HeartCore Enterprises, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provide a safe harbor for forward-looking statements made by or on behalf of HeartCore Enterprises, Inc. (the “Company”). The Company and its representatives may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange Commission (“SEC”) and in our reports and presentations to stockholders or potential stockholders. In some cases, forward-looking statements can be identified by words such as “believe,” “expect,” “anticipate,” “plan,” “potential,” “continue” or similar expressions. Such forward-looking statements include risks and uncertainties and there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors, risks and uncertainties can be found in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as the same may be updated from time to time, including in Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, it is not possible to foresee or identify all factors that could have a material effect on the future financial performance of the Company. The forward-looking statements in this report are made on the basis of management’s assumptions and analyses, as of the time the statements are made, in light of their experience and perception of historical conditions, expected future developments and other factors believed to be appropriate under the circumstances. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q and the information incorporated by reference in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based. Business Overview We are a leading software development company based in Tokyo, Japan. We provide software through two business units. The first business unit includes a customer experience management business that has been in existence for 12 years. Our customer experience management platform (the “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 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. On September 6, 2022, the Company entered into a share exchange and purchase agreement (“Sigmaways Agreement”) to acquire 51% of the outstanding shares of Sigmaways, Inc. (“Sigmaways”), a company incorporated under the laws of the State of California and engaged in the business of developing and sales of software in the United States. The acquisition closed on February 1, 2023. During 2022, we started the GO IPO consulting business, which supports Japanese companies seeking to list on Nasdaq and NYSE in the United States. As of November 13, 2023, we have entered into consulting agreements with 11 companies to assist them in their IPO process, whereby we are entitled to receive from each company a consulting fee ranging from $350,000 to $900,000 and warrants or Japanese 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. The revenue from the GO IPO business helped to offset the decline in sales in the CX and DX divisions. In the first quarter of 2023, we formed HeartCore Financial, Inc. and HeartCore Capital Advisors, Inc. as a part of our Go IPO consulting business. 3 We have made significant investments in our sales and marketing efforts globally. As of September 30, 2023, our sales and marketing organization was comprised of 16 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 September 30, 2023, our combined business units (customer experience management business unit and digital transformation business unit) had 937 total customers in Japan. Recent Developments GATES GROUP Inc. Service Agreement On October 2, 2023 (the “GATES Effective Date”), the Company entered into a Service Agreement (the “GATES Agreement”) by and between the Company and GATES GROUP Inc., a Japanese corporation (“GATES”). Pursuant to the terms of the GATES Agreement, GATES engaged the Company, on an exclusive basis, to render the following services for GATES (collectively, the “GATES Services”): (i) Phase 1: ● Suggesting to hire human resources, if the Company deems necessary; ● Suggesting to convert financial statements from Japanese tax law basis to Japanese generally accepted accounting principles, if the Company deems necessary; ● Suggesting to remove problematic accounting account, if the Company deems necessary; ● Suggesting to translate accounting documents (i.e., financial statement, general ledger, journal entry), if the Company deems necessary; ● Suggesting to develop growth strategy after public listing; ● Suggesting to consider the listing structure, if the Company deems necessary. (ii) Phase 2: ● Suggesting for the selection and negotiation of terms for a law firm, underwriter and auditing firm for GATES, if the Company deems necessary; ● Suggesting for the preparation of documentation for internal controls required for an initial public offering or de-SPAC transaction by GATES; ● Suggesting for converting GATES’ financial statement based on United States generally accounting principles (US GAAP), if the Company deems necessary; ● Translation of documents into English which the Company agrees to translate; ● Attending and, if requested by GATES and the Company deems necessary, leading, GATES’ meetings regarding the initial public offering; ● Suggesting GATES with support services related to GATES’ Nasdaq listing; ● Suggesting the preparation of Form S-1 or Form F-1, Form S-4 or Form F-4 filings, if the Company deems necessary; ● Support for investor relations activities, if the Company deems necessary; ● Suggesting for preparing of investor presentation/deck and executive summary of GATES’ operation, if the Company deems necessary; and (iii) Phase 3: ● Support for investor relations activities, if the Company deems necessary. In providing the GATES Services, the Company will not render legal advice or perform accounting services, and will not act as an investment advisor or broker/dealer. Pursuant to the terms of the GATES Agreement, the parties agreed that the Company will not provide the following services, among others: negotiation of the sale of GATES’ securities; participation in discussions between GATES and potential investors; assisting in structuring any transactions involving the sale of GATES’ securities; pre-screening of potential investors; due diligence activities; nor providing advice relating to valuation of or financial advisability of any investments in GATES. 4 In exchange for providing the GATES Services for Phase 1 and Phase 2, GATES will pay to the Company $600,000 (the “Services Fee”) as follows: ● 10% of the Services Fee on the GATES Effective Date; ● 50% of the Services Fee four months after the GATES Effective Date; ● 20% of the Services Fee six months after the GATES Effective Date; and ● 20% of the Services Fee eight months after the GATES Effective Date. For Phase 3, in return for GATES’ Nasdaq listing, GATES will issue and the Company will be entitled to receive, a warrant to acquire a number of shares of capital stock of the entity designated by the Company from GATES and its affiliated company becoming a publicly traded company. The total amount of such shares will be an amount equal to 3% of the fully diluted share capital of GATES as of the GATES Effective Date (subject to adjustment as set forth in the GATES Agreement). The term of the GATES Agreement will continue until the earlier of (i) three years from the GATES Effective Date; and (ii) two years later from the date on which the stock of GATES or any successor or resulting entity in the contemplated initial public offering of GATES’ stock in the U.S. or a merger or other similar transaction with a special purpose acquisition company, or other transaction pursuant to which GATES or its affiliated company becomes a public traded company in the U.S. The term of the GATES Agreement may be renewed upon the mutual written agreement of the parties to the GATES Agreement. The GATES Agreement may be terminated by either party upon one month’s written notice to the other party, with the payment set forth in the GATES Agreement. However, if either party engages in anti-social force activities, the other party will terminate the GATES Agreement without written notice immediately, and the other party will pay the compensation as set forth in the GATES Agreement. GATES Warrant On October 2, 2023, GATES issued to the Company a common stock purchase warrant (the “GATES Warrant”) to purchase 16 shares of GATES capital stock, subject to adjustment as set forth in the GATES Warrant. Pursuant to the terms of the GATES Warrant, the Company may, at any time (i) on or after the earlier of the date that either (a) GATES completes its first listing on any tier of the Nasdaq Stock Market, the new York Stock Exchange or the NYSE American; (b) GATES consummates a merger or other transaction with a special purpose acquisition company (“SPAC”) wherein GATES becomes a subsidiary of the SPAC; or (c) GATES consummates any other GATES Fundamental Transaction (as defined in the GATES Warrant) (the “GATES Trigger Date”); and (ii) on or prior to the close of business on the tenth anniversary of the GATES Trigger Date, exercise the GATES Warrant to purchase 16 shares of GATES’ capital stock (subject to adjustment as provided in the GATES Warrant), which represents 3% of Gates’ issued and outstanding common stock as of the issuance date of the GATES Warrant, for an exercise price per share of $0.01, subject to adjustment as provided in the GATES Warrant. The number of shares for which the GATES Warrant will be exercisable will be automatically adjusted on the GATES Trigger Date to be 3% of the fully diluted number and class of shares of capital stock of GATES as of the GATES Trigger Date, following completion of the transactions which caused the GATES Trigger Date to be achieved. The GATES Warrant contains a 9.99% equity blocker. Termination of May 2023 ATM Offering On October 12, 2023, the Company delivered written notice to Sutter Securities, Inc. (“Sutter”) that the Company was terminating the Common Stock Sales Agreement, dated May 29, 2023, by and between the Company and Sutter (the “Sales Agreement”), in accordance with its terms, which termination will be effective on October 22, 2023. Pursuant to the Sales Agreement, the Company filed a prospectus supplement on May 31, 2023 (the “May 2023 ATM Prospectus Supplement”) pursuant to which it may offer and sell, from time to time, shares of its common stock having an aggregate offering price of up to $4,205,067 through Sutter as the sales agent (the “May 2023 ATM Offering”). The Company did not sell any shares of common stock under the May 2023 Prospectus Supplement. The Company terminated the May 2023 ATM Prospectus Supplement and the May 2023 ATM Offering immediately following October 22, 2023, the effective date of the termination of the Sales Agreement. 5 October 2023 ATM Offering On October 23, 2023, the Company entered into the At The Market Offering Agreement (the “October 2023 ATM Agreement”) by and between the Company and H.C. Wainwright & Co., LLC (the “Manager”), as sales agent. Pursuant to the prospectus supplement and accompanying base prospectus relating to the offering of the Shares (as hereinafter defined), and under terms of the October 2023 ATM Agreement and the prospectus supplement and the accompanying base prospectus, filed on October 23, 2023, the Company may, from time to time, in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act issue and sell through or to the Manager, up to a maximum aggregate amount of $1,988,229 of shares of the Company’s common stock (the “Shares”). The issuance and sale of the Shares to or through the Manager from time to time will be effectuated pursuant to the Company’s effective shelf registration statement on Form S-3, as amended (File No. 333-270503), which was declared effective by the SEC on April 12, 2023 (the “Registration Statement”), and the related prospectus supplement and accompanying base prospectus relating to the offering of the Shares. Pursuant to the terms of the October 2023 ATM Agreement, the Company may issue and sell the Shares from time to time through the Manager, acting as sales agent or principal, and the Manager agrees to use its commercially reasonable efforts to sell, the Shares on the following terms: (i) the Shares will be sold on a daily basis or otherwise as agreed to by the Company and the Manager on any day that (a) is a day on which the Nasdaq Capital Market is open for trading, (b) the Company has instructed the Manager to make such sales, and (c) the Company has satisfied its obligations as set forth in the October 2023 ATM Agreement. The Company will designate the maximum amount of the Shares to be sold by the Manager daily, if any (subject to the limitations set forth in the October 2023 ATM Agreement) and the minimum price per Share at which such Shares, if any, may be sold. The Company has no obligation to sell, and the Manager is not obligated to buy or sell, any of the Shares under the October 2023 ATM Agreement and may at any time suspend offers under the October 2023 ATM Agreement or terminate the October 2023 ATM Agreement. The offering of the Shares pursuant to the prospectus supplement and the accompanying base prospectus will terminate upon the earlier of (i) the sale of the Shares pursuant to such prospectus supplement and accompanying base prospectus having an aggregate sales price of $1,988,229, and (ii) the termination by the Company or the Manager of the October 2023 ATM Agreement pursuant to its terms. The Manager may sell Shares by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 under the Securities Act. The Manager may also sell Shares in privately negotiated transactions, with the Company’s prior written approval, if so provided in the “Plan of Distribution” section of the prospectus supplement or a supplement thereto or in a new prospectus supplement disclosing the terms of such privately negotiated transaction. Unless otherwise agreed between the Company and the Manager, settlement for sales of the Shares will occur on the second trading day (and on and after May 28, 2024, on the first trading day or any such shorter settlement cycle as may be in effect under Rule 15c6-1 promulgated under the Exchange Act, from time to time) following the date on which any sales are made. Sales of the Shares will be settled through the facilities of The Depository Trust Company or by such other means as the Company and the Manager may agree. There is no arrangement for funds to be received in an escrow, trust or similar arrangement. The Company will pay the Manager a cash commission of 4.0% of the gross sales price of the Shares sold by the Manager pursuant to the October 2023 ATM Agreement; provided, however, that such compensation will not apply when the Manager acts as principal, in which case the Company may sell Shares to the Manager as principal at a price agreed upon at the relevant applicable time and pursuant to a separate agreement the Company will enter into with the Manager setting forth the applicable terms. Pursuant to the terms of the October 2023 ATM Agreement, the Company also agreed to reimburse the Manager for reasonable fees and expenses of the Manager’s counsel, not to exceed $75,000, and additional amounts for due diligence update sessions conducted in connection with each such date the Company files its Quarterly Reports on Form 10-Q or its Annual Report on Form 10-K, as applicable. 6 The Company has the right, by giving written notice as specified in the October 2023 ATM Agreement, to terminate the October 2023 ATM Agreement in its sole discretion at any time upon 10 business days’ prior written notice. The Manager has the right, by giving written notice as specified in the October 2023 ATM Agreement, to terminate the provisions of the October 2023 ATM Agreement relating to the solicitation of offers to purchase the Shares in its sole discretion at any time. The October 2023 ATM Agreement contains certain covenants, representations and warranties customary for an agreement of this type. The Company agreed to provide indemnification and contribution to the Manager against certain liabilities, including liabilities under the Securities Act. Nasdaq Notice Regarding Minimum Bid Price Requirement On October 26, 2023, the Company received written notice (the “Bid Price Notice”) from the Nasdaq Listing Qualification Department (the “Nasdaq Staff”) indicating that the Company is not in compliance with the $1.00 minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”) for continued listing on the Nasdaq Capital Market. The notification of noncompliance has no immediate effect on the listing or trading of the Company’s common stock on the Nasdaq Capital Market under the symbol “HTCR,” and the Company is currently monitoring the closing bid price of its common stock and evaluating its alternatives, if appropriate, to resolve the deficiency and regain compliance with this rule. The Nasdaq Listing Rules require listed securities to maintain a minimum bid price of $1.00 per share and, based upon the closing bid price for the last 30 consecutive business days, the Company no longer meets this requirement. The Bid Price Notice indicated that the Company will be provided 180 calendar days, or until April 23, 2024, in which to regain compliance. If at any time during this period the closing bid price of the Company’s common stock is at least $1.00 per share for a minimum of 10 consecutive business days, the Nasdaq Staff will provide the Company with written confirmation of compliance and the matter will be closed. Alternatively, if the Company fails to regain compliance with Rule 5550(a)(2) prior to the expiration of the 180 calendar day period, but meets the continued listing requirement for market value of publicly held shares and all of the other applicable standards for initial listing on the Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement, and provides written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary, then the Company may be granted an additional 180 calendar days to regain compliance with Rule 5550(a)(2). There can be no assurance that the Company will be able to regain compliance with the Minimum Bid Price Requirement, even if it maintains compliance with the other listing requirements. The Company is considering actions that it may take in response to the Bid Price Notice in order to regain compliance with the continued listing requirements, but no decisions regarding a response have been made at this time. Financial Overview For the three months ended September 30, 2023 and 2022, we generated revenues of $4,688,908 and $1,872,476, respectively, and reported net loss of $2,541,133 and $1,970,934, respectively. For the nine months ended September 30, 2023 and 2022, we generated revenues of $18,518,431 and $6,818,774, respectively, and reported net loss of $1,755,942 and $5,253,026, respectively, and cash flows used in operating activities of $2,457,661 and $4,206,370, respectively. As of September 30, 2023, we had an accumulated deficit of $11,910,310. 7 Results of Operations Comparison of Results of Operations for the Three Months Ended September 30, 2023 and 2022 The following table summarizes our operating results as reflected in our unaudited statements of operations for the three months ended September 30, 2023 and 2022, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods. For the Three Months Ended September 30, 2023 2022 Variance % of % of % of Amount Revenues Amount Revenues Amount Revenues Revenues $ 4,688,908 100.0 % $ 1,872,476 100.0 % $ 2,816,432 150.4 % Cost of Revenues 3,860,241 82.3 % 1,543,256 82.4 % 2,316,985 150.1 % Gross Profit 828,667 17.7 % 329,220 17.6 % 499,447 151.7 % Operating expenses: Selling expenses 274,043 5.9 % 771,496 41.2 % (497,453 ) -64.5 % General and administrative expenses 2,172,298 46.3 % 1,513,028 80.8 % 659,270 43.6 % Research and development expenses 170,071 3.6 % 58,275 3.1 % 111,796 191.8 % Total operating expenses 2,616,412 55.8 % 2,342,799 125.1 % 273,613 11.7 % Loss from operations (1,787,745 ) -38.1 % (2,013,579 ) -107.5 % 225,834 -11.2 % Other income (expenses) (733,975 ) -15.7 % 23,576 1.2 % (757,551 ) -3,213.2 % Loss before income tax provision (2,521,720 ) -53.8 % (1,990,003 ) -106.3 % (531,717 ) 26.7 % Income tax expense (benefit) 19,413 0.4 % (19,069 ) -1.0 % 38,482 -201.8 % Net loss (2,541,133 ) -54.2 % (1,970,934 ) -105.3 % (570,199 ) 28.9 % Less: net loss attributable to non-controlling interest (233,913 ) -5.0 % - - (233,913 ) -100.0 % Net loss attributable to HeartCore Enterprises, Inc. $ (2,307,220 ) -49.2 % $ (1,970,934 ) 105.3 % $ (336,286 ) 17.1 % Revenues Our total revenues increased by $2,816,432, or 150.4%, to $4,688,908 for the three months ended September 30, 2023 from $1,872,476 for the three months ended September 30, 2022, mainly attributable to (i) increased revenue of $2,405,907 from customized software development and services as a result of the acquisition of Sigmaways and its subsidiaries on February 1, 2023; (ii) increased revenue of $138,290 from GO IPO consulting services, as the Company obtained more IPO consulting customers in 2023. Cost of Revenues Our total cost of revenues increased by $2,316,985, or 150.1%, to $3,860,241 for the three months ended September 30, 2023 from $1,543,256 for the three months ended September 30, 2022, in light of the increase in sales in GO IPO consulting services and customized software development and services. 8 Gross Profit Our total gross profit increased by $499,447, or 151.7%, to $828,667 for the three months ended September 30, 2023 from $329,220 for the three months ended September 30, 2022, mainly attributable to (i) the increased gross profit of $113,685 from maintenance and support services, as we terminated some subcontractors in supporting service, as part of our effect to reduce costs; (ii) the increased gross profit of $220,792 from customized software development and services as a result of acquisition of Sigmaways and its subsidiaries on February 1, 2023; (iii) the increased gross profit of $135,404 from GO IPO consulting services in light of the increase in sale. Our overall gross profit margin increased slightly by 0.1% to 17.7% for the three months ended September 30, 2023, from 17.6% for the three months ended September 30, 2022. Selling Expenses Our selling expenses decreased by $497,453, or 64.5%, to $274,043 for the three months ended September 30, 2023 from $771,496 for the three months ended September 30, 2022, primarily attributable to a decrease of $561,559 in advertising expense, as the Company spent heavily on IR and PR in the U.S. immediately after listing in Nasdaq in early 2022; offset by an increase of $80,291 in stock-based compensation for sales staff. As a percentage of revenues, our selling expenses accounted for 5.9% and 41.2% of our total revenues for the three months ended September 30, 2023 and 2022, respectively. General and Administrative Expenses Our general and administrative expenses increased by $659,720, or 43.6%, to $2,172,298 for the three months ended September 30, 2023 from $1,513,028 for the three months ended September 30, 2022, primarily attributable to (i) an increase of $663,156 in salaries and welfare due to a company-wide wage increase and additional staff employed by Sigmaways and its subsidiaries; (ii) an increase of $169,154 in depreciation and amortization expenses, and an increase of $70,952 in rent expenses, mostly due to the acquisition of Sigmaways and its subsidiaries as well as the overall business expansion; offset by (iii) a decrease of $257,475 in stock-based compensation as the Company awarded options and RSUs to employees and service providers in early 2022 when the Company finished going public. As a percentage of revenues, general and administrative expenses were 46.3% and 80.8% of our revenues for the three months ended September 30, 2023 and 2022, respectively. Research and Development Expenses Our research and development expenses increased by $111,796, or 191.8%, to $170,071 for the three months ended September 30, 2023 from $58,275 for the three months ended September 30, 2022, primarily attributable to the increase in outsourcing expenses relating to the development of new CMS management screen features in the current period. As a percentage of revenues, research and development expenses were 3.6% and 3.1% of our revenues for the three months ended September 30, 2023 and 2022, respectively. Other Income (Expenses) Our other income (expenses) primarily include changes in fair value of investments in marketable securities, changes in fair value of investments in warrants, interest income generated from bank deposits, interest expense for bank loans and bonds, other income, and other expenses. Our other income decreased by $757,551, or 3,213.2%, from other income of $23,576 in the three months ended September 30, 2022 to other expenses of $733,975 in the three months ended September 30, 2023, primarily attributable to a decrease of $271,740 in changes in fair value of investments in marketable securities and a decrease of $460,672 in changes in fair value of investments in warrants, offset by an increase of $37,445 in other income, primarily attributable to the CMS development subsidy granted by the Japanese government. Income Tax Expense (Benefit) Our income tax expense was $19,413 in the three months ended September 30, 2023, as compared to the income tax benefit of $19,069 in the three months ended September 30, 2022, as one of the newly incorporated subsidiaries generated net income before income tax in the current period while no entity generated taxable income in the prior period. 9 Net Loss As a result of the foregoing, we reported a net loss of $2,541,133 for the three months ended September 30, 2023, representing a $570,199, or 28.9%, increase from a net loss of $1,970,934 for the three months ended September 30, 2022. Net Loss Attributable to Non-controlling Interest We owned 51% equity ownership interest of Sigmaways and its subsidiaries as of September 30, 2023. Accordingly, we recorded net loss attributable to the non-controlling interest of $233,913 in the three months ended September 30, 2023. Net Loss Attributable to HeartCore Enterprises, Inc. As a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $2,307,220 for the three months ended September 30, 2023, representing a $336,286, or 17.1%, increase from $1,970,934 for the three months ended September 30, 2022. Comparison of Results of Operations for the Nine Months Ended September 30, 2023 and 2022 The following table summarizes our operating results as reflected in our unaudited statements of operations during the nine months ended September 30, 2023 and 2022, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods. For the Nine Months Ended September 30, 2023 2022 Variance % of % of % of Amount Revenues Amount Revenues Amount Revenues Revenues $ 18,518,431 100.0 % $ 6,818,774 100.0 % $ 11,699,657 171.6 % Cost of Revenues 10,548,245 57.0 % 3,935,908 57.7 % 6,612,337 168.0 % Gross Profit 7,970,186 43.0 % 2,882,866 42.3 % 5,087,320 176.5 % Operating expenses: Selling expenses 1,330,747 7.2 % 1,706,250 25.0 % (375,503 ) -22.0 % General and administrative expenses 7,305,392 39.4 % 5,832,276 85.5 % 1,473,116 25.3 % Research and development expenses 289,303 1.6 % 583,762 8.6 % (294,459 ) -50.4 % Total operating expenses 8,925,442 48.2 % 8,122,288 119.1 % 803,154 9.9 % Loss from operations (955,256 ) -5.2 % (5,239,422 ) -76.8 % 4,284,166 -81.8 % Other expenses (741,827 ) -4.0 % (24,510 ) -0.4 % (717,317 ) 2,926.6 % Loss before income tax provision (1,697,083 ) -9.2 % (5,263,932 ) -77.2 % 3,566,849 -67.8 % Income tax expense (benefit) 58,859 0.3 % (10,906 ) -0.2 % 69,765 -639.7 % Net loss (1,755,942 ) -9.5 % (5,253,026 ) -77.0 % 3,497,084 -66.6 % Less: net loss attributable to non-controlling interest (419,211 ) -2.3 % - - (419,211 ) -100.0 % Net loss attributable to HeartCore Enterprises, Inc. $ (1,336,731 ) -7.2 % $ (5,253,026 ) -77.0 % $ 3,916,295 -74.6 % 10 Revenues Our total revenues increased by $11,699,657, or 171.6%, to $18,518,431 for the nine months ended September 30, 2023 from $6,818,774 for the nine months ended September 30, 2022, mainly attributable to (i) the increased revenue of $5,520,129 from GO IPO consulting services as the Company obtained more IPO consulting customers in 2023 and received warrants from its customers as noncash consideration from consulting services; (ii) the increased revenue of $6,332,479 from customized software development and services as a result of acquisition of Sigmaways and its subsidiaries on February 1, 2023; offset by (iii) the decreased revenue of $317,418 in revenue from sales of on-premise software, primarily due to the weak perform of a significant distributor in the current period. Cost of Revenues Our total cost of revenues increased by $6,612,337, or 168.0%, to $10,548,245 for the nine months ended September 30, 2023 from $3,935,908 for the nine months ended September 30, 2022, in light of the increase in sales in GO IPO consulting services and customized software development and services. Gross Profit Our total gross profit increased by $5,087,320, or 176.5%, to $7,970,186 for the nine months ended September 30, 2023 from $2,882,866 for the nine months ended September 30, 2022, mainly attributable to (i) the increased gross profit of $4,418,239 from GO IPO consulting services as the Company obtained more IPO consulting customers in 2023 and received warrants from its customers as noncash consideration from consulting services; (ii) the increased gross profit of $930,399 from customized software development and services as a result of acquisition of Sigmaways and its subsidiaries on February 1, 2023; offset by (iii) the decreased gross profit of $1,003,681 from sales of on-premise software due to the overall market competition. Our overall gross profit margin was 43.0% and 42.3% for the nine months ended September 30, 2023 and 2022, respectively. Selling Expenses Our selling expenses decreased by $375,503 or 22.0%, to $1,330,747 for the nine months ended September 30, 2023 from $1,706,250 for the nine months ended September 30, 2022, primarily attributable to a decrease of $902,271 in advertising expenses, as the Company spent heavily on IR and PR in the U.S. immediately after listing in Nasdaq in early 2022, offset by an increase of $483,669 in stock-based compensation for sales staff. As a percentage of revenues, our selling expenses accounted for 7.2% and 25.0% of our total revenues for the nine months ended September 30, 2023 and 2022, respectively. General and Administrative Expenses Our general and administrative expenses increased by $1,473,116, or 25.3%, to $7,305,392 for the nine months ended September 30, 2023 from $5,832,276 for the nine months ended September 30, 2022, primarily attributable to (i) an increase of $1,240,015 in salaries and welfare, an increase of $297,951 in office, utility and other expenses, an increase of $419,800 in depreciation and amortization expenses, and an increase of $186,759 in rent expenses, mostly due to the acquisition of Sigmaways and its subsidiaries, as well as the overall business expansion; offset by (ii) a decrease of $242,877 in listing-related expenses as we finished the process of going public in early 2022; and (iii) a decrease of $538,997 in stock-based compensation as the Company awarded options and RSUs to employees and service providers in early 2022 when the Company finished going public. As a percentage of revenues, general and administrative expenses were 39.4% and 85.5% of our revenues for the nine months ended September 30, 2023 and 2022, respectively. 11 Research and Development Expenses Our research and development expenses decreased by $294,459, or 50.4%, to $289,303 for the nine months ended September 30, 2023 from $583,762 for the nine months ended September 30, 2022, primarily attributable to the decrease of $328,402 in outsourcing expenses relating to the development of a high quality 12K VR camera and related data compression system, which was completed in June 2022, offset by an increase of $59,104 in stock-based compensation for research and development staff. As a percentage of revenues, research and development expenses were 1.6% and 8.6% of our revenues for the nine months ended September 30, 2023 and 2022, respectively. Other Expenses Our other expenses primarily include changes in fair value of investments in marketable securities and changes in fair value of investments in warrants, interest income generated from bank deposits, interest expense for bank loans and bonds, other income, and other expenses. Our other expenses increased by $717,317, or 2,926.6%, to $741,827 in the nine months ended September 30, 2023 from $24,510 in the nine months ended September 30, 2022, primarily attributable to (i) a decrease of $294,565 in changes in fair value of investments in warrants; (ii) a decrease of $500,762 in changes in fair value of investments in marketable securities; offset by (iii) an increase of $135,996 in other income, primarily attributable to the CMS development subsidy granted by the Japanese government. Income Tax Expense (Benefit) Our income tax expense was $58,859 in the nine months ended September 30, 2023, as compared to tax benefit of $10,906 in the nine months ended September 30, 2022, mainly due to one of our newly incorporated subsidiaries generated net income before income tax during the nine months ended September 30, 2023 while all entities suffered from taxable loss in the prior period. Net Loss As a result of the foregoing, we reported a net loss of $1,755,942 for the nine months ended September 30, 2023, representing a $3,497,084, or 66.6%, decrease from a net loss of $5,253,026 for the nine months ended September 30, 2022. Net Loss Attributable to Non-controlling Interest We owned 51% equity ownership interest of Sigmaways and its subsidiaries as of September 30, 2023. Accordingly, we recorded a net loss attributable to the non-controlling interest of $419,211 in the nine months ended September 30, 2023. Net Loss Attributable to HeartCore Enterprises, Inc. As a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $1,336,731 for the nine months ended September 30, 2023, representing a $3,916,295, or 74.6%, decrease from $5,253,026 for the nine months ended September 30, 2022. Liquidity and Capital Resources As of September 30, 2023, we had $2,199,565 in cash, as compared to $7,177,326 as of December 31, 2022. As of September 30, 2023, our working capital was $1,095,609, as compared to $4,887,444 as of December 31, 2022. We also had $2,562,239 in accounts receivable as of September 30, 2023. Our accounts receivable primarily includes balance due from customers for our on-premise software sold and services provided to and accepted by customers, as well as Sigmaways’s accounts receivable related to customized software development and services. 12 The following table sets forth summary of our cash flows for the periods indicated: For the Nine Months Ended September 30, 2023 2022 Net cash flows used in operating activities $ (2,457,661 ) $ (4,206,370 ) Net cash flows used in investing activities (1,781,810 ) (8,630 ) 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 Operating Activities Net cash flows used in operating activities was $2,457,661 for the nine months ended September 30, 2023, as compared to $4,206,370 net cash flows used in operating activities for the nine months ended September 30, 2022, primarily consisting of the following: ● Net loss of $1,755,942 for the nine months ended September 30, 2023. ● Warrants received as non-cash consideration of $4,009,335 as two of our IPO consulting customers completed the IPO during the current period. ● An increase of $322,583 in accounts receivable in light of the increase in revenues. ● Offset by an increase of $200,256 in deferred revenue, due to the upfront payment received for long-term service contracts. ● Offset by stock-based compensation of $1,267,699 for the nine months ended September 30, 2023, as we granted equity rewards to our employees and service providers in the current period. ● Offset by depreciation and amortization expenses of $495,200, 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 the loss from changes in fair value of investments in marketable securities of $500,762 due to the decrease in customers’ stock price from the warrant exercise date to the balance sheet date. ● Offset by the loss from changes in fair value of investments in warrants of $294,565 as we recognized investments in warrants and remeasured the fair value at the period end. ● Offset by an increase of $597,247 in accounts payable and accrued expenses as we incurred more operating expenses due to business. ● Offset by non-cash lease expense of $254,876 due to the amortization or operating lease right-of-use assets as time passed. Investing Activities Net cash flows used in investing activities amounted to $1,781,810 for the nine months ended September 30, 2023, as compared to net cash flows used in investing activities of $8,630 for the nine months ended September 30, 2022. Net cash flows used in investing activities for the nine months ended September 30, 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 $516,658. Financing Activities Net cash flows used in financing activities amounted to $432,051 for the nine months ended September 30, 2023, as compared to net cash flows provided by financing activities of $9,122,350 for the nine months ended September 30, 2022. Net cash flows used in financing activities primarily consisted of repayment of $584,779 for long-term debts, and repayment of $266,756 for insurance premium financing, offset by the net proceeds of $217,250 from the factoring arrangement and proceeds of $219,427 from long-term debt. 13 Contractual Obligations Lease commitment 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. As of September 30, 2023, future minimum lease payments under the non-cancellable lease agreements are as follows: Year Ended December 31, Finance Leases Operating Leases 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 Long-Term Debts The Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions. As of September 30, 2023, future minimum loan payments are as follows: 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 Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of September 30, 2023. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements. These financial statements are prepared in accordance with the generally accepted accounting principles in the United States (“U.S. GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenues and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. We continue to evaluate the estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed herein reflect the more significant judgments and estimates used in preparation of our unaudited consolidated financial statements. 14 Business Combinations We account for business combinations using the acquisition method, which requires management to estimate the fair value of the tangible assets, liabilities, identifiable intangible asset and non-controlling interest, and to properly allocate purchase price consideration to the individual assets acquired, liabilities assumed and non-controlling interest. Goodwill is measured as the excess amount of consideration transferred. The allocation of the purchase price utilizes significant estimates and assumptions in determining the fair values of identifiable assets acquired, liabilities assumed and non-controlling interest, especially with respect to intangible asset. These estimates are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset and are reviewed by consulting with third-party valuation appraisers. The purchase price allocation for business acquisitions contains uncertainties because it requires management’s judgment. The fair value of the intangible asset is estimated using the income approach using the multi-period excess earnings method. Management applies significant judgement related to this fair value method, which included the selection of an expected EBITDA margin assumption for the forecast period, and discount rate assumptions. These significant assumptions are based on company specific information and projections, which are not observable in the market (except for the discount rate assumption) and, therefore, are considered Level 2 and Level 3 measurements. These significant assumptions are forward-looking and could be affected by future changes in economic and market conditions. The accounting for business combinations is a critical accounting estimate because it requires estimates and judgement in assessing the future cash flows of the acquired business, the fair value of non-controlling interest, and the allocation of the future cash flows to identifiable intangible assets, in determining the fair value for assets and liabilities. 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. 15 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. 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 contracts 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. 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.