 ) Other income 52,640 15,195 176,641 40,645 Other expenses ( 25,947 ) ( 2,826 ) ( 62,701 ) ( 58,050 ) Total other income (expenses) ( 733,975 ) 23,576 ( 741,827 ) ( 24,510 ) Loss before income tax provision ( 2,521,720 ) ( 1,990,003 ) ( 1,697,083 ) ( 5,263,932 ) Income tax expense (benefit) 19,413 ( 19,069 ) 58,859 ( 10,906 ) Net loss ( 2,541,133 ) ( 1,970,934 ) ( 1,755,942 ) ( 5,253,026 ) Less: net loss attributable to non-controlling interest ( 233,913 ) - ( 419,211 ) - Net loss attributable to HeartCore Enterprises, Inc. $ ( 2,307,220 ) $ ( 1,970,934 ) $ ( 1,336,731 ) $ ( 5,253,026 ) Other comprehensive income (loss): Foreign currency translation adjustment ( 90,743 ) 128,705 ( 85,244 ) 428,118 Total comprehensive loss ( 2,631,876 ) ( 1,842,229 ) ( 1,841,186 ) ( 4,824,908 ) Less: comprehensive loss attributable to non-controlling interest ( 235,094 ) - ( 422,352 ) - Comprehensive loss attributable to HeartCore Enterprises, Inc. $ ( 2,396,782 ) $ ( 1,842,229 ) $ ( 1,418,834 ) $ ( 4,824,908 ) Net loss per common share attributable to HeartCore Enterprises, Inc. Basic $ ( 0.11 ) $ ( 0.11 ) $ ( 0.07 ) $ ( 0.29 ) Diluted $ ( 0.11 ) $ ( 0.11 ) $ ( 0.07 ) $ ( 0.29 ) Weighted average common shares outstanding Basic 20,842,690 17,835,027 20,257,020 18,014,483 Diluted 20,842,690 17,835,027 20,257,020 18,014,483 The accompanying notes are an integral part of these unaudited consolidated financial statements. F- 2 HEARTCORE ENTERPRISES, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022 Common Shares Additional Treasury Shares Accumulated Other Total Shareholders’ Number of Shares Amount Paid-in Capital Number of Shares Amount Accumulated Deficit Comprehensive Income (Loss) Equity (Deficit) Balance, December 31, 2021 15,546,454 $ 1,554 $ 3,350,779 - $ - $ ( 3,896,113 ) $ ( 15,172 ) - - $ ( 558,952 ) Net loss - - - - - ( 1,578,451 ) - ( 1,578,451 ) Foreign currency translation adjustment - - - - - - 80,053 80,053 Issuance of common shares for cash 3,096,000 310 13,643,969 - - - - - - 13,644,279 Issuance of common shares from exercise of share options 273,489 27 ( 11 ) - - - - 16 Stock-based compensation - - 422,164 - - - - - - 422,164 Balance, March 31, 2022 18,915,943 1,891 17,416,901 - - ( 5,474,564 ) 64,881 - - 12,009,109 Net loss - - - - - ( 1,703,641 ) - ( 1,703,641 ) Foreign currency translation adjustment - - - - - - 219,360 - - 219,360 Stock-based compensation 83,333 8 466,654 - - - - 466,662 Repurchase of common shares - - - ( 558,809 ) ( 1,336,762 ) - - ( 1,336,762 ) Balance, June 30, 2022 18,999,276 1,899 17,883,555 ( 558,809 ) ( 1,336,762 ) ( 7,178,205 ) 284,241 - - 9,654,728 Net loss - - - - - ( 1,970,934 ) - ( 1,970,934 ) Foreign currency translation adjustment - - - - - - 128,705 128,705 Stock-based compensation - - 336,651 - - - - - - 336,651 Repurchase of common shares - - - ( 790,581 ) ( 2,163,238 ) - - ( 2,163,238 ) Balance, September 30, 2022 18,999,276 $ 1,899 $ 18,220,206 ( 1,349,390 ) $ ( 3,500,000 ) $ ( 9,149,139 ) $ 412,946 - - $ 5,985,912 Common Shares Additional Accumulated Other Total HeartCore Enterprises, Inc. Non- Total Number of Shares Amount Paid-in Capital Accumulated Deficit Comprehensive Income Shareholders’ Equity controlling Interest Shareholders’ Equity Balance, December 31, 2022 17,649,886 $ 1,764 $ 15,014,607 $ ( 10,573,579 ) $ 364,837 $ 4,807,629 $ - $ 4,807,629 Net income (loss) - - - 1,882,289 - 1,882,289 ( 74,252 ) 1,808,037 Foreign currency translation adjustment - - - - ( 22,744 ) ( 22,744 ) ( 2,290 ) ( 25,034 ) Issuance of common shares for acquisition of subsidiary 2,500,000 250 3,149,750 - - 3,150,000 - 3,150,000 Non-controlling interests arising from acquisition of subsidiary - - - - - - 3,190,000 3,190,000 Stock-based compensation 692,804 69 915,159 - - 915,228 - 915,228 Balance, March 31, 2023 20,842,690 2,083 19,079,516 ( 8,691,290 ) 342,093 10,732,402 3,113,458 13,845,860 Net loss - - - ( 911,800 ) - ( 911,800 ) ( 111,046 ) ( 1,022,846 ) Foreign currency translation adjustment - - - - 30,203 30,203 330 30,533 Stock-based compensation - - 179,165 - - 179,165 - 179,165 Balance, June 30, 2023 20,842,690 2,083 19,258,681 ( 9,603,090 ) 372,296 10,029,970 3,002,742 13,032,712 Balance 20,842,690 2,083 19,258,681 ( 9,603,090 ) 372,296 10,029,970 3,002,742 13,032,712 Net loss - - - ( 2,307,220 ) - ( 2,307,220 ) ( 233,913 ) ( 2,541,133 ) Foreign currency translation adjustment - - - - ( 89,562 ) ( 89,562 ) ( 1,181 ) ( 90,743 ) Stock-based compensation - - 173,306 - - 173,306 - 173,306 Balance, September 30, 2023 20,842,690 $ 2,083 $ 19,431,987 $ ( 11,910,310 ) $ 282,734 $ 7,806,494 $ 2,767,648 $ 10,574,142 Balance 20,842,690 $ 2,083 $ 19,431,987 $ ( 11,910,310 ) $ 282,734 $ 7,806,494 $ 2,767,648 $ 10,574,142 The accompanying notes are an integral part of these unaudited consolidated financial statements. F- 3 HEARTCORE ENTERPRISES, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 2023 2022 Cash flows from operating activities: Net loss $ ( 1,755,942 ) $ ( 5,253,026 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expenses 495,200 64,398 Gain on disposal of property and equipment ( 4,737 ) - Amortization of debt issuance costs 2,257 3,051 Non-cash lease expense 254,876 207,549 Loss on termination of lease 76 - Deferred income taxes ( 109,690 ) ( 5,843 ) Stock-based compensation 1,267,699 1,225,477 Warrants received as noncash consideration ( 4,009,335 ) - Changes in fair value of investments in marketable securities 500,762 - Changes in fair value of investments in warrants 294,565 - Changes in assets and liabilities: Accounts receivable ( 322,583 ) 168,021 Prepaid expenses 187,269 ( 56,553 ) Other assets ( 23,982 ) ( 142,967 ) Accounts payable and accrued expenses 597,247 ( 96,238 ) Accrued payroll and other employee costs 7,471 59,059 Due to related party 7,562 3,098 Operating lease liabilities ( 231,499 ) ( 213,691 ) Finance lease liabilities - ( 370 ) Income tax payables 101,058 ( 7,704 ) Deferred revenue 200,256 45,938 Other liabilities 83,809 ( 206,569 ) Net cash flows used in operating activities ( 2,457,661 ) ( 4,206,370 ) Cash flows from investing activities: Purchases of property and equipment ( 516,658 ) ( 41,672 ) Proceeds from disposal of property and equipment 24,935 - Advances on note receivable ( 600,000 ) - Repayment of loan provided to related party 34,823 33,042 Payment for acquisition of subsidiary, net of cash acquired ( 724,910 ) - Net cash flows used in investing activities ( 1,781,810 ) ( 8,630 ) Cash flows from financing activities: Proceeds from initial public offering, net of issuance cost - 13,602,554 Proceeds from issuance of common shares prior to initial public offering - 220,572 Repurchase of common shares - ( 3,500,000 ) Payments for finance leases ( 16,537 ) ( 29,051 ) Proceeds from long-term debt 219,427 258,087 Repayment of long-term debts ( 584,779 ) ( 699,407 ) Repayment of insurance premium financing ( 266,756 ) ( 298,886 ) Net proceeds from factoring arrangement 217,250 - Payments for debt issuance costs ( 656 ) ( 1,030 ) Payment for mandatorily redeemable financial interest - ( 430,489 ) Net cash flows provided by (used in) financing activities ( 432,051 ) 9,122,350 Effect of exchange rate changes ( 306,239 ) ( 200,981 ) Net change in cash and cash equivalents ( 4,977,761 ) 4,706,369 Cash and cash equivalents - beginning of the period 7,177,326 3,136,839 Cash and cash equivalents - end of the period $ 2,199,565 $ 7,843,208 Supplemental cash flow disclosure: Interest paid $ 59,290 $ 38,387 Income taxes paid $ 91,657 $ 3,013 Non-cash investing and financing transactions: Payroll withheld as repayment of loan receivable from employees $ - $ 12,034 Liabilities assumed in connection with purchase of property and equipment $ 9,602 $ 17,731 Share repurchase liability settled by issuance of common shares $ - $ 16 Deferred offering costs recognized against the proceeds from the offering $ - $ 178,847 Insurance premium financing $ 389,035 $ 388,538 Common shares issued for acquisition of subsidiary $ 3,150,000 $ - Investments in warrants converted to marketable securities $ 1,257,868 $ - Finance lease right-of-use asset obtained in exchange for finance lease liability $ 93,117 $ - Operating lease right-of-use asset obtained in exchange for operating lease liability $ 317,040 $ - Remeasurement of operating lease liability and right-of-use asset due to lease modification $ 12,579 $ - The accompanying notes are an integral part of these unaudited consolidated financial statements. F- 4 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS HeartCore Enterprises, Inc. (“HeartCore USA” or the “Company”), a holding company, was incorporated under the laws of the State of Delaware on May 18, 2021. On July 16, 2021, the Company executed a Share Exchange Agreement with certain shareholders of HeartCore Co., Ltd. (“HeartCore Japan”), a company that was incorporated in Japan on June 12, 2009. Pursuant to the terms of the Share Exchange Agreement, the Company issued 15,999,994 shares of its common shares to the shareholders of HeartCore Japan in exchange for 10,706 shares out of 10,984 shares of common shares issued by HeartCore Japan, representing approximately 97.5 % of HeartCore Japan’s outstanding common shares. On February 24, 2022, the Company purchased the remaining 278 shares of common shares of HeartCore Japan. As a result, HeartCore Japan became a wholly-owned operating subsidiary of the Company. The share exchange on July 16, 2021 has been accounted for as a recapitalization between entities under common control since the same controlling shareholders controlled these two entities before and after the transaction. The consolidation of the Company and its subsidiary has been accounted for at historical cost and prepared on the basis as if the transaction had become effective as of the beginning of the earliest period presented in the accompanying unaudited consolidated financial statements. The Company, via its wholly-owned operating subsidiary, HeartCore Japan, is mainly engaged in the business of developing and sales of comprehensive software. Beginning from early 2022, HeartCore USA is engaged in business of providing consulting services to Japanese companies with intention to go public in the United States capital market. On September 6, 2022, HeartCore USA entered into a share exchange and purchase agreement (“Sigmaways Agreement”) to acquire 51 % of the outstanding shares of Sigmaways, Inc. (“Sigmaways”), a company incorporated under the laws of the State of California in April 2006, and its wholly-owned subsidiaries, Sigmaways B.V. and Sigmaways Technologies Ltd. (“Sigmaways Technologies”). Sigmaways B.V. was incorporated in Netherlands in November 2019. Sigmaways Technologies was incorporated in Canada in August 2020. Sigmaways and its wholly-owned subsidiaries are primarily engaged in the business of developing and sales of software in the United States. The acquisition was closed on February 1, 2023. In January 2023, HeartCore USA incorporated a wholly-owned subsidiary, HeartCore Financial, Inc. (“HeartCore Financial”), under the laws of the State of Delaware. HeartCore Financial is engaged in the business of providing financial consulting services. In February 2023, HeartCore USA incorporated a wholly-owned subsidiary, HeartCore Capital Advisors, Inc. (“HeartCore Capital Advisors”), in Japan. HeartCore Capital Advisors is engaged in the business of providing financial consulting services to Japanese companies. HeartCore USA, HeartCore Japan, Sigmaways, Sigmaways B.V., Sigmaways Technologies, HeartCore Financial and HeartCore Capital Advisors are hereafter referred to as the Company. F- 5 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. These unaudited interim consolidated financial statements do not include all of the information and disclosure required by the U.S. GAAP for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments consisting of normal recurring nature considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2022. Use of Estimates In preparing the unaudited consolidated financial statements in conformity U.S. GAAP, the management is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available as of the date of the unaudited consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the allowance for credit losses, useful lives of property and equipment, the impairment of long-lived assets and goodwill, valuation of stock-based compensation, valuation allowance of deferred tax assets, implicit interest rate of operating and financing leases, valuation of asset retirement obligations, valuation of investments in warrants, revenue recognition and purchase price allocation with respect to business combination. Actual results could differ from those estimates. COVID-19 While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment actions, it has already had an adverse effect on the global economy and the lasting effects of the pandemic continue to be unknown. The Company may experience customer losses, including due to bankruptcy or customers ceasing operations, which may result in delays in collections or an inability to collect accounts receivable from these customers. The extent to which COVID-19 may continue to impact the Company’s financial condition, results of operations, or liquidity continues to remain uncertain, and as of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or an adjustment to the carrying value of the Company’s assets or liabilities. These estimates may change, as new events occur and additional information is obtained, which will be recognized in the unaudited consolidated financial statements as soon as they become known. Actual results could differ from those estimates, and any such differences may be material to the Company’s unaudited consolidated financial statements. F- 6 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Asset Retirement Obligations Pursuant to the lease agreements for the office space, the Company is responsible to restore these spaces back to its original statute at the time of leaving. The Company recognizes an obligation related to these restorations as asset retirement obligation included in other non-current liabilities in the consolidated balance sheets, in accordance with the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) Topic 410, “Asset Retirement Obligation Accounting”. The Company capitalizes the associated asset retirement cost by increasing the carrying amount of the related property and equipment. The following table presents changes in asset retirement obligations: SCHEDULE OF CHANGES IN ASSET RETIREMENT OBLIGATIONS September 30, December 31, 2023 2022 Beginning balance $ 138,018 $ 155,666 Liabilities incurred 83,821 - Accretion expense 328 459 Foreign currency translation adjustment ( 24,350 ) ( 18,107 ) Ending balance $ 197,817 $ 138,018 Software Development Costs Software development costs are expensed as incurred until the point the Company establishes technological feasibility. Technological feasibility is established upon completion of a detailed program design or the completion of a working model. Costs incurred by the Company between establishment of technological feasibility and the point at which the product is ready for general release are capitalized and amortized over the economic life of the related products. The Company’s software development costs incurred subsequent to achieving technological feasibility have not been significant and all software development costs have been expensed as incurred. In the nine months ended September 30, 2023 and 2022, software development costs expensed as incurred amounted to $ 289,303 and $ 583,762 , respectively. These software development costs were included in the research and development expenses. Investments in Warrants Investments in warrants represent stock warrants of its consulting service customers and are not registered for public sale. The warrants are measured at fair value and any changes in fair value are recognized in other income (expenses). Investments in warrants are classified as long-term if the warrants are exercisable over one year after the date of receipt. Investments in Marketable Securities Investments in marketable securities represent equity securities registered for public sale with readily determinable fair value. The marketable securities as of September 30, 2023 were obtained through exercise of stock warrants of its consulting service customers and measured at fair value with changes in fair value recognized in other income (expenses). Intangible Asset, Net Intangible asset represents the customer relationship acquired from business acquisition of Sigmaways and its subsidiaries. The acquired intangible asset is recognized and measured at fair value at the time of acquisition and is amortized on a straight-line basis over the estimated economic useful life of the respective assets. The estimated useful life of the customer relationship is 8 years. Impairment of Long-Lived Assets Other Than Goodwill Long-lived assets with finite lives, primarily property and equipment, operating lease right-of-use assets and intangible asset, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition are below the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value. There were no impairments of these assets during the nine months ended September 30, 2023 and 2022. Goodwill Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. In accordance with ASC Topic 350, “Intangibles – Goodwill and Others”, goodwill is subject to at least an annual assessment for impairment or more frequently if events or changes in circumstances indicate that an impairment may exist, applying a fair-value based test. Fair value is generally determined using a discounted cash flow analysis. Foreign Currency Translation The functional currency of HeartCore Japan and HeartCore Capital Advisors is the Japanese Yen (“JPY”). The functional currency of HeartCore USA, HeartCore Financial and Sigmaways is the United States Dollar (“US$”). The functional currency of Sigmaways B.V. is the Euro (“EUR”). The functional currency of Sigmaways Technologies is the Canada Dollar (“CAD”). Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the unaudited consolidated statements of operations. F- 7 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The reporting currency of the Company is the US$, and the accompanying unaudited consolidated financial statements have been expressed in US$. In accordance with ASC Topic 830-30, “Translation of Financial Statements”, assets and liabilities of the Company whose functional currency is not US$ are translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from the translation of financial statements are recorded as a separate component of accumulated other comprehensive income (loss) within the unaudited statements of changes in shareholders’ equity (deficit). Revenue Recognition The Company recognizes revenues under ASC Topic 606, “Revenue from Contracts with customers”. To determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. Revenue amount represents the invoiced value, net of value-added taxes and applicable local government levies. The Company currently generates its revenues from the following main sources: Revenues from On-Premise Software Licenses for on-premise software provide the customer with a right to use the software as it exists when made available to the customer. The Company provides on-premise software in the form of both perpetual licenses and term-based licenses which grant the customers with the right for a specified term. Revenues from on-premise licenses are recognized upfront at the point in time when the software is made available to the customer. Licenses for on-premise software are typically sold to the customer with maintenance and support services in a bundle. Revenues under the bundled arrangements are allocated based on the relative standalone selling prices (“SSP”) of on-premise software and maintenance and support service. The SSP for maintenance and support services is estimated based upon observable transactions when those services are sold on a standalone basis. The SSP of on-premise software is typically estimated using the residual approach as the Company is unable to establish the SSP for on-premise licenses based on observable prices given the same products are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions or other observable evidence. Revenues from Maintenance and Support Services Maintenance and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted by the customers. Revenues from Software as a Service (“SaaS”) The Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company’s solution is made available to the customer. The subscription contracts are generally one year or less in length. F- 8 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Revenues from Software Development and Other Miscellaneous Services The Company provides customers with software development and support services pursuant to their specific requirements, which primarily compose of consulting, integration, training, custom application, and workflow development. The Company also provides other miscellaneous services, such as 3D Space photography. The Company generally recognizes revenue at a point in time when control is transferred to the customers and the Company is entitled to the payment, which is when the promised services are delivered and accepted by the customers. Revenues from Customized Software Development and Services The Company’s customized software development and services revenues primarily include revenues from providing software development solutions and other support services to its customers. The contract pricing is at stated billing rates per hour. These contracts are generally short-term in nature and not longer than one year in duration. For services provided under the contract that result in the transfer of control over time, the underlying deliverable in the contract is owned and controlled by the customer and does not create an asset with an alternative use to the Company. The Company recognizes revenue on rate per hour contracts based on the amount billable to the customer, as the Company has the right to invoice the customer in an amount that directly corresponds with the value to the customer of the Company’s performance to date. Revenues from Consulting Services The Company provides public listing related consulting services to customers pursuant to the specific requirements prescribed in the contracts, which primarily include communicating with intermediary parties, preparing required documents related to the initial public offering and supporting the listing process. The consulting service contracts are generally less than one year in length and normally include both cash and noncash consideration. Cash consideration is paid in installment payments and is recognized in revenue over the period of the contract by reference to progress toward complete satisfaction of that performance obligation. Noncash consideration is in the form of warrants of the customers and is measured at fair value at contract inception. Noncash consideration that is variable for reasons other than only the form of the consideration is included in the transaction price, but is subject to the constraint on variable consideration. The Company assesses the estimated amount of the variable noncash consideration at contract inception and subsequently, to determine when and to what extent it is probable that a significant reversal in the amount of cumulative revenues recognized will not occur once the uncertainty associated with the variable consideration is subsequently resolved. Only when the significant revenues reversal is concluded probable of not occurring can variable consideration be included in revenues. Based on evaluation of likelihood and magnitude of a reversal in applying the constraint, the variable noncash consideration is recognized in revenues until the underlying uncertainties have been resolved. The timing of revenue recognition may differ from the timing of invoicing to the customers. The Company has determined that its contracts do not include a significant financing component. The Company records a contract asset, which is included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company factors certain accounts receivable upon or after the performance obligation is being met. The Company records deferred revenue on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred revenue is reported net of related uncollected deferred revenue in the consolidated balance sheets. The amount of revenues recognized during the nine months ended September 30, 2023 and 2022 that were included in the opening deferred revenues balance was approximately $ 1.5 million and $ 1.2 million, respectively. Disaggregation of Revenues The Company disaggregates its revenues from contracts by service types, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenues and cash flows are affected by economic factors. The Company’s disaggregation of revenues for the three and nine months ended September 30, 2023 and 2022 is as following: SCHEDULE OF DISAGGREGATION OF REVENUES For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 Revenues from on-premise software $ 396,647 $ 257,121 $ 1,457,836 $ 1,775,254 Revenues from maintenance and support services 650,603 678,521 2,226,802 2,251,137 Revenues from software as a service (“SaaS”) 148,857 122,347 497,430 352,251 Revenues from software development and other miscellaneous services 474,859 340,742 1,561,655 1,518,032 Revenues from customized software development and services 2,405,907 - 6,332,479 - Revenues from consulting services 612,035 473,745 6,442,229 922,100 Total revenues $ 4,688,908 $ 1,872,476 $ 18,518,431 $ 6,818,774 F- 9 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The Company’s disaggregation of revenues by product/service is as following: 2023 2022 2023 2022 For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 Revenues from customer experience management platform $ 1,403,932 $ 1,171,150 $ 4,696,241 $ 4,757,369 Revenues from process mining 99,618 68,560 390,374 453,368 Revenues from robotic process automation 58,051 69,693 271,520 317,110 Revenues from task mining 74,958 66,799 277,725 252,234 Revenues from customized software development and services 2,405,907 - 6,332,479 - Revenues from consulting services 612,035 473,745 6,442,229 922,100 Revenues from others 34,407 22,529 107,863 116,593 Total revenues $ 4,688,908 $ 1,872,476 $ 18,518,431 $ 6,818,774 As of September 30, 2023 and 2022, and for the periods then ended, substantially all of the long-lived assets (excluding intangible asset) and the majority of revenues generated were attributed to the Company’s operation in Japan. Concentration of Credit Risk Financial instruments that potentially subject the Company to credit risk consist primarily of accounts and other receivables. The Company usually does not require collateral or other security to support these receivables. The Company conducts periodic reviews of the financial condition and payment practices of its customers to minimize collection risk on accounts receivable. For the nine months ended September 30, 2023, customer B and C represent 14.2 % and 13.6 %, respectively, of the Company’s total revenues. For the nine months ended September 30, 2022, customer A represents 10.0 % of the Company’s total revenues. For the nine months ended September 30, 2023, vendor D, B, A and E represent 26.4 %, 26.2 %, 22.1 % and 15.9 %, respectively, of the Company’s total purchases. For the nine months ended September 30, 2022, vendor A, B, C and D represent 25.9 %, 19.7 %, 16.3 % and 15.5 %, respectively, of the Company’s total purchases. Stock-based Compensation The Company accounts for stock-based compensation awards in accordance with ASC Topic 718, “Compensation – Stock Compensation”. The cost of services received from employees and non-employees in exchange for awards of equity instruments is recognized in the unaudited consolidated statements of operations based on the estimated fair value of those awards on the grant date and amortized on a straight-line basis over the requisite service period or vesting period. The Company records forfeitures as they occur. F- 10 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Business Combinations The Company accounts its business combinations using the acquisition method of accounting in accordance with ASC Topic 805. The purchase price of the acquisition is allocated to the tangible assets, liabilities, identifiable intangible asset acquired and non-controlling interest, if any, based on their estimated fair values as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. Acquisition-related expenses are expensed as incurred. Consideration transferred in a business combination is measured at the fair value as of the date of acquisition. Where the consideration in an acquisition includes contingent consideration, and the payment of which depends on the achievement of certain specified conditions post-acquisition, the contingent consideration is recognized and measured at its fair value at the acquisition date and is recorded as a liability. It is subsequently carried at fair value with changes in fair value reflected in earnings. In a business combination achieved in stages, the Company remeasures the previously held equity interest in the acquiree immediately before obtaining control at its acquisition-date fair value and the remeasurement gain or loss, if any, is recognized in the unaudited consolidated statements of operations and comprehensive loss. Fair value is determined based upon the guidance of ASC Topic 820, “Fair Value Measurements and Disclosures,” and generally are determined using Level 2 inputs and Level 3 inputs. The determination of fair value involves the use of significant judgments and estimates. The Company utilizes the assistance of a third-party valuation appraiser to determine the fair value as of the date of acquisition. Fair Value Measurements The Company performs fair value measurements in accordance with ASC Topic 820. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or a liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC Topic 820 establishes three levels of inputs that may be used to measure fair value: ● Level 1: quoted prices in active markets for identical assets or liabilities; ● Level 2: inputs other than Level 1 that are observable, either directly or indirectly; or ● Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities. As of September 30, 2023 and December 31, 2022, the carrying values of current assets, except for investments in marketable securities, and current liabilities approximated their fair values reported in the consolidated balance sheets due to the short-term maturities of these instruments. Investments in Warrants The Company received warrants from its customers as noncash consideration from consulting services. The warrants are not registered for public sale and are measured at fair value at contract inception. The Company’s investments in warrants are measured on a recurring basis and carried on the balance sheet at an estimated fair value at the end of the period. The valuation of investments in warrants was determined using a Black-Scholes model of value based upon the stock price, exercise price, expected volatility, time to maturity, and a risk-free interest rate for the term of the warrants exercise. Such valuations are classified within Level 3 of the fair value hierarchy. The following table summarizes the Company’s investments in warrants activity for the nine months ended September 30, 2023 and 2022: SCHEDULE OF INVESTMENTS IN WARRANTS \ For the Nine Months Ended September 30, 2023 2022 Fair value of investments in warrants at beginning of the period $ - $ - Warrants received as noncash consideration 4,009,335 - Changes in fair value of investments in warrants ( 294,565 ) - Investments in warrants converted to marketable securities ( 1,257,868 ) - Fair value of investments in warrants at end of the period $ 2,456,902 $ - Investments in Marketable Securities The Company’s investments in marketable securities registered for public sale with readily determinable fair value are measured at quoted prices on a recurring basis at the end of the period. Marketable securities are classified within Level 1 of the fair value hierarchy. The following table summarizes the Company’s investments in marketable securities activity for the nine months ended September 30, 2023 and 2022: SCHEDULE OF INVESTMENTS IN MARKETABLE SECURITIES For the Nine Months Ended September 30, 2023 2022 Fair value of investments in marketable securities at beginning of the period $ - $ - Investments in warrants converted to marketable securities 1,257,868 - Changes in fair value of investments in marketable securities ( 500,762 ) - Marketable securities sold - - Fair value of investments in marketable securities at end of the period $ 757,106 $ - F- 11 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Recent Accounting Pronouncements New Accounting Pronouncements Recently Adopted In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 was further amended in November 2020 by ASU No. 2020-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). As a result, ASC Topic 326, “Financial Instruments – Credit Losses” is effective for public companies for annual reporting periods, and interim periods within those years beginning after December 15, 2020. For all other entities, it is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As the Company is an “emerging growth company” and elects to apply for the new and revised accounting standards at the effective date for a private company, the Company adopted ASU No. 2016-13 on January 1, 2023 and the adoption did not have a material impact on the Company’s unaudited consolidated financial statements. In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASC Topic 606, “Revenue from Contracts with Customers”. This ASU is expected to improve comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. The new guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU No. 2021-08 on January 1, 2023 and the adoption did not have a material impact on the Company’s unaudited consolidated financial statements. New Accounting Pronouncements Not Yet Effective The Company has reviewed all other recently issued accounting pronouncements and concluded they were either not applicable or not expected to have a material impact on the Company’s unaudited consolidated financial statements. NOTE 3 — ACCOUNTS RECEIVABLE Accounts receivable consists of the following: SCHEDULE OF ACCOUNTS RECEIVABLE NET September 30, December 31, 2023 2022 Accounts receivable – non-factored $ 2,344,989 $ 551,064 Accounts receivable – factored with recourse 217,250 - Accounts receivable, gross 2,562,239 551,064 Less: allowance for credit losses - - Accounts receivable $ 2,562,239 $ 551,064 NOTE 4 — PREPAID EXPENSES Prepaid expenses consist of the following: SCHEDULE OF PREPAID EXPENSES September 30, December 31, 2023 2022 Prepayments to software vendors $ 185,540 $ 162,046 Prepaid marketing and consulting fees 102,839 99,770 Prepaid subscription fees 83,207 113,685 Prepaid insurance premium 208,385 66,023 Others 103,356 96,706 Total $ 683,327 $ 538,230 F- 12 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 — NOTE RECEIVABLE AND LONG-TERM NOTE RECEIVABLE On May 2, 2023, the Company purchased a $ 300,000 promissory note from a non-related company. The note bears an interest rate of 8 % per annum and matures on the earlier of 1) the date of the closing of capital-raising transactions in the amount of $ 300,000 or more consummated by the promissory note issuer, 2) the date on which the promissory note issuer completes its initial public offering (“IPO”) on the Nasdaq Capital Market or New York Stock Exchange , or 3) 180 days following the note issuance. The interest rate would be 12 % per annum for any amount that is unpaid when due. On July 27, 2023, the Company entered into a note exchange agreement with the promissory note issuer pursuant to which all of the promissory note principal amount and accrued interest owed to the Company shall be converted into and exchanged for 600,000 shares of common shares of the promissory note issuer upon the effectiveness of its IPO. The promissory note issuer has not completed the IPO as of September 30, 2023. On September 1, 2023, the Company purchased a $ 300,000 promissory note from a non-related company. The note bears an interest rate of 4 % per annum and matures on September 2, 2026. On the first business day following each annual anniversary of September 1, 2023, the promissory note issuer shall pay to the Company the sum of one-third of the total promissory note amount due and outstanding, including all accrued and unpaid interest as of such time, unless such annual payment has been forgiven by the Company pursuant to certain conditions. The interest rate would be 10 % per annum for any amount that is unpaid when due. NOTE 6 — RELATED PARTY TRANSACTIONS As of September 30, 2023 and December 31, 2022, the Company has a due to related party balance of $ 7,859 and $ 402 , respectively, from Sumitaka Yamamoto, the Chief Executive Officer (“CEO”) and major shareholder of the Company. The balance is unsecured, non-interest bearing and due on demand. During the nine months ended September 30, 2023, the related party paid operating expenses on behalf of the Company and received the payments in a net amount of $ 7,562 . During the nine months ended September 30, 2022, the related party paid operating expenses on behalf of the Company and received the payments in a net amount of $ 3,098 . As of September 30, 2023 and December 31, 2022, the Company has a loan receivable balance of $ 226,515 and $ 294,919 , respectively, from Heartcore Technology Inc., a company controlled by the CEO of the Company. The loan was made to the related party to support its operation. The balance is unsecured, bears an annual interest of 1.475 %, and requires repayments in installments starting from February 2022. During the nine months ended September 30, 2023 and 2022, the Company received repayments of $ 34,823 and $ 33,042 , respectively, from this related party. During the period from January 1, 2022 through January 13, 2022, the Company completed a private placement, in which it issued 30,000 shares of common shares at a purchase price of $ 2.50 per share to the officers of the Company for an aggregate amount of $ 75,000 . NOTE 7 — PROPERTY AND EQUIPMENT, NET Property and equipment, net consist of the following: SCHEDULE OF PROPERTY AND EQUIPMENT NET September 30, December 31, 2023 2022 Leasehold improvements $ 471,069 $ 298,637 Machinery and equipment 673,435 316,827 Vehicle 85,111 106,490 Software 142,829 163,049 Subtotal 1,372,444 885,003 Less: accumulated depreciation ( 619,504 ) ( 681,376 ) Property and equipment, net $ 752,940 $ 203,627 Depreciation expenses were $ 70,200 and $ 64,398 for the nine months ended September 30, 2023 and 2022, respectively. NOTE 8 — INTANGIBLE ASSET, NET Intangible asset, net is as follows: SCHEDULE OF INTANGIBLE ASSETS September 30, December 31, 2023 2022 Customer relationship $ 5,100,000 $ - Less: accumulated amortization ( 425,000 ) - Intangible asset, net $ 4,675,000 $ - Amortization expenses were $ 425,000 and nil for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, the future estimated amortization cost for intangible asset is as follows: SCHEDULE OF AMORTIZATION INTANGIBLE ASSET Estimated Year Ended December 31, Amortization Remaining of 2023 $ 159,375 2024 637,500 2025 637,500 2026 637,500 2027 637,500 Thereafter 1,965,625 Total $ 4,675,000 F- 13 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 — LEASES The Company has entered into four leases for its office space, which were classified as operating leases. It has also entered into two leases for office equipment, one of which was terminated in June 2022, and two leases for vehicles, one of which was terminated in September 2023, and these leases were classified as finance leases. Right-of-use assets of these finance leases in the amount of $ 85,591 and $ 18,335 are included in property and equipment, net as of September 30, 2023 and December 31, 2022, respectively. Operating lease expenses for lease payments are recognized on a straight-line basis over the lease term. Finance lease costs include amortization, which are recognized on a straight-line basis over the expected life of the leased assets, and interest expenses, which are recognized following an effective interest rate method. Leases with initial term of twelve months or less are not recorded on the consolidated balance sheets. The components of lease costs are as follows: SCHEDULE OF LEASE COSTS 2023 2022 For the Nine Months Ended September 30, 2023 2022 Finance lease costs Amortization of right-of-use assets $ 15,215 $ 26,825 Interest on lease liabilities 98 370 Total finance lease costs 15,313 27,195 Operating lease costs 286,934 244,688 Total lease costs $ 302,247 $ 271,883 F- 14 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The following table presents supplemental information related to the Company’s leases: SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO THE COMPANY’S LEASES 2023 2022 For the Nine Months Ended September 30, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 98 $ 370 Operating cash flows from operating leases 257,277 243,108 Financing cash flows from finance leases 16,537 29,051 Finance lease right-of-use asset obtained in exchange for finance lease liability 93,117 - Operating lease right-of-use asset obtained in exchange for operating lease liability 317,040 - Remeasurement of operating lease liability and right-of-use asset due to lease modification 12,579 - Weighted average remaining lease term (years) Finance leases 5.0 1.1 Operating leases 7.7 9.4 Weighted average discount rate (per annum) Finance leases 1.32 % 1.32 % Operating leases 1.33 % 1.32 % As of September 30, 2023, the future maturity of lease liabilities is as follows: SCHEDULE OF FINANCE LEASE AND OPERATING LEASE FUTURE MATURITY OF LEASE LIABILITIES Year Ended December 31, Finance Lease Operating Lease Remaining of 2023 $ 4,649 $ 101,255 2024 17,844 388,730 2025 17,593 383,300 2026 17,593 321,614 2027 17,593 277,553 Thereafter 13,195 1,142,795 Total lease payments 88,467 2,615,247 Less: imputed interest ( 2,856 ) ( 136,089 ) Total lease liabilities 85,611 2,479,158 Less: current portion ( 17,076 ) ( 365,241 ) Non-current lease liabilities $ 68,535 $ 2,113,917 Pursuant to the operating lease agreements, the Company made security deposits to the lessors. The security deposits amounted to $ 338,220 and $ 244,395 as of September 30, 2023 and December 31, 2022, respectively. F- 15 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 — FACTORING LIABILITY Sigmaways, the newly acquired subsidiary of the Company, entered into a Factoring and Security Agreement (the “Factoring Agreement”) with The Southern Bank Company, an unrelated factor (the “Factor”), in 2017, for the purpose of factoring certain accounts receivable. Under the terms of the Factoring Agreement, the Company may offer for sale, and the Factor may purchase in its sole discretion, certain accounts receivable of the Company (the “Purchased Receivable”). The Factoring Agreement provided for a maximum of $ 850,000 in Purchased Receivable. Selected accounts receivable is submitted to the Factor, and the Company receives 90 % of the face value of the accounts receivable by wire transfer. Upon payment by the customers, the remainder of the amount due is received from the Factor after deducting certain fees. The Factoring Agreement specifies that eligible accounts receivable is factored with recourse. Under the terms of the recourse provision, the Company is required to reimburse the Factor, upon demand, for Purchased Receivable that is not paid on time by the customers. The performance of all obligations and payments to the Factor is personally guaranteed by Prakash Sadasivam, CEO of Sigmaways and Chief Strategy Officer (“CSO”) of the Company, and secured by all Sigmaways’ now owned and hereafter assets and any sums maintained by the Factor that are identified as payable to the Company. The Factoring Agreement has an initial term of twelve months and automatically renews for successive twelve-month renewal periods unless terminated pursuant to the terms of the Factoring Agreement. The Company may terminate the Factoring Agreement with sixty days’ written notice to the Factor and is subject to certain early termination fee. The Factoring Agreement contained covenants that are customary for accounts receivable-based factoring agreements and also contained provisions relating to events of default that are customary for agreements of this type. As of September 30, 2023, there was $ 217,250 borrowed and outstanding under the Factoring Agreement. There are various fees charged by the Factor, including initial discount purchase fee, factoring fee and interest expense. During the nine months ended September 30, 2023, the Company recorded $ 54,790 in interest expense related to the Factoring Agreement. NOTE 11 — INSURANCE PREMIUM FINANCING In January 2023, the Company entered into an insurance premium financing agreement with BankDirect Capital Finance for $ 389,035 at an annual interest rate of 16.04 % for ten months from February 1, 2023, payable in ten monthly installments of principal and interest. In February 2022, the Company entered into an insurance premium financing agreement with BankDirect Capital Finance for $ 388,538 at an annual interest rate of 12.80 % for nine months from February 1, 2022, payable in nine monthly installments of principal and interest. As of September 30, 2023 and December 31, 2022, the balance of the insurance premium financing was $ 122,279 and nil , respectively. During the nine months ended September 30, 2023 and 2022, the interest incurred was $ 25,988 and $ 19,859 , respectively. F- 16 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 — LONG-TERM DEBTS The Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions, which consist of the following: SCHEDULE OF LONG-TERM DEBTS Name of Financial Institutions Original Amount Borrowed Loan Duration Annual Interest Rate Balance as of September 30, 2023 Balance as of December 31, 2022 Bond payable Corporate bond issued through Resona Bank, Limited JPY 100,000,000 (a)(c) 1/10/2019 – 1/10/2024 0.430 % $ 66,854 $ 228,956 Loans with banks and other financial institutions Resona Bank, Limited JPY 50,000,000 (a)(b) 12/29/2017 – 12/29/2024 0.675 % 63,779 113,677 Resona Bank, Limited JPY 10,000,000 (a)(b) 9/30/2020 – 9/30/2027 0.000 % 39,009 52,705 Resona Bank, Limited JPY 40,000,000 (a)(b) 9/30/2020 – 9/30/2027 0.000 % 156,037 210,822 Resona Bank, Limited JPY 20,000,000 (a)(b) 11/13/2020 – 10/31/2027 1.600 % 79,610 107,227 Sumitomo Mitsui Banking Corporation JPY 100,000,000 (a) 12/28/2018 – 12/28/2023 1.475 % 44,444 165,237 Sumitomo Mitsui Banking Corporation JPY 10,000,000 (a)(b) 12/30/2019 – 12/30/2026 1.975 % 31,849 44,532 The Shoko Chukin Bank, Ltd. JPY 30,000,000 9/28/2018 – 8/31/2023 1.200 % - 34,343 The Shoko Chukin Bank, Ltd. JPY 50,000,000 7/27/2020 – 6/30/2027 1.290 % 185,854 253,377 The Shoko Chukin Bank, Ltd. JPY 30,000,000 7/25/2023 – 6/30/2028 Tokyo Interbank Offered Rate + 1.950 % 193,742 - Japan Finance Corporation JPY 80,000,000 11/17/2020 – 11/30/2027 0.210 % 329,456 442,036 Higashi-Nippon Bank JPY 30,000,000 (a) 3/31/2022 – 3/31/2025 1.400 % 105,094 177,669 First Home Bank $ 350,000 (d) 4/18/2019 – 4/18/2029 Wall Street Journal U.S. Prime Rate + 2.750 % 237,336 - U.S. Small Business Administration $ 350,000 (d) 5/30/2020 – 5/30/2050 3.750 % 350,000 - Aggregate outstanding principal balances 1,883,064 1,830,581 Less: unamortized debt issuance costs ( 5,794 ) ( 8,969 ) Less: current portion ( 525,440 ) ( 697,877 ) Non-current portion $ 1,351,830 $ 1,123,735 (a) These debts are guaranteed by Sumitaka Yamamoto, the Company’s CEO and major shareholder. (b) These debts are guaranteed by Tokyo Credit Guarantee Association, and the Company has paid guarantee expenses for these debts. (c) The bond is guaranteed by Resona Bank, Limited. (d) These debts are guaranteed by Prakash Sadasivam, CEO of Sigmaways and CSO of the Company, and secured by all assets of Sigmaways. Interest expense for long-term debts was $ 44,295 and $ 19,502 for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, future minimum loan payments are as follows: SCHEDULE OF FUTURE MINIMUM LOAN PAYMENTS Loan Year Ended December 31, Payment Remaining of 2023 $ 146,763 2024 462,065 2025 305,291 2026 293,302 2027 262,017 Thereafter 413,626 Total $ 1,883,064 F- 17 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 — INCOME TAXES United States HeartCore USA, Sigmaways and HeartCore Financial, incorporated in the United States, are subject to federal income tax at 21 % statutory tax rate with respect to the profit generated from the United States. Netherlands Sigmaways B.V. is a company incorporated in Amsterdam in Netherlands in November 2019. The first EUR200,000 of taxable income will be taxed at 19% and the remaining taxable income will be taxed at statutory tax rate of 25.80% . Canada Sigmaways Technologies is a company incorporated in British Columbia in Canada in August 2020. It is subject to income tax on income arising in, or derived from, the tax jurisdiction in British Columbia it operates. The basic federal rate of Part I tax is 38 % of taxable income, 28 % after federal tax abatement. After the general tax reduction, the net federal tax rate is 15 %. The provincial and territorial lower and higher tax rates in British Columbia are 2 % and 12 %, respectively. Japan The Company conducts its major businesses in Japan and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the local tax authority. Income taxes in Japan applicable to the Company are imposed by the national, prefectural, and municipal governments, and in the aggregate resulted in an effective statutory tax rate of approximately 34.59 % for the nine months ended September 30, 2023 and 2022. For the nine months ended September 30, 2023 and 2022, the Company’s income tax expense (benefit) are as follows: SCHEDULE OF INCOME TAX EXPENSES 2023 2022 For the Nine Months Ended September 30, 2023 2022 Current $ 168,549 $ ( 2,108 ) Deferred ( 109,690 ) ( 8,798 ) Income tax expense (benefit) $ 58,859 $ ( 10,906 ) The effective tax rate was ( 3.47 ) % and 0.21 % for the nine months ended September 30, 2023 and 2022, respectively. F- 18 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 – STOCK-BASED COMPENSATION Options In May 2016, the Company granted 507 units stock options to its employees each to acquire one share of common shares of HeartCore Japan (an equivalent of approximately 1,494 shares of common shares of HeartCore USA) at JPY 10 (approximately $ 0.09 ) each. All options are exercisable upon issuance with a repurchase provision before the completion of the Company’s initial public offering, which serves as a vesting condition. All employees that were granted these stock options had early exercised their stock options in 2016 prior to the vesting of the related stock options. As of November 3, 2021, 324 units of the options were forfeited, and the CEO of the Company has repurchased and held the shares issued related to the early exercise of such stock options on behalf of the Company. On November 3, 2021, the Company redeemed 484,056 shares (equivalent to 324 shares of common shares of HeartCore Japan) from the CEO of the Company. The consideration received for the remaining early exercised options was recorded by the Company as a share repurchase liability included in other current liabilities in the consolidated balance sheet with JPY 1,830 (approximately $ 16 ) as of December 31, 2021. The shares issued related to the early exercise of the above-mentioned stock options were not considered outstanding as of December 31, 2021. On February 14, 2022, the 183 units of stock options were vested upon the completion of the Company’s initial public offering and the Company recognized stock-based compensation of $ 11,005 during the nine months ended September 30, 2022. In the same period, the share repurchase liability of $ 16 was settled by issuance of 273,489 shares of common shares (equivalent to 183 shares of common shares of HeartCore Japan) from exercise of stock options. The following table summarizes the Company’s stock option activity for the stock options issued in 2016 for the nine months ended September 30, 2022: SCHEDULE OF UNVESTED STOCK OPTION Number of Stock Options Issued and unvested as of January 1, 2022 183 Vested and exercised 183 Issued and unvested as of September 30, 2022 - On August 6, 2021, the Board of Directors and stockholders of the Company approved a 2021 Equity Incentive Plan (the “2021 Plan”), under which 2,400,000 shares of common shares are authorized for issuance. On December 25, 2021, the Company awarded options to purchase 1,534,500 shares of common shares pursuant to the 2021 Plan at an exercise price of $ 2.50 per share to various officers, directors, employees and consultants of the Company. The options vest on each annual anniversary of the date of issuance, in an amount equal to 25 % of the applicable shares of common shares, with the expiration date on December 25, 2031 . On August 2, 2022, the Company awarded options to purchase 2,000 shares of common shares pursuant to the 2021 Plan at an exercise price of $ 2.94 per share to an employee of the Company. The options vest on each annual anniversary of the date of issuance, in an amount equal to 25 % of the applicable shares of common shares, with the expiration date on August 2, 2032 . On August 9, 2022, the Company awarded options to purchase 14,500 shares of common shares at an exercise price of $ 2.48 per share to three prior employees of the Company. The options are fully vested and exercisable on the grant date, with the expiration date on August 9, 2026 . On February 3, 2023, the Company awarded options to purchase 100,000 shares of common shares pursuant to the 2021 Plan at an exercise price of $ 1.17 per share to an employee of the Company. The options vest 50 % on the grant date and February 1, 2024, respectively, with the expiration date on February 3, 2033 . On August 25, 2023, the Company awarded options to purchase 2,000 shares of common shares pursuant to the 2021 Plan at an exercise price of $ 1.10 per share to an employee of the Company. The options vest on each annual anniversary of the date of issuance, in an amount equal to 25 % of the applicable shares of common shares, with the expiration date on August 25, 2033 . On August 1, 2023, the Board of Directors and stockholders of the Company approved a 2023 Equity Incentive Plan (the “2023 Plan”), under which 2,000,000 shares of common shares are authorized for issuance. No shares were issued pursuant to the 2023 Plan as of September 30, 2023. F- 19 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the stock options activity and related information for the nine months ended September 30, 2023 and 2022: SCHEDULE OF STOCK OPTION ACTIVITY Number of Options Weighted Average Exercise Price Weighted Average Remaining Term (Years) Intrinsic Value As of January 1, 2022 1,534,500 $ 2.50 9.99 $ - Granted 16,500 2.54 4.59 - Exercised -         - - - Forfeited ( 39,500 ) 2.50 - - As of September 30, 2022 1,511,500 $ 2.50 9.19 $ - As of January 1, 2023 1,466,500 $ 2.50 8.94 $ - Granted 102,000 1.17 9.36 - Exercised - -   - - Forfeited ( 9,500 ) 2.50 - - As of September 30, 2023 1,559,000 $ 2.41 8.27 $ - Vested and exercisable as of September 30, 2023 425,125 $ 2.34 8.19 $ - The Company calculated the fair value of options granted in the nine months ended September 30, 2023 using the Black-Scholes model. Significant assumptions used in the valuation include expected volatility, risk-free interest rate, dividend yield and expected exercise term. For the three and nine months ended September 30, 2023, the Company recognized stock-based compensation related to options of $ 144,306 and $ 479,122 , respectively. For the three and nine months ended September 30, 2022, the Company recognized stock-based compensation related to options of $ 280,883 and $ 858,633 , respectively. The outstanding unamortized stock-based compensation related to options was $ 578,075 (which will be recognized through August 2027) as of September 30, 2023. Restricted Stock Units (“RSUs”) On February 9, 2022, the Company entered into executive employment agreements with five executives and granted 85,820 RSUs pursuant to the 2021 Plan. The RSUs vest on each annual anniversary of the date of the employment agreement, in an amount equal to 25 % of the applicable shares of common shares. The fair value of the RSUs at grant date was $ 424,809 . On February 25, 2022, the Company entered into a service agreement with a marketing company to purchase 6-month marketing services and granted 83,333 RSUs. The RSUs were issued and vested on May 15, 2022. The fair value of the RSUs at grant date was $ 224,999 . On March 22, 2023, the Company entered into agreements with employees and service providers of Sigmaways and granted 671,350 RSUs pursuant to the 2021 Plan. The RSUs were fully vested upon issuance. The fair value of the RSUs at grant date was $ 691,491 . The following table summarizes the RSUs activity for the nine months ended September 30, 2023 and 2022: SCHEDULE OF RESTRICTED STOCK UNITS Number of RSUs Weighted Average Grant Date Fair Value per Share Unvested as of January 1, 2022 - $ - Granted 169,153 3.84 Vested ( 83,333 ) 2.70 Forfeited - - Unvested as of September 30, 2022 85,820 $ 4.95 Unvested as of January 1, 2023 85,820 $ 4.95 Granted 671,350 1.03 Vested ( 692,805 ) 1.15 Forfeited - - Unvested as of September 30, 2023 64,365 $ 4.95 For the three and nine months ended September 30, 2023, the Company recognized stock-based compensation related to RSUs of $ 29,000 and $ 788,577 , respectively. For the three and nine months ended September 30, 2022, the Company recognized stock-based compensation related to RSUs of $ 55,768 and $ 366,844 , respectively. The outstanding unamortized stock-based compensation related to RSUs was $ 130,110 (which will be recognized through February 2026) as of September 30, 2023. F- 20 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 – SHAREHOLDERS’ EQUITY The Company was authorized to issue 200,000,000 shares of common shares, par value of $ 0.0001 per share, and 20,000,000 shares of preferred shares, par value of $ 0.0001 per share. During the period from January 1, 2022 through January 13, 2022, the Company issued 96,000 shares of common shares at a purchase price of $ 2.50 per share for aggregate net proceeds of $ 220,572 in a private placement, including 30,000 shares of common shares issued to the officers of the Company. On February 14, 2022, the Company completed its initial public offering on the NASDAQ Capital Market under the symbol of “HTCR”. The Company offered 3,000,000 common shares at $ 5.00 per share. Net proceeds raised by the Company from the initial public offering amounted to $ 13,724,167 after deducting underwriting discounts and commissions and other offering expenses. The Company has deferred costs of $ 300,460 directly attributed to the offering, among which $ 178,847 offering costs were paid and deferred as of December 31, 2021. Those costs were charged against the proceeds from the offering. On February 14, 2022, 273,489 shares of common shares were issued from exercise of stock options by settling share repurchase liability of $ 16 (also see NOTE 14). On May 15, 2022, 83,333 shares of restricted shares were issued to a marketing company as compensation of services received (also see NOTE 14). Share Repurchase Program On June 1, 2022, the Board of Directors approved a share repurchase program (“2022 Share Repurchase Program”), pursuant to which the Company is authorized to repurchase up to $ 3.5 million of its outstanding common shares. The timing and amount of repurchases under the program are determined by the Company’s management based on its evaluation of market conditions and other factors. This program has no set termination date and may be suspended or discontinued by at any time. During the period from June 1, 2022 through September 30, 2022, the Company repurchased 1,349,390 shares of common shares at an average price of $ 2.59 per share totaling approximately $ 3.5 million (including commissions) under the 2022 Share Repurchase Program. As of September 30, 2022, the Company has used up the entire balance authorized under the 2022 Share Repurchase Program. On February 1, 2023, 2,500,000 shares of common shares were issued for the acquisition of 51 % of the outstanding shares of Sigmaways and its subsidiaries with fair value of $ 3,150,000 (also see NOTE 17). As of September 30, 2023 and December 31, 2022, there were 20,842,690 and 17,649,886 shares of common shares issued and outstanding, respectively. No preferred shares were issued and outstanding as of September 30, 2023 and December 31, 2022. NOTE 16 – NET LOSS PER SHARE Basic net loss per share is calculated on the basis of weighted average outstanding common shares. Diluted net loss per share is computed on the basis of basic weighted average outstanding common shares adjusted for the dilutive effect of stock options, RSUs and other dilutive securities. Common shares equivalents are determined by applying the treasury stock method to the assumed conversion of share repurchase liability to common shares related to the early exercised stock options and unvested RSUs, and are not included in the calculation of diluted loss per share if their effect would be anti-dilutive. The computation of basic and diluted net loss per share for the three and nine months ended September 30, 2023 and 2022 is as follows: SCHEDULE OF COMPUTATION OF BASIC AND DILUTED EARNINGS (LOSS) PER SHARE For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 Net loss per share - basic and diluted: Numerator: Net loss attributable to HeartCore Enterprises, Inc. common shareholders $ ( 2,307,220 ) $ ( 1,970,934 ) $ ( 1,336,731 ) $ ( 5,253,026 ) Denominator: Weighted average number of common shares outstanding used in calculating net loss per share 20,842,690 17,835,027 20,257,020 18,014,483 Net loss per share - basic and diluted $ ( 0.11 ) $ ( 0.11 ) $ ( 0.07 ) $ ( 0.29 ) For the three and nine months ended September 30, 2023 and 2022, the weighted average common shares outstanding are the same for basic and diluted net loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect. F- 21 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 – BUSINESS COMBINATION On September 6, 2022, HeartCore USA entered into a share exchange and purchase agreement (“Sigmaways Agreement”) to acquire 51 % of the outstanding shares of Sigmaways, Inc. (“Sigmaways”), a company incorporated under the laws of the State of California, and its subsidiaries. The Sigmaways Agreement was further amended on December 23, 2022 and February 1, 2023, respectively, and the transaction was closed on February 1, 2023. Sigmaways and its subsidiaries are primarily engaged in the business of developing and sales of software in the United States. The Company aimed to expand the business of software development and sales in the United States through this acquisition. The purchase consideration was $ 4,150,000 , consisted of $ 1,000,000 in cash and 2,500,000 shares of common shares of the Company with fair value of $ 3,150,000 at the closing date. The total purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities and non-controlling interest based on their estimated fair values as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. Amounts recorded in the business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available. The purchase price was allocated on the acquisition date as follows: SCHEDULE OF BUSINESS PURCHASE PRICE ALLOCATION Amount Current assets $ 2,066,683 Acquired intangible asset 5,100,000 Non-current assets 47,979 Current liabilities ( 1,146,900 ) Deferred tax liabilities ( 1,428,000 ) Non-current liabilities ( 576,203 ) Goodwill 3,276,441 Non-controlling interest ( 3,190,000 ) Total purchase consideration $ 4,150,000 The results of operations, financial position and cash flows of Sigmaways and its subsidiaries have been included in the Company’s unaudited consolidated financial statements since the date of acquisition. Sigmaways and its subsidiaries contributed revenues and net loss of $ 6,332,479 and $ 855,532 , respectively, to the Company from February 1, 2023 to September 30, 2023. Pro forma results of operations for the business combination have not been presented because they are not material to the unaudited consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2023 and 2022. The Company’s policy is to perform its annual impairment testing on goodwill for its reporting unit on December 31 of each fiscal year or more frequently if events or changes in circumstances indicate that an impairment may exist. The Company did not recognize any impairment loss on goodwill during the nine months ended September 30, 2023. NOTE 18 - SUBSEQUENT EVENTS On October 4, 2023, the Company obtained a five-year term loan in the amount of JPY 10,000,000 (approximately $ 73,000 ) from the Sumitomo Mitsui Banking Corporation, with an interest rate of 0.2 % per annum starting in November 2026. The loan is co-guaranteed by Sumitaka Yamamoto, the Company’s CEO and major shareholder, and Tokyo Credit Guarantee Association. On October 4, 2023, the Company obtained a five-year term loan in the amount of JPY 10,000,000 (approximately $ 73,000 ) from the Sumitomo Mitsui Banking Corporation, with an interest rate of 0.6 % per annum. The loan is co-guaranteed by Sumitaka Yamamoto, the Company’s CEO and major shareholder, and Tokyo Credit Guarantee Association. On October 5, 2023, the Company obtained a five-year term loan in the amount of JPY 30,000,000 (approximately $ 219,000 ) from the Higashi-Nippon Bank, with an interest rate of 1.45 % per annum. The loan is co-guaranteed by Sumitaka Yamamoto, the Company’s CEO and major shareholder, and Tokyo Credit Guarantee Association. F- 22