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 us or on our behalf. We and our 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, 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, our CX division, includes a customer experience management business (the “CXM Platform”) that has been in existence for 15 years. Our CXM Platform includes marketing, sales, service and content management systems, as well as other tools and integrations, that enable companies to attract and engage customers throughout the customer experience. We also provide education, services and support to help customers be successful with our CXM Platform. The second business unit, our DX division, is a digital transformation business which provides customers with robotics process automation, process mining and task mining to accelerate the digital transformation of enterprises. We also have an ongoing technology innovation team to develop software that supports the narrow needs of large enterprise customers. During 2022, we started the GO IPO business, which supports Japanese companies listing on The Nasdaq Stock Market and the New York Stock Exchange in the United States. As of November 14, 2024, we have entered into consulting agreements with 14 companies to assist them in their IPO process, pursuant to which we are entitled to receive from each company a consulting fee that ranges from $380,000 to $900,000 and warrants or stock acquisition rights to purchase 1% to 4% of the fully-diluted share capital of such companies that is exercisable on certain dates at an exercise price of $0.01 or JPY1 per share. 3 We were incorporated in the State of Delaware on May 18, 2021. We conduct business activities principally through our wholly owned subsidiary, HeartCore Co., Ltd. (“HeartCore Japan”), a Japanese corporation, which was established in Japan by Mr. Sumitaka Yamamoto, our CEO, in 2009. 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, 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 closed on February 1, 2023. In the first quarter of 2023, we formed HeartCore Financial, Inc. (“HeartCore Financial”) in the U.S. and HeartCore Capital Advisors, Inc. (“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 (“HeartCore Luvina”), which is engaged in the business of software development. On November 17, 2023, HeartCore Japan and HeartCore Capital Advisors entered into a merger agreement to merge the two entities into one with HeartCore Japan being the surviving entity. On January 1, 2024, the merger was completed and HeartCore Capital Advisors transferred all of its assets and liabilities to HeartCore Japan. The merger has been accounted for as a recapitalization between entities under common control since the same controlling shareholders controlled the two entities before and after the transaction. In April 2024, HeartCore Financial incorporated a branch office, HeartCore Financial, Inc. – Japan Branch Office, in Japan. Recent Developments Sale of Warrants On February 29, 2024, the Company entered into a warrants transfer agreement with a non-related company to sell partial of the warrants it received from a customer (“Consulting Customer”) as noncash consideration from consulting services for $9,000,000 in cash. The warrants to be transferred are exercisable only upon its Consulting Customer’s consummation of the Merger with a special purpose acquisition company or the occurrence of other fundamental events defined in the warrant agreement it had with the Consulting Customer. The Company completed its sale of warrants in September 2024 and recorded $3,970,628 in loss on sale of warrants from this transaction. Cash Dividends On March 29, 2024, the Board of Directors of the Company declared a cash dividend of $0.02 per share of the Company’s common shares. The dividend was paid on May 3, 2024 to shareholders of record as of April 26, 2024, resulting in an aggregate of $417,283 in total dividends paid by the Company. On July 22, 2024, the Board of Directors of the Company declared a cash dividend of $0.02 per share of the Company’s common shares. The dividend was paid on August 26, 2024 to shareholders of record as of August 19, 2024, resulting in an aggregate of $417,283 in total dividends paid by the Company. 4 The Company may continue to issue quarterly dividends going forward, contingent upon Board of Directors approval, following review of the Company’s then-current financial results. Future dividends, if any, may be less than, equal to or greater than recent dividends. Noncompliance with Nasdaq’s Minimum Bid Price Requirement On October 26, 2023, the Company received written notice (the “Bid Price Notice”) from the Nasdaq Listing Qualifications Department (the “Nasdaq Staff”) indicating that the Company was 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 had 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 continued to monitor the closing bid price of its common stock and evaluate 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, as of October 26, 2023, based upon the closing bid price for the then-last 30 consecutive business days, the Company no longer met this requirement. The Bid Price Notice indicated that the Company would 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 would provide the Company with written confirmation of compliance and the matter will be closed. Alternatively, if the Company failed to regain compliance with Rule 5550(a)(2) prior to the expiration of the 180 calendar day period, but met 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 provided 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). On April 24, 2024, the Company received written notice (the “April 2024 Nasdaq Letter”) from the Nasdaq Staff indicating that although the Company was not in compliance with the Minimum Bid Price Requirement, the Nasdaq Staff determined that the Company was eligible for an additional 180 calendar day period, or until October 21, 2024, to regain compliance. The Nasdaq Staff indicated that its determination was based on the Company meeting the continued listing requirement for market value of publicly held shares and all of the other applicable requirements for initial listing on the Nasdaq Capital Market, with the exception of the Minimum Bid Requirement, and the Company’s written notice of its intention to cure the deficiency during the second compliance period by effectuating a reverse stock split, if necessary. Accordingly, there was no immediate effect on the listing or trading of the Company’s common stock on the Nasdaq Capital Market under the symbol “HTCR.” If at any time between April 24, 2024 and October 21, 2024, the closing bid price of the Company’s common stock was at least $1.00 per share for a minimum of 10 consecutive business days, the Nasdaq Staff would provide the Company with written confirmation of compliance and the matter would be closed. On October 22, 2024, the Company received written notice (the “October 2024 Nasdaq Notice”) from the Nasdaq Staff indicating that the Company was not in compliance with the Minimum Bid Price Requirement. Pursuant to the October 2024 Nasdaq Notice, unless the Company requests an appeal of the determination to delist the Company’s common stock by October 29, 2024, trading of the Company’s common stock will be suspended at the opening of business on October 31, 2024, and a Form 25-NSE will be filed with the SEC which will remove the Company’s securities from listing and registration on Nasdaq. The Company appealed the determination on October 29, 2024. Submission of the hearing request stayed the suspension of the Company’s securities and the filing of the Form 25-NSE pending the Panel’s decision. On November 5, 2024, the Company received written notice from the Nasdaq Staff that the Company demonstrated compliance with the $1.00 minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on the Nasdaq Capital Market. As a result, the hearing appealed on October 29, 2024 has now been cancelled as the Company regained compliance with the Nasdaq Capital Market’s listing requirements. 5 Financial Overview For the three months ended September 30, 2024 and 2023, we generated revenues of $17,850,411 and $4,688,908, respectively, reported a net income of $10,816,930 and a net loss of $2,541,133, respectively. For the nine months ended September 30, 2024 and 2023, we generated revenues of $26,963,531 and $18,518,431, respectively, reported a net income of $7,127,810 and a net loss of $1,755,942, respectively, and had cash flows used in operating activities of $3,499,514 and $2,457,661, respectively. As noted in our unaudited consolidated financial statements, as of September 30, 2024, we had an accumulated deficit of $6,990,113. Results of Operations Comparison of Results of Operations for the Three Months Ended September 30, 2024 and 2023 The following table summarizes our operating results as reflected in our unaudited statements of operations during the three months ended September 30, 2024 and 2023, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods. For the Three Months Ended September 30, 2024 2023 Variance % of % of Amount Revenues Amount Revenues Amount % Revenues $ 17,850,411 100.0 % $ 4,688,908 100.0 % $ 13,161,503 280.7 % Cost of revenues 3,433,024 19.2 % 3,860,241 82.3 % (427,217 ) -11.1 % Gross profit 14,417,387 80.8 % 828,667 17.7 % 13,588,720 1,639.8 % Operating expenses: Selling expenses 243,110 1.4 % 274,043 5.9 % (30,933 ) -11.3 % General and administrative expenses 1,966,717 11.0 % 2,172,298 46.3 % (205,581 ) -9.5 % Research and development expenses 107,529 0.6 % 170,071 3.6 % (62,542 ) -36.8 % Total operating expenses 2,317,356 13.0 % 2,616,412 55.8 % (299,056 ) -11.4 % Income (loss) from operations 12,100,031 67.8 % (1,787,745 ) -38.1 % 13,887,776 -776.8 % Other expenses (1,057,826 ) -5.9 % (733,975 ) -15.7 % (323,851 ) 44.1 % Income (loss) before income tax provision 11,042,205 61.9 % (2,521,720 ) -53.8 % 13,563,925 -537.9 % Income tax expense 225,275 1.3 % 19,413 0.4 % 205,862 1,060.4 % Net income (loss) 10,816,930 60.6 % (2,541,133 ) -54.2 % 13,358,063 -525.7 % Less: net loss attributable to non-controlling interests (240,876 ) -1.3 % (233,913 ) -5.0 % (6,963 ) 3.0 % Net income (loss) attributable to HeartCore Enterprises, Inc. $ 11,057,806 61.9 % $ (2,307,220 ) -49.2 % $ 13,365,026 -579.3 % 6 Revenues Our total revenues increased by $13,161,503, or 280.7%, to $17,850,411 for the three months ended September 30, 2024 from $4,688,908 for the three months ended September 30, 2023, mainly attributable to the increased revenues of $13,272,315 from GO IPO consulting services as two of the Company’s GO IPO customers successfully listed on the Nasdaq in the third quarter of 2024 and the Company recognized revenues from noncash consideration in the form of warrants and ordinary shares from the consulting services customers. Cost of Revenues Our total costs of revenues decreased by $427,217, or 11.1%, to $3,433,024 for the three months ended September 30, 2024 from $3,860,241 for the three months ended September 30, 2023, primarily attributable to (i) a decrease of $238,701 in the costs of GO IPO consulting services in line with the decrease in revenues of GO IPO consulting services by excluding th e amount recognized from noncash consideration; (ii) a decrease of $219,058 in the costs of customized software development and services in light of the decrease in sales. Gross Profit Our total gross profit increased by $13,588,720, or 1,639.8%, to $14,417,387 for the three months ended September 30, 2024 from $828,667 for the three months ended September 30, 2023, mainly attributable to an increase in gross profit of $13,511,016 from GO IPO consulting services as the Company recognized revenues from noncash consideration in the form of warrants and ordinary shares from two of IPO customers upon their IPO effectiveness with no associated costs in the three months ended September 30, 2024, while there was no such event during the three months ended September 30, 2023 . For the reason discussed above, our overall gross profit margin increased by 63.1% to 80.8% for the three months ended September 30, 2024 from 17.7% for the three months ended September 30, 2023. Selling Expenses Our selling expenses decreased by $30,933, or 11.3%, to $243,110 for the three months ended September 30, 2024 from $274,043 in the three months ended September 30, 2023, primarily attributable to a decrease of $41,224 in stock-based compensation as the Company granted shares of common stock to employees and service providers of Sigmaways in 2023, and there was no such event in the current period. As a percentage of revenues, our selling expenses accounted for 1.4% and 5.9% of our total revenues for the three months ended September 30, 2024 and 2023, respectively. General and Administrative Expenses Our general and administrative expenses decreased by $205,581, or 9.5%, to $1,966,717 for the three months ended September 30, 2024 from $2,172,298 in the three months ended September 30, 2023, primarily attributable to a decrease of $230,045 in salaries and welfare due to the retirement of certain employees. As a percentage of revenues, our general and administrative expenses were 11.0% and 46.3% of our total revenues for the three months ended September 30, 2024 and 2023, respectively. Research and Development Expenses Our research and development expenses decreased by $62,542, or 36.8%, to $107,529 in the three months ended September 30, 2024 from $170,071 in the three months ended September 30, 2023, primarily attributable to a decrease of $61,986 in outsourcing expenses relating to the development of new CMS management screen features which will be completed soon. As a percentage of revenues, our research and development expenses were 0.6% and 3.6% of our total revenues for the three months ended September 30, 2024 and 2023, respectively. 7 Other Income (Expenses), Net Our other income (expenses) primarily includes changes in fair value of investments in marketable securities, changes in fair value of investment in warrants, loss on sale of warrants, interest income generated from bank deposits, interest expense for bank loans and bond, other income, and other expenses. Other expenses, net, of $733,975 for the three months ended September 30, 2023 increased by $323,851, or 44.1%, to other expenses, net, of $1,057,826 for the three months ended September 30, 2024, primarily attributable to (i) a loss of $3,970,628 on sale of warrants, offset (ii) by an increase of $3,330,079 in changes in fair value of investment in warrants and (iii) an increase of $394,012 in changes in fair value of investments in marketable securities. Income Tax Expense Income tax expense was $225,275 in the three months ended September 30, 2024, an increase of $205,862, or 1,060.4%, from income tax expense of $19,413 in the three months ended September 30, 2023, primarily due to a net income before income tax provision in the current period, while we recorded a net loss before income tax provision in the three months ended September 30, 2023. Net Income (Loss) As a result of the foregoing, we reported a net income of $10,816,930 for the three months ended September 30, 2024, representing a $13,358,063, or 525.7%, increase from a net loss of $2,541,133 for the three months ended September 30, 2023. Net Loss Attributable to Non-controlling Interests We owned 51% equity interest in Sigmaways and its subsidiaries and 51% equity interest in HeartCore Luvina. Accordingly, we recorded net loss attributable to non-controlling interests of $240,876 and $233,913 for the three months ended September 30, 2024 and 2023, respectively. Net Income (Loss) Attributable to HeartCore Enterprises, Inc. As a result of the foregoing, we reported a net income attributable to HeartCore Enterprises, Inc. of $11,057,806 for the three months ended September 30, 2024, representing a $13,365,026, or 579.3%, increase from a net loss attributable to HeartCore Enterprises, Inc. of $2,307,220 for the three months ended September 30, 2023. 8 Comparison of Results of Operations for the Nine Months Ended September 30, 2024 and 2023 The following table summarizes our operating results as reflected in our unaudited statements of operations during the nine months ended September 30, 2024 and 2023, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods. For the Nine Months Ended September 30, 2024 2023 Variance % of % of Amount Revenues Amount Revenues Amount % Revenues $ 26,963,531 100.0 % $ 18,518,431 100.0 % $ 8,445,100 45.6 % Cost of revenues 9,708,074 36.0 % 10,548,245 57.0 % (840,171 ) -8.0 % Gross profit 17,255,457 64.0 % 7,970,186 43.0 % 9,285,271 116.5 % Operating expenses: Selling expenses 642,225 2.4 % 1,330,747 7.2 % (688,522 ) -51.7 % General and administrative expenses 6,395,429 23.8 % 7,305,392 39.4 % (909,963 ) -12.5 % Research and development expenses 307,931 1.1 % 289,303 1.6 % 18,628 6.4 % Total operating expenses 7,345,585 27.3 % 8,925,442 48.2 % (1,579,857 ) -17.7 % Income (loss) from operations 9,909,872 36.7 % (955,256 ) -5.2 % 10,865,128 -1,137.4 % Other expenses (2,709,117 ) -10.0 % (741,827 ) -4.0 % (1,967,290 ) 265.2 % Income (loss) before income tax provision 7,200,755 26.7 % (1,697,083 ) -9.2 % 8,897,838 -524.3 % Income tax expense 72,945 0.3 % 58,859 0.3 % 14,086 23.9 % Net income (loss) 7,127,810 26.4 % (1,755,942 ) -9.5 % 8,883,752 -505.9 % Less: net loss attributable to non-controlling interests (645,546 ) -2.4 % (419,211 ) -2.3 % (226,335 ) 54.0 % Net income (loss) attributable to HeartCore Enterprises, Inc. $ 7,773,356 28.8 % $ (1,336,731 ) -7.2 % $ 9,110,087 -681.5 % Revenues Our total revenues increased by $8,445,100, or 45.6%, to $26,963,531 for the nine months ended September 30, 2024 from $18,518,431 for the nine months ended September 30, 2023, mainly attributable to the increased revenues of $8,168,414 from GO IPO consulting services as two of the Company’s GO IPO customers successfully listed on the Nasdaq in the third quarter of 2024 and the Company recognized revenues from noncash consideration in the form of warrants and ordinary shares from the consulting services customers of $13.5 million, while only $4 million of revenue recognized from noncash consideration in the form of warrants in the nine months ended September 30, 2023. Cost of Revenues Our total cost of revenues decreased by $840,171, or 8.0%, to $9,708,074 for the nine months ended September 30, 2024 from $10,548,245 for the nine months ended September 30, 2023, mainly attributable to (i) a decrease of $975,454 in the costs of GO IPO consulting services in line with the decrease in revenues of GO IPO consulting services by excluding th e amount recognized from noncash consideration, offset by (ii) an increase of $259,917 in customized software development and services as the sales increased. Gross Profit Our total gross profit increased by $9,285,271, or 116.5%, to $17,255,457 for the nine months ended September 30, 2024 from $7,970,186 for the nine months ended September 30, 2023, mainly attributable to an increase in gross profit of $9,143,868 from GO IPO consulting services, as the Company recognized greater revenues from noncash consideration from IPO customers upon their IPO effectiveness with no associated costs in the nine months ended September 30, 2024 than that recognized in the same period in 2023. For the reason discussed above, our overall gross profit margin increased by 21.0% to 64.0% for the nine months ended September 30, 2024 from 43.0% in the nine months ended September 30, 2023. Selling Expenses Our selling expenses decreased by $688,522, or 51.7%, to $642,225 for the nine months ended September 30, 2024 from $1,330,747 in the nine months ended September 30, 2023, primarily attributable to (i) a decrease of $380,087 in stock-based compensation, as the Company granted shares of common stock to employees and service providers of Sigmaways in 2023, and there was no such event in the current period; and (ii) a decrease of $337,882 in advertising expense due to less advertising activities in the current period. As a percentage of revenues, our selling expenses accounted for 2.4% and 7.2% of our total revenues for the nine months ended September 30, 2024 and 2023, respectively. 9 General and Administrative Expenses Our general and administrative expenses decreased by $909,963, or 12.5%, to $6,395,429 for the nine months ended September 30, 2024 from $7,305,392 in the nine months ended September 30, 2023, primarily attributable to (i) a decrease of $566,923 in stock-based compensation, as the Company granted shares of common stock to employees and service providers of Sigmaways in 2023, and there was no such event in the current period; and (ii) a decrease of $314,119 in salaries welfare mainly due to the retirement of certain employees. As a percentage of revenues, our general and administrative expenses were 23.8% and 39.4% of our total revenues for the nine months ended September 30, 2024 and 2023, respectively. Research and Development Expenses Our research and development expenses slightly increased by $18,628, or 6.4%, to $307,931 in the nine months ended September 30, 2024 from $289,303 in the nine months ended September 30, 2023, primarily attributable to (i) an increase of $75,981 in outsourcing expenses relating to the development of new CMS management screen features in the current period; offset by (ii) a decrease of $57,353 in stock-based compensation, as the Company granted shares of common stock to employees and service providers of Sigmaways in 2023, and there was no such event in the current period. As a percentage of revenues, our research and development expenses were 1.1% and 1.6% of our total revenues for the nine months ended September 30, 2024 and 2023, respectively. Other Income (Expenses), Net Our other income (expenses) primarily includes changes in fair value of investments in marketable securities, changes in fair value of investment in warrants, loss on sale of warrants, interest income generated from bank deposits, interest expense for bank loans and bond, other income, and other expenses. Other expenses, net, of $741,827 for the nine months ended September 30, 2023 increased by $1,967,290, or 265.2%, to other expenses, net, of $2,709,117 for the nine months ended September 30, 2024, primarily attributable to a loss of $3,970,628 on sale of warrants, offset by an increase of $192,703 in changes in fair value of investments in marketable securities and an increase of $1,926,265 in changes in fair value of investment in warrants. Income Tax Expense Income tax expense was $72,945 for the nine months ended September 30, 2024, an increase of $14,086, or 23.9%, from income tax expense of $58,859 in the nine months ended September 30, 2023, primarily due to an income before income tax provision in the current period, while we recorded a loss before income tax provision in the nine months ended September 30, 2023. Net Income (Loss) As a result of the foregoing, we reported a net income of $7,127,810 for the nine months ended September 30, 2024, representing a $8,883,752, or 505.9%, increase from a loss of $1,755,942 for the nine months ended September 30, 2023. Net Loss Attributable to Non-controlling Interests We owned 51% equity interest in Sigmaways and its subsidiaries and 51% equity interest of HeartCore Luvina. Accordingly, we recorded net loss attributable to non-controlling interests of $645,546 and $419,211 for the nine months ended September 30, 2024 and 2023, respectively. 10 Net Income (Loss) Attributable to HeartCore Enterprises, Inc. As a result of the foregoing, we reported a net income attributable to HeartCore Enterprises, Inc. of $7,773,356 for the nine months ended September 30, 2024, representing a $9,110,087, or 681.5%, increase from a net loss attributable to HeartCore Enterprises, Inc. of $1,336,731 for the nine months ended September 30, 2023. Liquidity and Capital Resources As of September 30, 2024, we had $1,232,117 in cash and cash equivalents, as compared to $1,012,479 as of December 31, 2023. We also had $2,578,855 in accounts receivable, current as of September 30, 2024. Our accounts receivable primarily include balance due from customers for our on-premise software sold and services provided and accepted by customers, as well as amounts billable to the customers for customized software development and services. The following table sets forth a summary of our cash flows for the periods indicated: For the Nine Months Ended September 30, 2024 2023 Net cash flows used in operating activities $ (3,499,514 ) $ (2,457,661 ) Net cash flows provided by (used in) investing activities 5,317,323 (1,781,810 ) Net cash flows used in financing activities (1,529,441 ) (432,051 ) Effect of exchange rate changes (68,730 ) (306,239 ) Net change in cash and cash equivalents 219,638 (4,977,761 ) Cash and cash equivalents, beginning of the period 1,012,479 7,177,326 Cash and cash equivalents, end of the period $ 1,232,117 $ 2,199,565 Operating Activities Net cash flows used in operating activities was $3,499,514 for the nine months ended September 30, 2024, primarily consisting of the following: ● Net income of $7,127,810 for the nine months ended September 30, 2024. ● Marketable securities and warrants received as noncash consideration in total of $13,541,693 as two of our IPO consulting customers completed the IPO during the current period. ● A gain of $1,631,700 on fair value changes in investment in warrants. ● An increase of $685,531 in accounts receivable due to increased sale of on-premise software in the current period. ● Offset by loss of $3,970,628 recognized on sale of warrants to a third party. ● Offset by depreciation and amortization expenses of $561,659. ● Offset by an increase of $540,008 in other liabilities, mainly because we terminated the consulting service agreement with a GO IPO customer and will refund $500,000 to the customer. Investing Activities Net cash flows provided by investing activities amounted to $5,317,323 for the nine months ended September 30, 2024, primarily attributable to net proceeds from sale of warrants of $5,640,000, offset by payment of $350,000 to purchase long-term investment in SAFE. Financing Activities Net cash flows used in financing activities amounted to $1,529,441 for the nine months ended September 30, 2024, primarily consisting of repayment of $453,048 for short-term and long-term debts, net repayment of $257,295 for factoring arrangement, and dividend distribution of $834,566. 11 Contractual Obligations Lease Commitment The Company has entered into six leases for its office space, one of which was terminated in February 2024, and these leases were classified as operating leases. It has also entered into a lease for office equipment and it was terminated in March 2024, 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, 2024, future minimum lease payments under the non-cancelable lease agreements are as follows: Year Ended December 31, Finance Leases Operating Leases Remaining of 2024 $ 4,545 $ 107,999 2025 18,179 403,889 2026 18,179 329,040 2027 18,179 283,512 2028 12,119 283,512 Thereafter - 942,387 Total lease payments 71,201 2,350,339 Less: imputed interest (1,821 ) (107,797 ) Total lease liabilities 69,380 2,242,542 Less: current portion (17,375 ) (382,594 ) Non-current lease liabilities $ 52,005 $ 1,859,948 Debts The Company’s debts included long-term debts borrowed from banks and financial institutions. As of September 30, 2024, future minimum principal payments for long-term debts are as follows: Principal Year End ed December 31, Payment Remaining of 2024 $ 99,325 2025 434,474 2026 386,063 2027 414,474 2028 187,152 Thereafter 336,584 Total $ 1,858,072 Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of September 30, 2024. 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 unaudited 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. 12 Revenue Recognition The Company recognizes revenues under the Financial Accounting Standards Board’s Accounting Standards Codification (“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. Revenues amount represents the invoiced value, net of a value-added tax (“Consumption Tax”) and applicable local government levies. The Consumption Tax on sales are calculated at 10% of gross sales in Japan and Vietnam, 5% of gross sales in Canada, 21% of gross sales in Netherlands and nil of gross sales in the United States. The Company currently generates its revenue from the following main sources: Revenues from On-Premise Software Licenses for on-premise software provide the customers with a right to use the software as it exists when made available to the customers. 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 customers. Licenses for on-premise software are typically sold to the customers with maintenance and support services in a bundle. Revenues under the bundled arrangements are allocated based on the relative standalone selling prices (“SSP”) of on-premise software and maintenance and support service. The SSP for maintenance and support services is estimated based upon observable transactions when those services are sold on a standalone basis. The SSP of on-premise software is typically estimated using the residual approach as the Company is unable to establish the SSP for on-premise licenses based on observable prices given the same products are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions or other observable evidence. Revenues from Maintenance and Support Services Maintenance and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted by the customers. Revenues from Software as a Service (“SaaS”) The Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company’s solution is made available to the customers. 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 are primarily composed 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 revenues 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. 13 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 contracts that result in the transfer of control over time, the underlying deliverable in the contracts is owned and controlled by the customers and does not create an asset with an alternative use to the Company. The Company recognizes revenues on rate per hour contracts based on the amount billable to the customers, as the Company has the right to invoice the customers in an amount that directly corresponds with the value to the customers 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 normally include both cash and noncash considerations. Cash consideration is paid in installment payments and is recognized in revenues over the period of the contract by reference to progress toward complete satisfaction of that performance obligation. Noncash consideration is 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 Company records reduction to revenues for estimated customer returns and allowances. The Company bases its estimates on historical rates of customer returns and allowances as well as the specific identification of outstanding returns. The actual amount of customer returns and allowances, which is inherently uncertain, may differ from the Company’s estimates. If the Company determines that actual or expected returns or allowances are significantly higher or lower than the reserves it established, it would record a reduction or increase, as appropriate, to revenues in the period in which it makes such a determination. Reserves for customer refunds are included within other current liabilities on the consolidated balance sheets. At a minimum, the Company reviews and refines these estimates on a quarterly basis. 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, current and non-current, in the consolidated balance sheets, when revenues are recognized prior to invoicing. The Company factors certain accounts receivable upon or after the performance obligation is being met. The Company records deferred revenue in 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, 2024 and 2023 that were included in the opening deferred revenue balance was approximately $1.8 million and $1.5 million, respectively. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.