Item 7. Management’s Discussion and Analysis
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special
Note Regarding Forward-Looking Statements
All
statements other than statements of historical fact included in this annual report, including, without limitation, statements under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business
strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this annual report,
words such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and
similar expressions, as they relate to us or the Company’s management, identify forward-looking statements. Such forward-looking
statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company’s
management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors
detailed in our filings with the SEC.
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial
statements and the notes thereto contained elsewhere in this annual report. Certain information contained in the discussion and analysis
set forth below includes forward-looking statements that involve risks and uncertainties. References herein to “we,” “us”
or the “Company” refers to HeartCore Enterprises, Inc. and its consolidated subsidiaries, including, but not limited to,
HeartCore Co., Ltd. (“HeartCore Co.”) and its subsidiary, HeartCore Capital Advisors, Inc. (“HeartCore Capital Advisors”),
HeartCore Financial, Inc. (“HeartCore Financial”), and Sigmaways, Inc. (“Sigmaways”) and its subsidiaries. HeartCore
Financial was incorporated in January 2023. HeartCore Capital Advisors was incorporated in February 2023. The acquisition of Sigmaways
and its subsidiaries was closed in February 2023.
Business
Overview
We are a leading software development
company based in Tokyo, Japan. We provide software through two business units. The first business unit, our CX division, includes a customer
experience management business (the “CXM Platform”) that has been in existence for 14 years. Our CXM Platform includes marketing,
sales, service and content management systems, as well as other tools and integrations, that enable companies to attract and engage customers
throughout the customer experience. We also provide education, services and support to help customers be successful with our CXM Platform.
The second business unit, our
DX division, is a digital transformation business which provides customers with robotics process automation, process mining and task mining
to accelerate the digital transformation of enterprises. We also have an ongoing technology innovation team to develop software that supports
the narrow needs of large enterprise customers.
We have made significant investments
in our sales and marketing efforts globally. As of December 31, 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 December 31, 2023, our combined business units (customer experience management business unit and digital transformation business unit)
had 949 total customers in Japan, of which 691, or 72.8%, were paying customers, and 24 total customers outside Japan, of which 1, or
0.1%, was a paying customer. Our 280 non-paying customers were originally paying customers that utilized our paid services but now use
a free version of the CXM Platform. There is the potential for non-paying customers to become paying customers again if and when they
start utilizing our paid services again.
During 2022, we started the GO
IPO business, which supports Japanese companies listing on Nasdaq and NYSE in the United States. As of December 31, 2023, we have entered
into consulting agreements with eleven companies to assist them in their IPO process, whereby we are entitled to receive from each company
a consulting fee that ranges from $380,000 to $900,000 and warrants or stock acquisition rights to purchase one to four percent of the
fully-diluted share capital of such companies that is exercisable on certain dates at an exercise price of $0.01 or JPY1 per share. The
revenue in the GO IPO business helped to offset the decline in sales in the CX and DX divisions in Japan.
71
We were incorporated in the State
of Delaware on May 18, 2021. We conduct business activities principally through our wholly owned subsidiary, HeartCore Co., a Japanese
corporation, which was established in Japan by Mr. Sumitaka Yamamoto, our CEO, in 2009.
On September 6, 2022, HeartCore
Enterprises, Inc. entered into a share exchange and purchase agreement (“Sigmaways Agreement”) to acquire 51% of the outstanding
shares of Sigmaways, a company incorporated under the laws of the State of California, and its wholly owned subsidiaries. Sigmaways and
its wholly owned subsidiaries are engaged in the business of developing and sales of software in the United States. The acquisition was
closed on February 1, 2023.
In the first quarter of 2023,
we formed HeartCore Financial in the U.S. and HeartCore Capital Advisors in Japan, as a part of our Go IPO consulting business. In the
fourth quarter of 2023, we formed HeartCore Luvina Vietnam Company Limited in Vietnam, which is engaged in the business of software development.
For the fiscal years ended December
31, 2023 and 2022, we generated revenues of $21,845,830 and $8,818,312, respectively, and reported net loss of $4,876,700 and $6,677,466,
respectively, and cash flows used in operating activities of $4,331,209 and $4,808,547, respectively. As noted in our consolidated financial
statements, as of December 31, 2023, we had an accumulated deficit of $14,763,469.
Key Factors that Affect Our Results of Operations
We believe the following key factors
may affect our financial condition and results of operations:
Our Ability to Strength Our Competitive Advantages
Our mission is to be at the forefront
of innovation and thought leadership in enterprise business automation, analyzing enterprise users’ desktops and mission-critical
systems, and creating end-to-end software that provides business automation based on the results of that analysis and further simulating
the numbers. We create end-to-end software that provides business automation. Our customers use our software across their organizations
so that they can run their operations in a more fully automated manner. Our ability to successfully implement the automation in our software
greatly affects our profitability.
Our Ability to Expand International Market
We maintain a physical sales presence
in the Japanese software market. Using our global go-to-market strategy we believe we have established a diversified revenue and customer
base. We will continue to develop our global operation. International expansion over the long term represents a significant opportunity
and we plan to continue to invest in growing our presence internationally, both through expanding our sales and marketing efforts and
leveraging channel and other ecosystem partners.
Our Ability to Control Costs and Expenses and
Improve Our Operating Efficiency
Our business growth is dependent
on our ability to attract and retain qualified and productive employees, identify business opportunities, secure new contracts with customers
and our ability to control costs and expenses to improve our operating efficiency. Our software costs (mostly including purchased software
license, salaries and welfare, and outsourcing expenses) have a direct impact on our profitability. Our success is dependent, in part,
on our ability to reduce our exposure to increase in those costs through a variety of ways, while maintaining and improving margins and
market share. In addition, our staffing costs (including salaries and welfare) and administrative expenses also have a direct impact on
our profitability. Our ability to drive the productivity of our staff and enhance our operating efficiency affects our profitability.
72
Our
Ability to Manage and Retain Customer Renewals
Our
ability to manage and retain customer renewals is vital to our expansion of renewals in our customer base and continuous and growing
revenue. By achieving and maintaining high retention of customer renewals, we are able to cover most of our expenses from the revenue
generated from such retained customer renewals. In order to achieve and maintain a high retention of customer renewals, we engage in
the following actions: (i) we conduct annual surveys of existing customers; (ii) we conduct Net Promoter Scoring (NPS), whereby we measure
customer loyalty and satisfaction by asking our customers how likely they are to recommend our product and service to others; and (iii)
we have sales representatives visit important customers to increase customer retention. Our ability to expand within our customer base
is demonstrated by our net retention rate, which represents the rate of net expansion of annualized renewal run-rate from existing customers
over the last 12 months.
As
of December 31, 2023, our combined business units (customer experience management business unit and digital transformation business unit)
had 949 total customers in Japan, of which 691, or 72.8%, were paying customers and 24 total customers outside Japan, of which 1, or
0.1%, was a paying customer. Our 280 non-paying customers were originally paying customers that utilized our paid services but now use
a free version of the CXM Platform. Our net retention rate for our paying customers of our customer experience management
business unit (CMS business) was 88%, 92%, and 95% as of December 31, 2023, 2022, and 2021, respectively. There is an insignificant
impact (below 10%) on our net retention rate as to former paying customers of our CMS business utilizing the free version of your CXM
Platform.
COVID-19
Affecting Our Results of Operations
On
March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The pandemic has resulted in the implementation
of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of
the virus. Companies are also taking precautions, such as requiring employees to work remotely, imposing travel restrictions, and temporarily
closing businesses. The effects of the COVID-19 pandemic are still impacting the global economy as well as our operations. The duration
and extent of this impact depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness
of containment actions. The lasting effects of the pandemic continue to be unknown. As of the filing date of this Annual Report on Form
10-K, the extent of the future impact of COVID-19 is still highly uncertain and cannot be predicted.
A
Severe or Prolonged Slowdown in the Global and Japan Economy Could Materially and Adversely Affect Our Business and Our Financial Condition
In
recent years, the economic indicators in Japan have shown mixed signs, and future growth of the Japanese economy is subject to many factors
beyond our control. The current administration of Prime Minster Fumio Kishida and the former administration of Prime Minister Yoshihide
Suga have introduced policies to combat deflation and promote economic growth. In addition, the Bank of Japan introduced a plan for quantitative
and qualitative monetary easing in April 2013 and announced a negative interest rate policy in January 2016. However, the long-term impact
of these policy initiatives on Japan’s economy remains uncertain. The impact of Brexit on the Japanese economy and on the value
of the Japanese yen against currencies of other countries in which we generate revenue, in both the short and long term, is also uncertain.
In addition, an increase in the consumption tax rate, which took place in April 2014 with a further increase in October 2019, may also
adversely impact the Japanese economy, potentially impacting consumer spending, and advertising spending by businesses. Any future deterioration
of the Japanese or global economy may result in a decline in consumption that would have a negative impact on demand for our products
and their prices.
GO
IPO consulting services business may experience a decrease in clients due to external factors such as the slowdown of the Japanese economy.
In addition, an increase in the number of competitors may have an impact on the business.
73
Results
of Operations
Comparison
of Results of Operations for the Fiscal Years Ended December 31, 2023 and 2022
The
following table summarizes our operating results as reflected in our statements of operations during the fiscal years ended December
31, 2023 and 2022, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.
For
the Years Ended December 31,
2023
2022
Variance
%
of
%
of
Amount
Revenues
Amount
Revenues
Amount
%
Revenues
$ 21,845,830
100.0 %
$ 8,818,312
100.0 %
$ 13,027,518
147.7 %
Cost
of revenues
13,778,416
63.1 %
5,467,017
62.0 %
8,311,399
152.0 %
Gross
profit
8,067,414
36.9 %
3,351,295
38.0 %
4,716,119
140.7 %
Operating
expenses:
Selling
expenses
1,516,247
6.9 %
2,826,615
32.0 %
(1,310,368 )
-46.4 %
General
and administrative expenses
9,651,381
44.2 %
6,579,734
74.6 %
3,071,647
46.7 %
Research
and development expenses
1,019,141
4.7 %
641,025
7.3 %
378,116
59.0 %
Total
operating expenses
12,186,769
55.8 %
10,047,374
113.9 %
2,139,395
21.3 %
Loss from operations
(4,119,355 )
-18.9 %
(6,696,079 )
-75.9 %
2,576,724
-38.5 %
Other
income (expenses)
(891,009 )
-4.0 %
12,695
0.1 %
(903,704 )
-7,118.6 %
Loss before income tax benefit
(5,010,364 )
-22.9 %
(6,683,384 )
-75.8 %
1,673,020
-25.0 %
Income
tax benefit
(133,664 )
-0.6 %
(5,918 )
-0.1 %
(127,746 )
2,158.6 %
Net
loss
(4,876,700 )
-22.3 %
(6,677,466 )
-75.7 %
1,800,766
-27.0 %
Less:
net loss attributable to non-controlling interest
(686,810 )
-3.1 %
-
-
(686,810 )
- 100.0 %
Net
loss attributable to HeartCore Enterprises, Inc.
$ (4,189,890 )
-19.2 %
$ (6,677,466 )
-75.7 %
$ 2,487,576
-37.3 %
For
the Years Ended December 31,
2023
2022
Variance
Amount
%
Amount
%
Amount
%
Revenues
Revenues
from on-premise software
$ 1,586,218
7.3 %
$ 1,860,573
21.1 %
$ (274,355 )
-14.7 %
Revenues
from maintenance and support services
2,646,148
12.1 %
2,962,325
33.6 %
(316,177 )
-10.7 %
Revenues
from software as a service (“SaaS”)
635,927
2.9 %
500,461
5.7 %
135,466
27.1 %
Revenues
from software development and other miscellaneous services
1,980,979
9.1 %
2,046,588
23.2 %
(65,609 )
-3.2 %
Revenues
from customized software development and services
8,784,239
40.2 %
-
-
8,784,239
100.0 %
Revenues
from consulting services
6,212,319
28.4 %
1,448,365
16.4 %
4,763,954
328.9 %
Total
revenues
21,845,830
100.0 %
8,818,312
100.0 %
13,027,518
147.7 %
Cost
of revenues
Costs
of on-premise software
1,485,769
10.8 %
1,138,533
20.9 %
347,236
30.5 %
Costs
of maintenance and support services
1,024,059
7.4 %
1,159,418
21.2 %
(135,359 )
-11.7 %
Costs
of software as a service (“SaaS”)
366,277
2.7 %
241,756
4.4 %
124,521
51.5 %
Costs of software development and other miscellaneous services
1,655,461
12.0 %
2,003,127
36.6 %
(347,666 )
-17.4 %
Costs of customized software development and services
7,219,892
52.4 %
-
-
7,219,892
100.0 %
Costs
of consulting services
2,026,958
14.7 %
924,183
16.9 %
1,102,775
119.3 %
Total
cost of revenues
13,778,416
100 %
5,467,017
100.0 %
8,311,399
152.0 %
Gross
profit
On-premise
software
100,449
1 .3 %
722,040
21.5 %
(621,591 )
-86.1 %
Maintenance
and support services
1,622,089
20.2 %
1,802,907
53.8 %
(180,818 )
-10.0 %
Software
as a service (“SaaS”)
269,650
3.3 %
258,705
7.7 %
10,945
4.2 %
Software development and other miscellaneous
services
325,518
4.0 %
43,461
1.3 %
282,057
649.0 %
Customized software development and services
1,564,347
19.4 %
-
-
1,564,347
100.0 %
Consulting
services
4,185,361
51.8 %
524,182
15.7 %
3,661,179
698.5 %
Total
gross profit
$ 8,067,414
100.0 %
$ 3,351,295
100.0 %
$ 4,716,119
140.7 %
74
Revenues
Our total revenues increased by $13,027,518, or 147.7%,
to $21,845,830 for the year ended December 31, 2023 from $8,818,312 for the year ended December 31, 2022, mainly
attributable to (i) the increased revenue of $4,763,954 from GO IPO consulting services as the Company obtained more IPO consulting customers
in 2023 and received warrants from its customers as noncash consideration from consulting services; (ii) the increased revenue of $8,784,239
from customized software development and services as a result of acquisition of Sigmaways and its subsidiaries on February 1, 2023; offset
by (iii) the decrease of $274,355 in revenue from sales of on-premise software, primarily due to the weak performance of a significant
distributor and approximately 8% depreciation of Yen in the current period; and (iv) the
decrease of $316,177 in revenue from maintenance and support services, as some clients canceled their maintenance service contracts,
and approximately 8% depreciation of Yen.
Cost of Revenues
Our total costs of revenues increased by $8,311,399,
or 152.0%, to $13,778,416 for the year ended December 31, 2023 from $5,467,017 for the year ended December 31, 2022, in
light of the increase in sales in GO IPO consulting services and customized software development and services, offset by the overall decrease
in software development and other services, because the Company conducted several complex software development projects to meet customer
requirements in 2022, while no such projects in 2023. The decrease was also caused by approximately 8% depreciation of Yen.
Gross Profit
Our total gross profit increased by $4,716,119, or
140.7%, to $8,067,414 for the year ended December 31, 2023 from $3,351,295 for the year ended December 31, 2022, mainly
attributable to (i) an increased gross profit of $1,564,347 from customized software development and services as a result of acquisition
of Sigmaways and its subsidiaries on February 1, 2023; (ii) an increased gross profit of $3,661,179 from GO IPO consulting services, as
we recognized revenue from the warrants of the customers upon customers’ IPO effectiveness in current year, while no corresponding
cost for such revenue recognized; offset by (iii) a decrease of $621,591 in sale of on-premises software due to lower volume in sale and
higher costs to purchase valuable licenses in the current period.
For
the reasons discussed above, our overall gross profit margin decreased by 1.1% to 36.9% for the year ended December 31, 2023 from 38.0%
in the fiscal year 2022.
75
Operating
Expenses
The
following table sets forth the breakdown of our operating expenses for the fiscal years ended December 31, 2023 and 2022:
For
the Years Ended December 31,
2023
2022
Variance
%
of
%
of
Amount
Revenues
Amount
Revenues
Amount
%
of
Total
revenues
$ 21,845,830
100.0 %
$ 8,818,312
100.0 %
$ 13,027,518
147.7 %
Operating
expenses:
Selling
expenses
1,516,247
6.9 %
2,826,615
32.0 %
(1,310,368 )
-46.4 %
General
and administrative expenses
9,651,381
44.2 %
6,579,734
74.6 %
3,071,647
46.7 %
Research
and development expenses
1,019,141
4.7 %
641,025
7.3 %
378,116
59.0 %
Total
operating expenses
$ 12,186,769
55.8 %
$ 10,047,374
113.9 %
$ 2,139,395
21.3 %
Selling
Expenses
Our
selling expenses primarily include advertising expenses, sales commissions, sales promotion expenses, and stock-based compensation.
For
the Years Ended December 31,
2023
2022
Variance
Amount
%
of
Amount
%
of
Amount
%
of
Selling
expenses
Advertising
expenses
$
832,491
54.9
%
$
1,902,942
67.3
%
$
(1,070,451
)
-56.3
%
Sales
commissions
119,736
7.9
%
122,797
4.3
%
(3,061
)
-2.5
%
Sales
promotion expenses
2,931
0.2
%
16,017
0.6
%
(13,086
)
-81.7
%
Stock-based
compensation
561,089
37.0
%
784,859
27.8
%
(223,770
)
-28.5
%
Total
selling expenses
$
1,516,247
100.0
%
$
2,826,615
100.0
%
$
(1,310,368
)
-46.4
%
Our selling expenses decreased by $1,310,368, or 46.4%,
to $1,516,247 for the year ended December 31, 2023 from $2,826,615 in the fiscal year 2022, primarily attributable to
a decrease of $1,070,451 in advertising expenses, as the Company spent heavily on investor relations and public relations in the U.S.
immediately after listing in Nasdaq in early 2022, and a decrease of $223,770 in stock-based compensation, as the Company granted stock
options to certain sales staff in 2022, who were promoted to executive management in 2023, therefore the corresponding stock-based compensation
was classified to general and administrative expenses.
As
a percentage of revenues, our selling expenses accounted for 6.9% and 32.0% of our total revenues for the years ended December 31, 2023
and 2022, respectively.
76
General
and Administrative Expenses
Our general and administrative expenses primarily
consist of employee salaries and welfare expenses, consulting and professional service fees, depreciation and amortization expenses, rent
expense, office, utility and other expenses, travel and entertainment expenses, and stock-based compensation.
For
the Years Ended December 31,
2023
2022
Variance
Amount
%
of
Amount
%
of
Amount
%
of
General
and administrative expenses
Salaries
and welfare expenses
$ 4,532,749
47.0 %
$ 2,924,547
44.4 %
$ 1,608,202
55.0 %
Consulting
and professional service fees
1,520,176
15.8 %
1,629,622
24.8 %
(109,446 )
-6.7 %
Depreciation
and amortization expenses
666,721
6.9 %
76,924
1.2 %
589,797
766.7 %
Rent
expense
302,844
3.1 %
184,179
2.8 %
118,665
64.4 %
Office,
utility and other expenses
1,505,981
15.6 %
836,609
12.7 %
669,372
80.0 %
Travel
and entertainment expenses
359,105
3.7 %
299,655
4.6 %
59,450
19.8 %
Stock-based
compensation
763,805
7.9 %
628,198
9.5 %
135,607
21.6 %
Total
general and administrative expenses
$ 9,651,381
100.0 %
$ 6,579,734
100.0 %
$ 3,071,647
46.7 %
Our general and administrative expenses increased
by $3,071,647 or 46.7%, to $9,651,381 for the year ended December 31, 2023 from $6,579,734 in the fiscal year 2022, primarily attributable
to (i) an increase of $1,608,202 in salaries and welfare expenses due to increased remuneration
for executive officers and additional staff employed by Sigmaways and its subsidiaries; (ii) an increase of $589,797 in depreciation and
amortization expenses, an increase of 669,372 in office, utility and other expenses, and an increase of $118,665 in rent expense, mostly
due to the acquisition of Sigmaways and its subsidiaries as well as the overall business expansion; and (iii) an increase of $135,607
in stock-based compensation, as certain sales staff were promoted to executive management, and their stock-based compensation was reclassified
from selling expenses in 2022 to general and administrative expenses in 2023.
As
a percentage of revenues, general and administrative expenses were 44.2% and 74.6% of our revenues for the fiscal years ended December
31, 2023 and 2022, respectively.
Research
and Development Expenses
Our
research and development expenses primarily consist of employee salaries and welfare expenses, outsourcing expenses, and stock-based
compensation.
For
the Years Ended December 31,
2023
2022
Variance
Amount
%
of
Amount
%
of
Amount
%
of
Research
and development expenses
Salaries
and welfare expenses
$ -
-
$ 29,681
4.6 %
$ (29,681 )
-100.0 %
Outsourcing
expenses
958,830
94.1 %
601,583
93.9 %
357,247
59.4 %
Stock-based
compensation
60,311
5.9 %
9,761
1.5 %
50,550
517.9 %
Total
research and development expenses
$ 1,019,141
100.0 %
$ 641,025
100.0 %
$ 378,116
59.0 %
Our research and development expenses increased by
$378,116 or 59.0%, to $1,019,141 in the fiscal year ended December 31, 2023 from $641,025 in the fiscal year ended December 31, 2022,
primarily attributable to an increase of $357,247 in outsourcing expenses relating to the development
of new CMS management screen features in the current period and additional R&D expenses incurred by Sigmaways to support its customized
software development and services .
As
a percentage of revenues, research and development expenses were 4.7% and 7.3% of our revenues for the fiscal years ended December 31,
2023 and 2022, respectively.
77
Other
Income (Expenses), Net
Our other income (expenses) primarily includes changes
in fair value of investments in marketable securities, changes in fair value of investment in warrants, interest income generated from
bank deposits, interest expense for bank loans, bonds, and leases, government grants, other income, and other expenses. Total other expenses,
net, increased by $903,704 or 7,118.6%, from other income, net, of $12,695 for the year ended December 31, 2022 to other expenses, net,
of $891,009 for the year ended December 31, 2023, primarily attributable to an increase of $615,520
in loss on fair value changes in investments in marketable securities and an increase of $501,445 in loss on fair value changes in investment
in warrants, offset by an increase of $309,015 in other income, primarily due to the penalty payment that we received from certain customers
in the current period.
Income Tax Benefit
Income tax benefit was $133,664 for the year ended
December 31, 2023, an increase of $127,746, or 2,158.6% from income tax benefit of $5,918 in the fiscal year 2022, primarily due to the
increase in deferred income tax benefit brought by the amortization of intangible asset acquired as a result
of Sigmaways during the current year.
Net
Loss
As a result of the foregoing, we reported a net loss
of $4,876,700 for the fiscal year ended December 31, 2023, representing a $1,800,766 or 27.0% decrease from a net loss of $6,677,466 for
the fiscal year ended December 31, 2022.
Net Loss Attributable to Non-controlling Interest
We
owned 51% equity ownership interest of Sigmaways and its subsidiaries as of December 31, 2023. Accordingly, we recorded net loss attributable
to the non-controlling interest of $686,810 in the year ended December 31, 2023 .
Net Loss Attributable to HeartCore Enterprises,
Inc.
As a result of the foregoing, we reported a net loss
attributable to HeartCore Enterprises, Inc. of $4,189,890 for the fiscal year ended December 31, 2023, representing a $2,487,576 or 37.3%
decrease from a net loss of $6,677,466 for the fiscal year ended December 31, 2022.
Liquidity and Capital Resources
As of December 31, 2023, we had $1,012,479 in cash
as compared to $7,177,326 as of December 31, 2022. We also had $2,623,682 in accounts receivable as of December 31, 2023. Our accounts
receivable primarily include balance due from customers for our on-premise software sold and services provided and accepted by customers,
as well as amounts billable to the customers for customized software development and services.
As
of December 31, 2023, our working capital deficit was $1,016,662. In assessing our liquidity, management monitors and analyzes our cash,
our ability to generate sufficient revenues in the future, and our operating and capital expenditure commitments.
78
Cash
Flows for the Years Ended December 31, 2023 and 2022
The
following table sets forth summary of our cash flows for the periods indicated:
For
the Years Ended
December 31,
2023
2022
Net
cash used in operating activities
$ (4,331,209 )
$ (4,808,547 )
Net
cash used in investing activities
(1,780,952 )
(12,200 )
Net
cash provided by financing activities
136,194
8,915,341
Effect
of exchange rate changes
(188,880 )
(54,107 )
Net
change in cash and cash equivalents
(6,164,847 )
4,040,487
Cash
and cash equivalents, beginning of the year
7,177,326
3,136,839
Cash
and cash equivalents, end of the year
$ 1,012,479
$ 7,177,326
Operating
Activities
Net
cash used in operating activities was $4,331,209 for the year ended December 31, 2023, primarily consisting of the following:
●
Net
loss of $4,876,700 for the fiscal year.
●
Warrants received as non-cash consideration of $3,763,621 as our IPO consulting customers completed the IPO during the current period.
●
An increase in accounts receivable of $338,312. The increase was primarily
due to the increase in our sales generated by our newly acquired subsidiary, Sigmaways . The
collected accounts receivable is available cash, which can be used as working capital for our business operation, if necessary.
●
A
decrease of $327,877 in operating lease liabilities, due to the rent payment made.
●
Offset
by stock-based compensation of $1,430,513, as we granted equity rewards to our employees and service providers in 2023.
●
Offset by a loss of $615,520 from the changes in fair value of investments
in marketable securities.
●
Offset by a loss of $501,445 from
the changes in fair value of investment in warrants.
●
Offset
by depreciation and amortization expenses of $683,019, mainly because we acquired Sigmaways
and its subsidiaries on February 1, 2023, and recognized amortization expense for the intangible asset identified through the acquisition .
●
Offset
by an increase of $532,790 in accounts payable and accrued expenses as we incurred more operating
expenses due to the expansion of our business .
●
Offset by an increase in deferred revenue of $553,130, due to the upfront payment received for IPO consulting
services while most IPO customer were not declared IPO effective as of the balance sheet date.
●
Offset
by non-cash lease expense of $346,070.
Net
cash used in operating activities was $4,808,547 for the year ended December 31, 2022, primarily consisting of the following:
●
Net
loss of $6,677,466 for the fiscal year.
●
A
decrease of $283,921 in operating lease liabilities, due to the rent payment made .
●
Offset
by non-cash lease expense of $273,836.
●
Offset
by stock-based compensation of $1,519,743, as we granted equity rewards to our employees
in 2022.
●
Offset
by a decrease in accounts receivable of $296,835. The decrease was primarily due to the decrease in our sales in the current fiscal
year. The collected accounts receivable is available cash, which can be used as working capital for our business operation, if necessary.
●
Offset
by an increase in deferred revenue of $239,129. We request upfront payment for service provided over a period of time. The deferred
revenue increased as a result of newly established consultant services in 2022 .
Investing
Activities
Net
cash used in investing activities amounted to $1,780,952 for the year ended December 31, 2023, primarily
consisted of (i) payment for acquisition of Sigmaways and its subsidiaries, net of cash acquired, of $724,910; (ii) advances on notes
receivable of $600,000; and (iii) purchases of property and equipment of $ 526,260 .
Net
cash used in investing activities amounted to $12,200 for the year ended December 31, 2022, primarily consisted of the purchases of fixed
assets of $57,071, offset by the repayment of $44,871 of loan provided to related party .
Financing
Activities
Net
cash provided by financing activities amounted to $136,194 for the fiscal year ended December 31, 2023, primarily
consisted of proceeds of $710,107 from short-term and long-term debts, and net proceeds of $562,767 from factoring arrangement,
offset by repayment of $711,395 for long-term debts, and repayment of 389,035 for insurance premium financing.
79
Net
cash provided by financing activities amounted to $8,915,341 for the fiscal year ended December 31, 2022, primarily consisting of proceeds
of $13,823,126 from the initial public offering and issuance of common shares prior to the initial public offering, proceeds of $258,087
from long-term debt, offset by payment for mandatorily redeemable financial interest of $430,489, payment for repurchase of common shares
of $3,500,000, repayment of long-term debts of $810,750, and repayment of insurance premium financing of $388,538.
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 a lease for office equipment, and two leases for vehicles, one
of which was terminated in September 2023, and these
leases were classified as finance leases.
As
of December 31, 2023, future minimum lease payments under the non-cancelable lease agreements are as follows:
Year Ended December 31,
Finance Leases
Operating Leases
2024
$ 18,819
$ 427,774
2025
18,555
404,244
2026
18,555
339,188
2027
18,555
292,720
2028
12,370
292,720
Thereafter
-
912,521
Total lease payments
86,854
2,669,167
Less: imputed interest
(2,630 )
(137,472 )
Total lease liabilities
84,224
2,531,695
Less: current portion
(17,445 )
(396,535 )
Non-current lease liabilities
$ 66,779
$ 2,135,160
80
Debt s
The
Company’s debts included short-term debt and long-term debts borrowed from banks and other financial institutions.
As
of December 31, 2023, future minimum payments for long-term debts are as follows:
Loan
Year
Ended December 31,
Payment
2024
$
376,639
2025
442,568
2026
393,011
2027
421,900
2028
189,783
Thereafter
336,472
Total
$
2,1 60 ,3 73
COVID-19
In
December 2019, a novel coronavirus disease (“COVID-19”) was reported to have surfaced in Wuhan, China, and on March 11, 2020,
the World Health Organization characterized COVID-19 as a pandemic. The pandemic, which has continued to spread, and the related adverse
public health developments, including orders to shelter-in-place, travel restrictions, and mandated business closures, have adversely
affected workforces, organizations, customers, economies, and financial markets globally, leading to an economic downturn and increased
market volatility. It has also disrupted the normal operations of many businesses, including ours.
For
example, many cities, counties, states, and even countries have imposed or may impose a wide range of restrictions on the physical movement
of our employees, partners and customers to limit the spread of the pandemic, including physical distancing, travel bans and restrictions,
closure of non-essential business, quarantines, work-from-home directives, shelter-in-place orders, and limitations on public gatherings.
These measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide.
In March 2020, we temporarily closed our offices, including our corporate headquarters, suspended all company-related travel, and all
HeartCore Co. employees were required to work from home for several months during the height of the pandemic. We cancelled or shifted
our customer and industry events to virtual-only experiences. Although we have begun to slowly re-open our offices on a staggered, region-by-region
basis in accordance with local authority guidelines, we may deem it advisable to similarly alter, postpone or cancel entirely additional
customer, employee or industry events in the future. All of these changes may disrupt the way we operate our business. In addition, our
management team has, and will likely continue, to spend significant time, attention and resources monitoring the pandemic and seeking
to minimize the risk of the virus and manage its effects on our business and workforce.
Although our company has been
in existence for less than three years, our wholly owned operating subsidiary, HeartCore Co. operated throughout the pandemic and continues
to operate after the pandemic. HeartCore Co.’s business is affected by a variety of external factors related to the pandemic and
post-pandemic that are beyond our control. For existing customers, the pandemic had no impact on the use of our software; for new customers
in the travel, hotel, airline, rail, and food service industries in the CX division, the pandemic resulted in a decrease in new orders.
Although the effects of the pandemic are decreasing, we feel it will take additional time before the economy is fully normalized. In addition,
the Japanese yen was weakening, so that sales in dollar terms in 2023 were slightly lower than in 2022. Regarding the impact
of the pandemic on the DX sector, demand for our DX software increased as large companies were forced to change their work patterns, forcing
employees to work remotely. During 2022, we started the GO IPO business, which supports Japanese companies to list on Nasdaq and NYSE
in the United States. As of December 31, 2023, we have entered into consulting agreements with eleven companies to assist them in their
IPO process, whereby we are entitled to receive from each company a consulting fee that ranges from $380,000 to $900,000 and warrants
or stock acquisition rights to purchase one to four percent of the fully-diluted share capital of such companies that is exercisable on
certain dates at an exercise price of $0.01 or JPY1 per share. The revenue in the GO IPO business helped to offset the decline in sales
in the CX and DX divisions in Japan.
The
duration and extent of the impact from the pandemic depends on future developments that cannot be accurately predicted at this time,
such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the disruption caused
by such actions, the effectiveness of vaccines and other treatments for COVID-19, and the impact of these and other factors on our employees,
customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will
be harmed.
To
the extent the pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the
other risks described in the “Risk Factors” section, including, in particular, risks related to our dependence on customer
renewals, the addition of new customers and increased revenue from existing customer, risks that our operating results could be negatively
affected by changes in the sizes or types of businesses that purchase our platform and the risk that weakened global economic conditions
may harm our industry, business and results of operations.
81
Off-Balance
Sheet Arrangements
We
did not have any off-balance sheet arrangements as of December 31, 2023.
Critical
Accounting Estimates
Our discussion and analysis of our financial condition
and results of operations are based upon our consolidated financial statements. These financial statements are prepared in accordance
with the generally accepted accounting principles in the United States (“U.S. GAAP”), which requires us to make estimates
and assumptions that affect the reported amounts of our assets and liabilities and revenues and expenses, to disclose contingent assets
and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenues and expenses incurred
during the financial reporting period. We continue to evaluate the estimates and assumptions that we believe to be reasonable under the
circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual
results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application.
We believe critical accounting policies reflect the more significant judgments and estimates used in preparation of our consolidated financial
statements.
Our accounting
policies are discussed in detail in the footnotes to our consolidated financial statements included in this Annual Report on Form 10-K
for the year ended December 31, 2023. However, we consider our critical accounting policies to be those related to revenue recognition and business combination.
Our critical
accounting estimates include the estimates used in the purchase price allocation of the Company’s business combination.
Business
Combination
We
account for business combination using the acquisition method, which requires management to estimate the fair value of the tangible
assets, liabilities, identifiable intangible asset and non-controlling interest, and to properly allocate purchase price
consideration to the individual assets acquired, liabilities assumed and non-controlling interest. Goodwill is measured as the
excess amount of consideration transferred. The allocation of the purchase price utilizes significant estimates and assumptions in
determining the fair values of identifiable assets acquired, liabilities assumed and non-controlling interest, especially with
respect to intangible asset acquired. These estimates are based on all available information and in some cases assumptions with respect to
the timing and amount of future revenues and expenses associated with an asset and are reviewed by consulting with third-party
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 includes the selection of an expected EBITDA margin assumption for the
forecast period, and discount rate assumptions. These significant assumptions are based on company specific information and projections,
which are not observable in the market (except for the discount rate assumption) and, therefore, are considered Level 2 and Level 3 measurements.
These significant assumptions are forward-looking and could be affected by future changes in economic and market conditions.
The accounting
for business combination is a critical accounting estimate because it requires estimates and judgement as to expectations for
future cash flows of the Company; future cash flows of the acquired business, and the allocation of those cash flows to
identifiable intangible asset, in determining the fair value for assets and liabilities.
82
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference
is made to pages F-1 through F-24 comprising a portion of this annual report.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not
applicable.