ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
All statements other than
statements of historical fact included in this annual report, including, without limitation, statements under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business
strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this annual report,
words such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and
similar expressions, as they relate to us or the Company’s management, identify forward-looking statements. Such forward-looking
statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company’s
management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors
detailed in our filings with the SEC.
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial
statements and the notes thereto contained elsewhere in this annual report. Certain information contained in the discussion and analysis
set forth below includes forward-looking statements that involve risks and uncertainties. References herein to “we,” “us”
or the “Company” refers to HeartCore Enterprises, Inc. and its consolidated subsidiaries, including HeartCore Co., Ltd. (“HeartCore
Co.”), HeartCore Capital Advisors, Inc. (“HeartCore Capital Advisors”), HeartCore Financial, Inc. (“HeartCore
Financial”) and its branch office in Japan, HeartCore Luvina Vietnam Company Limited (“HeartCore Luvina”), and Sigmaways,
Inc. (“Sigmaways”) and its subsidiaries. HeartCore Capital Advisors was merged into HeartCore Japan in January 2024. HeartCore
Luvina was incorporated in the fourth quarter 2023 and started to operate in February 2024.
Business Overview
We are a leading software development company based in Tokyo, Japan.
We provide software through two business units. The first business unit, our CX division, includes a customer experience management business
(the “CXM Platform”) that has been in existence for 15 years. Our CXM Platform includes marketing, sales, service and content
management systems, as well as other tools and integrations, that enable companies to attract and engage customers throughout the customer
experience. We also provide education, services and support to help customers be successful with our CXM Platform.
The second business unit,
our DX division, is a digital transformation business which provides customers with robotics process automation, process mining and task
mining to accelerate the digital transformation of enterprises. We also have an ongoing technology innovation team to develop software
that supports the narrow needs of large enterprise customers.
We have made significant investments
in our sales and marketing efforts globally. As of December 31, 2024, our sales and marketing organization was comprised of 12 employees
including our field sales organization, which maintains a physical sales presence in the Japanese software market. Using our go-to-market
strategy, we believe we have made significant contributions in Japan and have established a diversified revenue and customer base. As
of December 31, 2024, our combined business units (customer experience management business unit and digital transformation business unit)
had 982 total customers in Japan, of which 724, or 73.7%, were paying customers, and 26 total customers outside Japan, of which 1, or
0.1%, was a paying customer. Our 280 non-paying customers were originally paying customers that utilized our paid services but now use
a free version of the CXM Platform. There is the potential for non-paying customers to become paying customers again if and when they
start utilizing our paid services again.
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During 2022, we started the GO IPO business, which supports Japanese
companies listing on Nasdaq and NYSE in the United States. As of December 31, 2024, we have entered into consulting agreements with 14
companies to assist them in their IPO process, whereby we are entitled to receive from each company a consulting fee that ranges from
$380,000 to $900,000 and warrants or stock acquisition rights to purchase 1% to 4% of the fully-diluted share capital of such companies
that is exercisable on certain dates at an exercise price of $0.01 or JPY1 per share.
We were incorporated in the
State of Delaware on May 18, 2021. We conduct business activities principally through our wholly owned subsidiary, HeartCore Co., a Japanese
corporation, which was established in Japan by Mr. Sumitaka Yamamoto, our CEO, in 2009.
On September 6, 2022, HeartCore
Enterprises, Inc. entered into a share exchange and purchase agreement (“Sigmaways Agreement”) to acquire 51% of the outstanding
shares of Sigmaways, a company incorporated under the laws of the State of California, and its wholly owned subsidiaries. Sigmaways and
its wholly owned subsidiaries are engaged in the business of developing and sales of software in the United States. The acquisition was
closed on February 1, 2023.
In the first quarter of 2023, we formed HeartCore Financial in the
U.S. and HeartCore Capital Advisors as part of our Go IPO consulting business. In the fourth quarter of 2023, we formed HeartCore Luvina
in Vietnam, which is engaged in the business of software development.
On November 17, 2023 HeartCore
Japan and HeartCore Capital Advisors entered into a merger agreement to merge the two entities into one with HeartCore Japan being the
surviving entity. On January 1, 2024, the merger was completed and HeartCore Capital Advisors transferred all of its assets and liabilities
to HeartCore Japan. The merger has been accounted for as a recapitalization between entities under common control since the same controlling
shareholders controlled the two entities before and after the transaction.
In April 2024, HeartCore Financial incorporated a branch office, HeartCore
Financial, Inc. – Japan Branch Office, in Japan.
For the fiscal years ended December 31, 2024 and 2023, we generated
revenues of $30,407,229 and $21,845,830, respectively, and reported net loss of $5,212,900 and $4,876,700, respectively, and cash flows
used in operating activities of $4,774,971 and $4,331,209, respectively. As noted in our consolidated financial statements, as of December
31, 2024, we had an accumulated deficit of $16,244,843.
Key Factors that Affect Our Results of Operations
We believe the following key
factors may affect our financial condition and results of operations:
Our Ability to Strength Our Competitive
Advantages
Our mission is to be at the
forefront of innovation and thought leadership in enterprise business automation, analyzing enterprise users’ desktops and mission-critical
systems, and creating end-to-end software that provides business automation based on the results of that analysis and further simulating
the numbers. We create end-to-end software that provides business automation. Our customers use our software across their organizations
so that they can run their operations in a more fully automated manner. Our ability to successfully implement the automation in our software
greatly affects our profitability.
Our Ability to Expand International Market
We maintain a physical sales
presence in the Japanese software market. Using our global go-to-market strategy we believe we have established a diversified revenue
and customer base. We will continue to develop our global operation. International expansion over the long term represents a significant
opportunity and we plan to continue to invest in growing our presence internationally, both through expanding our sales and marketing
efforts and leveraging channel and other ecosystem partners.
Our Ability to Control Costs and Expenses
and Improve Our Operating Efficiency
Our business growth is dependent
on our ability to attract and retain qualified and productive employees, identify business opportunities, secure new contracts with customers
and our ability to control costs and expenses to improve our operating efficiency. Our software costs (mostly including purchased software
license, salaries and welfare, and outsourcing expenses) have a direct impact on our profitability. Our success is dependent, in part,
on our ability to reduce our exposure to increase in those costs through a variety of ways, while maintaining and improving margins and
market share. In addition, our staffing costs (including salaries and welfare) and administrative expenses also have a direct impact on
our profitability. Our ability to drive the productivity of our staff and enhance our operating efficiency affects our profitability.
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Our Ability to Manage and Retain Customer
Renewals
Our ability to manage and
retain customer renewals is vital to our expansion of renewals in our customer base and continuous and growing revenue. By achieving and
maintaining high retention of customer renewals, we are able to cover most of our expenses from the revenue generated from such retained
customer renewals. In order to achieve and maintain a high retention of customer renewals, we engage in the following actions: (i) we
conduct annual surveys of existing customers; (ii) we conduct Net Promoter Scoring (NPS), whereby we measure customer loyalty and satisfaction
by asking our customers how likely they are to recommend our product and service to others; and (iii) we have sales representatives visit
important customers to increase customer retention. Our ability to expand within our customer base is demonstrated by our net retention
rate, which represents the rate of net expansion of annualized renewal run-rate from existing customers over the last 12 months.
As of December 31, 2024, our
combined business units (customer experience management business unit and digital transformation business unit) had 982 total customers
in Japan, of which 724, or 73.7%, were paying customers and 26 total customers outside Japan, of which 1, or 0.1%, was a paying customer.
Our 280 non-paying customers were originally paying customers that utilized our paid services but now use a free version of the CXM Platform. Our
net retention rate for our paying customers of our customer experience management business unit (CMS business) was 95%, 88%, and 92% as
of December 31, 2024, 2023, and 2022, respectively. There is an insignificant impact (below 10%) on our net retention rate as to former
paying customers of our CMS business utilizing the free version of your CXM Platform.
A Severe or Prolonged Slowdown in the Global
and Japan Economy Could Materially and Adversely Affect Our Business and Our Financial Condition
In recent years, the economic
indicators in Japan have shown mixed signs, and future growth of the Japanese economy is subject to many factors beyond our control. The
current administration of Prime Minster Shigeru Ishiba and the former administration of Prime Minister Fumio Kishida have introduced policies
to combat deflation and promote economic growth. In addition, the Bank of Japan introduced a plan for quantitative and qualitative monetary
easing in April 2013 and announced a negative interest rate policy in January 2016. However, the long-term impact of these policy initiatives
on Japan’s economy remains uncertain. The impact of Brexit on the Japanese economy and on the value of the Japanese yen against
currencies of other countries in which we generate revenue, in both the short and long term, is also uncertain. In addition, an increase
in the consumption tax rate, which took place in April 2014 with a further increase in October 2019, may also adversely impact the Japanese
economy, potentially impacting consumer spending, and advertising spending by businesses. Any future deterioration of the Japanese or
global economy may result in a decline in consumption that would have a negative impact on demand for our products and their prices.
GO IPO consulting services
business may experience a decrease in clients due to external factors such as the slowdown of the Japanese economy. In addition, an increase
in the number of competitors may have an impact on the business.
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Results of Operations
Comparison of Results of Operations for the
Fiscal Years Ended December 31, 2024 and 2023
The following table summarizes
our operating results as reflected in our statements of operations for the fiscal years ended December 31, 2024 and 2023, respectively,
and provides information regarding the dollar and percentage increase or (decrease) during such periods.
For the Years Ended December 31,
% of % of
Amount Revenues Amount Revenues Amount %
Operating expenses:
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For the Years Ended December 31,
Amount % Amount % Amount %
Revenues
Cost of revenues
Gross profit
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Revenues
Our total revenues increased by $8,561,399, or 39.2%, to $30,407,229
for the year ended December 31, 2024 from $21,845,830 for the year ended December 31, 2023, mainly
attributable to (i) the increased revenue of $8,524,455 from GO IPO consulting services as two of the Company’s GO IPO consulting
customers successfully listed on the Nasdaq in the fiscal year 2024 and the Company recognized revenues from noncash consideration in
the form of warrants and ordinary shares from the consulting services customers of $13.5 million, while only $3.8 million of revenue recognized
from noncash consideration in the form of warrants in the fiscal year 2023; and (ii) an increase of $1,114,551 in on-premise software
revenue as we entered into multiple long-term license contracts with relatively large contract price and revenue amount in the fiscal
year 2024; and offset by (iii) a decrease of $929,954 in revenue from customized software development and services due to intense market
competition and we obtained fewer customer orders in the fiscal year 2024.
Cost of Revenues
Our total costs of revenues decreased by $1,199,057, or 8.7%, to $12,579,359
for the year ended December 31, 2024 from $13,778,416 for the year ended December 31, 2023, mainly
attributable to (i) a decrease of $1,085,192 in the cost of GO IPO consulting services in line with the decrease in revenues of GO IPO
consulting services by excluding the amount recognized from noncash consideration; and (ii) a decrease of $332,033 in cost of maintenance
and support services as we gradually used internal resources to provide the services in 2024, which
was less costly when compared with using outsourcing resources.
Gross Profit
Our total gross profit
increased by $9,760,456, or 121.0%, to $17,827,870 for the year ended December 31, 2024 from $8,067,414 for the year ended December
31, 2023, mainly attributable to an increase in gross profit of $9,609,647 from GO IPO
consulting services, as we recognized greater revenues from noncash consideration from IPO customers upon their IPO effectiveness
with no associated costs in the fiscal year 2024 than that recognized in 2023.
For the reasons discussed
above, our overall gross profit margin increased by 21.7% to 58.6% for the year ended December 31, 2024 from 36.9% in the fiscal year
2023.
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Operating Expenses
The following table sets forth
the breakdown of our operating expenses for the fiscal years ended December 31, 2024 and 2023:
For the Years Ended December 31,
% of % of
Amount Revenues Amount Revenues Amount % of
Operating expenses:
Selling Expenses
Our selling expenses primarily include advertising expenses, sales
salaries, commissions, and welfare, sales promotion expenses, referral expense, and stock-based compensation.
For the Years Ended December 31,
Amount % Amount % Amount %
Selling expenses
Our selling expenses decreased
by $260,879, or 17.2%, to $1,255,368 for the year ended December 31, 2024 from $1,516,247 in the fiscal year 2023, primarily attributable
to (i) a decrease of $359,359 in advertising expenses due to less advertising activities in the current year, (ii) a decrease of $416,476
in stock-based compensation, as the Company granted restricted common stocks which immediately vested upon issuance and stock options
to employees of Sigmaways in 2023, and there was no such amount restricted common stocks and stock options granted in the current year,
the decrease is also contributed by the graded vesting method of stock options for those issued in previous years, which generally more
stock-based compensation will recognize in the early stage, offset by (iii) the increase of $464,963 in sales salaries, commissions and
welfare as the Company shifted marketing strategy in the fiscal year 2024.
As a percentage of revenues,
our selling expenses accounted for 4.1% and 6.9% of our total revenues for the years ended December 31, 2024 and 2023, respectively.
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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,
Amount % Amount % Amount %
General and administrative expenses
Our general and administrative expenses decreased by $1,027,794 or
10.6%, to $8,628,587 for the year ended December 31, 2024 from $9,651,381 in the fiscal year 2023, primarily attributable to (i) a decrease
of $825,248 in salaries and welfare expenses due decrease in numbers of directors, change in bonus structures, and dissolution of HeartCore
Capital Advisors in the fiscal year 2024; (ii) a decrease of $558,041 in stock-based compensation, as the Company granted restricted common
stocks which immediately vested upon issuance and stock options to employees of Sigmaways in 2023, and there was no such amount restricted
common stocks and stock options granted in the current year, the decrease is also contributed by the graded vesting method of stock options
for those issued in previous years, which generally more stock-based compensation will recognize in the early stage; offset by (iii) an
increase of $479,668 in consulting and professional service fees, primarily because the Company newly engaged public relations related
activities in 2024 to enhance compliance and regulation information, while no such activities occurred in previous year.
As a percentage of revenues,
general and administrative expenses were 28.4% and 44.2% of our revenues for the fiscal years ended December 31, 2024 and 2023, respectively.
Research and Development Expenses
Our research and development
expenses primarily consist of employee salaries and welfare expenses, outsourcing expenses, and stock-based compensation.
For the Years Ended December 31,
Amount % Amount % Amount %
Research and development expenses
Our research and development
expenses decreased by $289,557 or 28.4%, to $729,584 in the year ended December 31, 2024 from $1,019,141 in the year ended December 31,
2023, primarily attributable to a decrease of $603,367 in outsourcing expenses relating to the development
of new CMS management screen features, which stared in 2023 and about to completed in the current year; and offset by an increase of $371,748
in salaries and welfare expenses for the employees assigned to the development of a new product, Global CMS, started in 2024.
As a percentage of revenues,
research and development expenses were 2.4% and 4.7% of our revenues for the fiscal years ended December 31, 2024 and 2023, respectively.
Impairment of Intangible Asset
Our intangible asset represents
the customer relationship acquired from business acquisition of Sigmaways and its subsidiaries. As of December 31, 2024, we accessed the
value of such intangible asset become zero by engaging a third-party valuation appraiser, accordingly, we recorded an impairment of intangible
asset of $3,878,125, excluding an amortization expense of $637,500 in the year ended December 31, 2024.
Impairment of Goodwill
Our goodwill represents the
excess of the purchase price over the fair value of the net identifiable assets acquired in business acquisition of Sigmaways and its
subsidiaries. As of December 31, 2024, we evaluated the fair value of the reporting unit of Sigmaways and its subsidiaries and estimated
the value of goodwill become zero by engaging a third-party valuation appraiser, accordingly, we recorded an impairment of goodwill of
$3,276,441 in the year ended December 31, 2024.
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Other Income (Expenses), Net
Our other income (expenses) primarily includes changes in fair value
of investments in marketable securities, changes in fair value of investment in warrants, loss on sale of warrants, interest income generated
from bank deposits, interest expenses for bank loans and bonds, government grants, impairment of investment in equity securities, loss
on forgiveness of note receivable, other income, and other expenses. Total other expenses, net, increased by $4,523,478 or 507.7%, from
other expenses, net, of $891,009 for the year ended December 31, 2023 to other expenses, net, of $5,414,487 for the year ended December
31, 2024, primarily attributable to an increase of $1,796,865 in loss on fair value changes in investments
in marketable securities, an increase of $3,970,628 in loss on sale of warrants, and an increase of $300,000 in impairment of investment
in equity securities, offset by an increase of $2,159,144 in gain on fair value changes in investment in warrants.
Income Tax Benefit
Income tax benefit was $136,822
for the year ended December 31, 2024, a slight increase of $3,158, or 2.4% from income tax benefit of $133,664 in the fiscal year 2023.
Net Loss
As a result of the foregoing,
we reported a net loss of $5,212,900 for the fiscal year ended December 31, 2024, representing a $336,200 or 6.9% increase from a net
loss of $4,876,700 for the fiscal year ended December 31, 2023.
Net Loss Attributable to Non-controlling
Interests
We
owned 51% equity interest of Sigmaways and its subsidiaries and 51% equity interest of HeartCore Luvina as of December 31, 2024.
Accordingly, we recorded net loss attributable to the non-controlling interests of $3,731,526 and $686,810 in the year ended
December 31, 2024 and 2023, respectively.
Net Loss Attributable to HeartCore Enterprises,
Inc.
As a result of the foregoing, we reported a net loss attributable to
HeartCore Enterprises, Inc. of $1,481,374 for the fiscal year ended December 31, 2024, representing a $2,708,516 or 64.6% decrease from
a net loss attributable to HeartCore Enterprise, Inc. of $4,189,890 for the fiscal year ended December 31, 2023.
Liquidity and Capital Resources
As of December 31, 2024, we had $2,121,089 in cash and cash equivalents
as compared to $1,012,479 as of December 31, 2023. We also had $1,950,050 in accounts receivable as of December 31, 2024. Our accounts
receivable primarily include balance due from customers for our on-premise software sold and services provided and accepted by customers,
as well as amounts billable to the customers for customized software development and services.
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As of December 31, 2024, our working capital was $1,995,643. In assessing
our liquidity, management monitors and analyzes our cash, our ability to generate sufficient revenues in the future, and our operating
and capital expenditure commitments.
Cash Flows for the Years Ended December
31, 2024 and 2023
The following table sets forth summary of our
cash flows for the periods indicated:
For the Years Ended December 31,
Net cash provided by (used in) investing activities 6,349,204 (1,780,952 )
Net cash provided by (used in) financing activities (318,646 ) 136,194
Operating Activities
Net cash used in operating
activities was $4,774,971 for the year ended December 31, 2024, primarily consisting of the following:
● Net loss of $5,212,900 for the fiscal year.
● A gain of $1,657,699 on fair value changes in investment in warrants.
● Offset by loss of $3,970,628 recognized on sale of warrants to a third party.
● Offset by depreciation and amortization expenses of $749,639.
● Offset by an increase of $669,142 in income tax payable.
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Net cash used in operating
activities was $4,331,209 for the year ended December 31, 2023, primarily consisting of the following:
● Net loss of $4,876,700 for the fiscal year.
● Offset by non-cash lease expense of $346,070.
Investing Activities
Net cash provided by investing activities amounted to $6,349,204 for
the year ended December 31, 2024, primarily consisted of (i) net proceeds of $5,640,000 from sale
of warrants, and (ii) net proceeds of $749,546 from sale of marketable securities.
Net cash used in investing
activities amounted to $1,780,952 for the year ended December 31, 2023, primarily consisted of (i)
payment for acquisition of Sigmaways and its subsidiaries, net of cash acquired, of $724,910; (ii) advances on notes receivable of $600,000;
and (iii) purchases of property and equipment of $526,260.
Financing Activities
Net cash used in financing
activities amounted to $318,646 for the year ended December 31, 2024, primarily consisted of (i)
dividends distribution of $834,566; (ii) repayment of $554,553 for short-term and long-term debts; (iii) net repayment of $390,373 for
factoring arrangement, and (iv) proceeds of $1,423,342 from issuance of common stocks.
Net cash provided by financing
activities amounted to $136,194 for the fiscal year ended December 31, 2023, primarily consisted
of proceeds of $710,107 from short-term and long-term debts, and net proceeds of $562,767 from factoring arrangement, offset by repayment
of $711,395 for long-term debts, and repayment of 389,035 for insurance premium financing.
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Contractual Obligations
Lease Commitment
The Company has entered into
operating leases for office space with terms ranging from two to fifteen years, and finance leases for office equipment and vehicle with
terms of five years.
As of December 31, 2024, future
minimum lease payments under the non-cancelable lease agreements are as follows:
Year Ended December 31, Finance Lease Operating Leases
Debts
The Company’s debts included long-term debts borrowed from banks
and financial institutions.
As of December 31, 2024, future
minimum payments for long-term debts are as follows:
Principal
Year Ended December 31, Payment
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements
as of December 31, 2024.
Critical Accounting Policies and
Estimates
Our discussion and analysis
of our financial condition and results of operations are based upon our consolidated financial statements. These financial statements
are prepared in accordance with the generally accepted accounting principles in the United States (“U.S. GAAP”), which requires
us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenues and expenses, to disclose
contingent assets and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenues
and expenses incurred during the financial reporting period. We continue to evaluate the estimates and assumptions that we believe to
be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial
reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment
than others in their application. We believe critical accounting policies reflect the more significant judgments and estimates used in
preparation of our consolidated financial statements.
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Revenue Recognition
We generate revenues from the following main sources:
on-premise software sales, maintenance and support services, software as a service (“SaaS”), software development and other
miscellaneous services, customized software development and services and consulting
services. A single contract could include one or multiple performance obligations. For those contracts that have multiple performance
obligations, we allocate the total transaction price to each performance obligation based on its relative standalone selling price.
Revenue is recognized when control of the goods
and services provided are transferred to our customers and in an amount that reflects the consideration we expect to be entitled to in
exchange for those goods and services using the following steps: 1) identify the contract, 2) identify the performance obligations, 3)
determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue
as or when we satisfy the performance obligations.
We satisfy our performance obligations for maintenance
and support services, software as a service (“SaaS”), customized software development and services and consulting services
over time as the related services are provided. We satisfy our performance obligations for on-premise software sales and software development
and other miscellaneous services at point in time.
We provide public listing related consulting services
to customers pursuant to the specific requirements prescribed in the contracts, which primarily include communicating with intermediary
parties, preparing required documents related to the initial public offering and supporting the listing process. The consulting service
contracts normally include both cash and noncash considerations. Cash consideration is paid in installment payments and is recognized
in revenues over the period of the contract by reference to progress toward complete satisfaction of that performance obligation. Noncash
consideration is primarily in the form of warrants of the customers and is measured at fair value at contract inception. Noncash consideration
that is variable for reasons other than only the form of the consideration is included in the transaction price, but is subject to the
constraint on variable consideration. We assess the estimated amount of the variable noncash consideration at contract inception and subsequently,
to determine when and to what extent it is probable that a significant reversal in the amount of cumulative revenues recognized will not
occur once the uncertainty associated with the variable consideration is subsequently resolved. Only when the significant revenues reversal
is concluded probable of not occurring can variable consideration be included in revenues. Based on evaluation of likelihood and magnitude
of a reversal in applying the constraint, the variable noncash consideration is recognized in revenues until the underlying uncertainties
have been resolved.
The valuation of noncash
consideration in the form of warrants of the customers are estimates are based on all available information and in some cases
assumptions with respect to the timing and amount of future revenues and expenses and are reviewed by consulting with third-party
valuation appraisers. The fair value of the warrants received from the customers are estimated using the Black-Scholes model and
binomial model. In connection with assessing the stock price as one of the inputs to the valuation model, income approach, through
the discounted cash flow method, and market approach, through the guideline company method, are used in the valuation process.
Management applies significant judgement related to these valuation models and approaches, such as future cash flows estimate,
discount rate assumption, selection of comparable companies, and etc. These significant assumptions are based on company specific
information and projections, which may not be observable in the market, and, therefore, are considered Level 2 and Level 3
measurements. These significant assumptions are forward-looking and could be affected by future changes in economic and market
conditions. We believe the accounting estimate for revenue recognition in connection with the valuation of the warrants received by
the Company as part of the consideration for consulting services is a critical accounting estimate because it requires estimates and
judgement as to expectations that are highly subjective, but which are inherently uncertain and, as a result, actual results may
differ from estimates.
Impairment of Intangible Asset and Goodwill
We review our intangible asset
for impairment and perform a goodwill impairment assessment on an annual basis through a qualitative or quantitative assessment and when
events and circumstances indicate that the estimated fair value of a reporting unit may no longer exceed its carrying value. The process
of evaluating the potential impairment of intangible asset and goodwill is subjective because it requires the use of estimates and assumptions
in determining a reporting unit’s fair value, as well as the fair value of the intangible asset. We calculate the fair values by
using the income approach, through the discounted cash flow method and multi-period excess earnings method, based on the present value
of future discounted cash flows, which requires us to use estimates and judgments about the future cash flows of the reporting unit, primarily
including forecasted revenue and revenue growth rates, weighted average cost of capital, and forecasted operating cash flows. We believe
the accounting estimate for impairment of intangible asset and reporting unit are critical accounting estimates because our estimates
of fair values of intangible asset and reporting unit are based upon assumptions that are highly subjective, but which are inherently
uncertain and, as a result, actual results may differ from estimates.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Reference is made to pages
F-1 through F-29 comprising a portion of this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls are procedures
that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act,
such as this annual report, is recorded, processed, summarized, and reported within the time period specified in the SEC’s rules
and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated
to our management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding
required disclosure. Our management evaluated, with the participation of our current chief executive officer and chief financial officer
(our “Certifying Officers”), the effectiveness of our disclosure controls and procedures as of December 31, 2024, pursuant
to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of December 31, 2024,
our disclosure controls and procedures were not effective. The ineffectiveness of our disclosure controls and procedures was due to the
existence of the material weakness identified below.
We do not expect that our
disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how
well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures
are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the
benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no
evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and
instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future
conditions.
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Management’s Report on Internal Control
Over Financial Reporting
Our management is responsible
for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and
14d-14(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
All internal control systems,
no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined
to be effective can only provide reasonable assurance with respect to financial reporting reliability and financial statement preparation
and presentation. In addition, projections of any evaluation of effectiveness to future periods are subject to risk that controls become
inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness
of the Company’s internal control over financial reporting as of December 31, 2024. In making the assessment, management used the
criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO – 2013) in Internal Control-Integrated
Framework. Based on its assessment, management concluded that, as of December 31, 2024, our Company’s internal control over financial
reporting was not effective.
Changes in Internal Control over Financial
Reporting
There were no changes in our
internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three
months ended December 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS
THAT PREVENT INSPECTIONS
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
Officers and Directors
The following table sets forth
the names and ages of the members of our Board of Directors and our executive officers and the positions held by each. Each director’s
term continues until his or her successor is elected or qualified at the next annual meeting, unless such director earlier resigns or
is removed.
Name Age Positions
Sumitaka Yamamoto 59 Chairman of Board, Chief Executive Officer and President
Kimio Hosaka 56 Chief Operating Officer and Director
Prakash Sadasivam 51 Chief Strategy Officer and Director
Hidekazu Miyata 54 Chief Technical Officer
Qizhi Gao 43 Chief Financial Officer
Keisuke Kuno 49 CX Division Vice President
Ferdinand Groenewald 40 Director
Heather Neville 53 Director
Koji Sato 55 Director
Biographical information
concerning our directors and executive officers listed above is set forth below.
Sumitaka Yamamoto.
Mr. Yamamoto has served as our Chairman of the Board of Directors since August 16, 2021 and served as our Chief Executive Officer and
President and been a member of our Board of Directors since May 18, 2021. Mr. Yamamoto is also the founder of HeartCore Co. and has served
as the Chief Executive Officer and member of the Board of Directors of HeartCore Co. since June 2009. Mr. Yamamoto is a seasoned information
technology software programmer. Mr. Yamamoto graduated with a bachelor’s degree in Spanish from Kansai Gaidai University, Tokyo,
Japan. Mr. Yamamoto does not hold, and has not previously held, any directorships in any reporting companies. We believe that Mr. Yamamoto
is qualified to serve on our Board of Directors due to his experience in all aspects of our business and his ability to provide an insider’s
perspective in board discussions about the business and strategic direction of the Company. We believe that his experience gives him unique
insights into our opportunities, challenges and operations.
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Kimio Hosaka.
Mr. Hosaka has served as our Chief Operating Officer and been a member of our Board of Directors since May 18, 2021. Mr. Hosaka has served
as the Chief Operating Officer and member of the Board of Managers of HeartCore Co. since August 2015. Mr. Hosaka graduated with a bachelor’s
degree in physics from Chuo University, Tokyo, Japan. Mr. Hosaka does not hold, and has not previously held, any directorships in any
reporting companies. We believe that Mr. Hosaka is qualified to serve on our Board of Directors due to his experience in business and
operations matters.
Prakash Sadasivam. Mr.
Sadasivam has served as our Chief Strategy Officer and been a member of our Board of Directors since February 1, 2023. Mr. Sadasivam is
a technology entrepreneur and the founder of Sigmaways. Under his leadership, Sigmaways has grown into a global organization with a diverse
team of experts in various technology fields. Mr. Sadasivam completed his undergraduate studies in Computer Science and Engineering from
Vellore Institute of Technology in India. He has also completed Management Development for Entrepreneurs from UCLA, Anderson School of
Management. He has also been official member of Forbes Technology Council since 2020. We believe that Mr. Sadasivam is qualified to serve
on our Board of Directors due to his experience in business, and technology.
Hidekazu Miyata.
Mr. Miyata has served as our Chief Technical Officer since June 1, 2021. Mr. Miyata has also served as the head of the DX division of
HeartCore Co. from October 1, 2019 to May 31, 2021. Mr. Miyata graduated with a bachelor’s degree in economics from Doshisha University,
Japan. Mr. Miyata does not hold, and has not previously held, any directorships in any reporting companies.
Qizhi Gao. Mr.
Gao has served as our Chief Financial Officer since May 18, 2021. Mr. Gao has also served as the Chief Financial Officer of HeartCore
Co. since May 2017. From December 2007 through April 2017, Mr. Gao served as the Group Leader, Finance & Accounting Department at
Marubishi Corporation in Tokyo, Japan. Mr. Gao graduated with a bachelor’s degree in computer accounting from Chuo College of Information
and Accounting, Japan. Mr. Gao does not hold, and has not previously held, any directorships in any reporting companies.
Keisuke Kuno.
Mr. Kuno has served as our CX division Vice President since October 1, 2019. Since August 30, 2021, Mr. Kuno has also served as the head
of the CX division and member of the Board of Directors of HeartCore Co. Mr. Kuno graduated with a bachelor’s degree in business
administration from Hosei University, Tokyo, Japan. Mr. Kuno does not hold, and has not previously held, any directorships in any reporting
companies.
Ferdinand Groenewald.
Mr. Groenewald has been an independent member of our Board of Directors since January 24, 2022. From January 2022 to July 2022, Mr. Groenewald
served as the Chief Accounting Officer of Sadot Group, Inc. (f/k/a Muscle Maker, Inc., a Nasdaq listed company). From September 2018 to
January 2, 2022, Mr. Groenewald served as the Chief Financial Officer of Muscle Maker, Inc. From January 25, 2018 through May 29, 2018,
Mr. Groenewald served as the Vice President of Finance, Principal Financial Officer and Principal Accounting Officer of Muscle Maker,
Inc., Muscle Maker Development, LLC and Muscle Maker Corp., LLC. In addition, from October 2017 through May 29, 2018, he served as the
controller of Muscle Maker, Inc. Mr. Groenewald is a certified public accountant with significant experience in finance and accounting.
From July 2018 through August 2018, he served as senior financial reporting accountant of Wrinkle Gardner & Company, a full service
tax, accounting and business consulting firm. From February 2017 to October 2017, Mr. Groenewald served as Senior Financial Accounting
Consultant at Pharos Advisors, Inc. serving a broad range of industries. From November 2013 to February 2017, he served as a Senior Staff
Accountant at Financial Consulting Strategies, LLC where he provided a broad range of accounting, financial reporting, and pre-auditing
services to various industries. From August 2015 to December 2015, Mr. Groenewald served as a Financial Reporting Analyst at Valley National
Bank. Mr. Groenewald holds a Bachelor of Science in accounting from the University of South Africa. Mr. Groenewald does not hold, and
has not previously held, any directorships in any reporting companies.
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Heather
Neville. Ms. Neville has served as Vice President of People Operations (Human Resources) at PlayStation since January 2021. From
June 2019 to January 2021, she was Senior Director of People Operations (Human Resources) at StubHub, an eBay Inc. (Nasdaq: EBAY) company,
and from 2018 to 2019, Ms. Neville served as Senior Director of Go-to-Market Operations at Adobe Inc. (Nasdaq: ADBE). Prior to that time,
she served as Senior Director, North American Business Operations (2017-2018) and Senior Director, Head of HR operations & Chief of
Staff (2015-2017) at eBay Inc. She also previously held various positions at Dell Inc. (NYSE: DELL). Ms. Neville earned a Bachelor of
Arts from Ecole Superieure de Gestion in Paris, France, and a Master of Business Administration from Paris Graduate School of Management
in Paris, France. We believe that Ms. Neville is qualified to serve on our Board of Directors due to her experience in business, financial
and public company matters.
Koji Sato. Mr.
Sato has served as a member of our Board since September 2023. He is founder and Managing Partner of GIIP Global Advisory, Inc., a multi-country
accounting and CFO service business. He has served as Managing Partner since its founding in 2009. Mr. Sato previously served as Senior
Financial Officer and fund of funds manager for Japanese investors for AIFAM Inc. and as Senior Consultant at KPMG, LLP and PricewaterhouseCoopers
Japan (Chuo-Aoyama Audit Corporation). Mr. Sato received a Masters in Business Administration from University of Southern California,
Marshall School of Business, and a B.S. in Social Science from Hitotsubashi University in Tokyo, Japan. We believe that Mr. Sato is qualified
to serve on our Board of Directors due to his experience in business, financial and accounting matters.
Our Board of Directors elects
our executive officers annually by majority vote. Each director’s term continues until his or her successor is elected or qualified
at the next annual meeting, unless such director earlier resigns or is removed.
Family Relationships
There are no family relationships
among any of our directors or executive officers.
Involvement in Certain Legal Proceedings
No executive officer, member
of the board of directors or control person of our Company has been involved in any legal proceeding listed in Item 401(f) of Regulation
S-K in the past 10 years.
Board Leadership Structure and Board’s
Role in Risk Oversight
We have not separated the
positions of Chairman of the Board and Chief Executive Officer. Mr. Yamamoto has served as our Chairman of the Board of Directors since
August 16, 2021 and Chief Executive Officer since May 18, 2021. We believe that combining the positions of Chairman and Chief Executive
Officer allows for focused leadership of our organization which benefits us in our relationships with investors, customers, suppliers,
employees and other constituencies. We believe that consolidating the leadership of the Company under Mr. Yamamoto is the appropriate
leadership structure for our Company and that any risks inherent in that structure are balanced by the oversight of our other independent
directors on our Board. However, no single leadership model is right for all companies and at all times. The Board recognizes that depending
on the circumstances, other leadership models, such as the appointment of a lead independent director, might be appropriate. Accordingly,
the Board may periodically review its leadership structure. In addition, our Board holds executive sessions in which only independent
directors are present.
Our Board is generally responsible
for the oversight of corporate risk in its review and deliberations relating to our activities. Our principal source of risk falls into
two categories, financial and product commercialization. The audit committee oversees management of financial risks, and our Board regularly
reviews information regarding our cash position, liquidity and operations, as well as the risks associated with each. The Board regularly
reviews plans, results and potential risks related to our business. The Board is also expected to oversee risk management as it relates
to our compensation plans, policies and practices for all employees including executives and directors, particularly whether our compensation
programs may create incentives for our employees to take excessive or inappropriate risks which could have a material adverse effect on
the Company.
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Change in Controlled Company Status and Director
Independence
Upon initially listing with
Nasdaq and during the fiscal year ended December 31, 2024, the Company qualified as a “controlled company” because more than
50% of the voting power for the election of directors was held by Mr. Yamamoto, the Company’s Chairman of the Board, Chief Executive
Officer and President. As a result of certain sales under the Company’s previously announced at-the-market offering, Mr. Yamamoto
no longer holds more than 50% of the voting power for the election of directors and therefore, the Company no longer qualifies as a “controlled
company.” As a result, the Company is required, subject to phase-in rules, to comply with Nasdaq requirements that:
The Company previously availed
itself of certain of the controlled company exemptions. More specifically, the Company did not have a compensation committee or a nominating
and corporate governance committee.
We no longer qualify as a
controlled company and accordingly, on February 14, 2025, we formed a compensation committee and a nominating and corporate governance
committee; however, we currently utilize and presently intend to continue to utilize, the exemption relating to a majority independent
board. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate
governance requirements of Nasdaq Capital Market. Pursuant to Nasdaq’s phase-in rules, we have a period of one year from the date
on which we ceased to be a controlled company to comply with the majority independent board.
The Company’s Board
of Directors has affirmatively determined that three of its six directors (Ferdinand Groenewald, Heather Neville, and Koji Sato) are independent
directors of the Company within the meaning of Nasdaq Capital Market’s rules.
Committees of the Board of Directors