HeartCore Enterprises, Inc. - Quarter Report: 2022 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2022

For the transition period from ______, 20___, to _____, 20___.

Commission File Number 001-41272

HeartCore Enterprises, Inc.

(Exact Name of Registrant as Specified in its Charter)

1-2-33, Higashigotanda, Shinagawa-ku

Tokyo, Japan

(Address of Principal Executive Offices) (Zip Code)

(206) 385-0488, ext. 100

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 9, 2022, there were 17,789,216 shares of outstanding common stock, par value $0.0001 per share, of the registrant.

HeartCore Enterprises, Inc.

Contents

Item 1. Financial Statements.

HEARTCORE ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these unaudited consolidated financial statements.

HEARTCORE ENTERPRISES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

HEARTCORE ENTERPRISES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

The accompanying notes are an integral part of these unaudited consolidated financial statements.

HEARTCORE ENTERPRISES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these unaudited consolidated financial statements.

HEARTCORE ENTERPRISES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

HeartCore Enterprises, Inc. (“HeartCore USA” or the “Company”), a holding company, was incorporated under the laws of the State of Delaware on May 18, 2021.

On July 16, 2021, the Company executed a Share Exchange Agreement with certain shareholders of HeartCore Co. Ltd. (“HeartCore Japan”), a company that was incorporated in Japan on June 12, 2009. Pursuant to the terms of the Share Exchange Agreement, the Company issued 15,999,994 shares of its common shares to the shareholders of HeartCore Japan in exchange for 10,706 shares out of 10,984 shares of common shares issued by HeartCore Japan, representing approximately 97.5% of HeartCore Japan’s outstanding common shares. On February 24, 2022, the Company purchased the remaining 278 shares of common shares of HeartCore Japan. As a result, HeartCore Japan became a wholly owned operating subsidiary of the Company.

The share exchange on July 16, 2021 has been accounted for as a recapitalization between entities under common control since the same controlling shareholders controlled these two entities before and after the transaction. The consolidation of the Company and its subsidiary has been accounted for at historical cost and prepared on the basis as if the transaction had become effective as of the beginning of the earliest period presented in the accompanying unaudited consolidated financial statements.

The Company, via its wholly-owned operating subsidiary, HeartCore Japan, is mainly engaged in the business of developing and sales of comprehensive software. HeartCore USA and HeartCore Japan are hereafter referred to as the Company.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements include the accounts of the Company and its subsidiary. Prior to February 24, 2022, ownership interest of non-controlling party is presented as mandatorily redeemable financial interest or non-controlling interest as applicable. All significant intercompany accounts and transactions have been eliminated.

These unaudited interim consolidated financial statements do not include all of the information and disclosure required by the U.S. GAAP for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments consisting of normal recurring nature considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2021.

Use of Estimates

In preparing the consolidated financial statements in conformity U.S. GAAP, the management is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available as of the date of the consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the allowance for doubtful accounts, useful lives of property and equipment, the impairment of long-lived assets, valuation of share-based compensation, valuation allowance of deferred tax assets, implicit interest rate of operating and financing leases, valuation of asset retirement obligations and revenue recognition. Actual results could differ from those estimates.

COVID-19

While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment actions, it has already had an adverse effect on the global economy and the lasting effects of the pandemic continue to be unknown. The Company may experience customer losses, including due to bankruptcy or customers ceasing operations, which may result in delays in collections or an inability to collect accounts receivable from these customers. The extent to which COVID-19 may continue to impact the Company’s financial condition, results of operations, or liquidity continues to remain uncertain, and as of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or an adjustment to the carrying value of the Company’s assets or liabilities. These estimates may change, as new events occur and additional information is obtained, which will be recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates, and any such differences may be material to the Company’s financial statements.

Asset Retirement Obligations

Pursuant to the lease agreements for the office space, the Company is responsible to restore these spaces back to its original statute at the time of leaving. The Company recognizes an obligation related to these restorations as asset retirement obligation included in other non-current liabilities in the consolidated balance sheets, in accordance with Accounting Standards Codification (“ASC”) 410, “Asset Retirement Obligation Accounting”. The Company capitalizes the associated asset retirement cost by increasing the carrying amount of the related property and equipment. The following table presents changes in asset retirement obligations:

SCHEDULE OF CHANGES IN ASSET RETIREMENT OBLIGATIONS

Software Development Costs

Software development costs are expensed as incurred until the point the Company establishes technological feasibility. Technological feasibility is established upon completion of a detailed program design or the completion of a working model. Costs incurred by the Company between establishment of technological feasibility and the point at which the product is ready for general release are capitalized and amortized over the economic life of the related products. The Company’s software development costs incurred subsequent to achieving technological feasibility have not been significant and all software development costs have been expensed as incurred.

In the six months ended June 30, 2022 and 2021, software development costs expensed as incurred amounted to $525,487 and $132,171, respectively. These software development costs were included in the research and development expenses.

Impairment of Long-Lived Assets

Long-lived assets with finite lives, primarily property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition are below the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value. There were no impairments of these assets during the six months ended June 30, 2022 and 2021.

Foreign Currency Translation

The Company maintains its books and record in its local currency, Japanese YEN (“JPY”), which is a functional currency as being the primary currency of the economic environment in which its operation is conducted. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statements of operations.

The reporting currency of the Company is the United States Dollars (“US$”), and the accompanying unaudited consolidated financial statements have been expressed in US$. In accordance with ASC Topic 830-30, “Translation of Financial Statements”, assets and liabilities of the Company whose functional currency is not US$ are translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from the translation of financial statements are recorded as a separate component of accumulated other comprehensive income (loss) within the statements of changes in shareholders’ equity (deficit).

Translation of amounts from the local currency of the Company into US$1 has been made at the following exchange rates:

SCHEDULE OF FOREIGN CURRENCY TRANSLATION 

Revenue Recognition

The Company recognizes revenue under ASC Topic 606, “Revenue from Contracts with customers”.

To determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. Revenue amount represents the invoiced value, net of a value-added tax (“Consumption Tax”) and applicable local government levies. The Consumption Tax on sales is calculated at 10% of gross sales.

The Company currently generates its revenue from the following main sources:

Revenue from On-Premise Software

Licenses for on-premise software provide the customer with a right to use the software as it exists when made available to the customer. The Company provides on-premise software in the form of both perpetual licenses and term-based licenses which grant the customers with the right for a specified term. Revenue from on-premise licenses is recognized upfront at the point in time when the software is made available to the customer. Licenses for on-premise software are typically sold to the customer with maintenance and support services in a bundle. Revenues under the bundled arrangements are allocated based on the relative standalone selling prices (“SSP”) of on-premise software and maintenance and support service. The SSP for maintenance and support services is estimated based upon observable transactions when those services are sold on a standalone basis. The SSP of on-premise software is typically estimated using the residual approach as the Company is unable to establish the SSP for on-premise licenses based on observable prices given the same products are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions or other observable evidence.

Revenue from Maintenance and Support service

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.

Revenue from Software as a Service (“SaaS”)

The Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company’s solution is made available to the customer. The subscription contracts are generally one year or less in length.

Revenue from Software Development and other Miscellaneous Services

The Company provides customers with software development and support service pursuant to their specific requirements, which primarily compose of consulting, integration, training, custom application, and workflow development. The Company also provides other miscellaneous services, such as 3D Space photography. The Company generally recognizes revenue at a point in time when control is transferred to the customers and the Company is entitled to the payment, which is when the promised services are delivered and accepted by the customers.

Revenue from Consulting Service

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 and supporting the listing process. Revenues from consulting services are recognized over time as such services are performed. The consulting service contracts are generally less than one year in length.

The timing of revenue recognition may differ from the timing of invoicing to the customers. The Company records a contract asset, which is included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company records deferred revenues on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred revenues are reported net of related uncollected deferred revenues in the consolidated balance sheets. The amount of revenues recognized during the six months ended June 30, 2022 and 2021 that were included in the opening deferred revenues balance was approximately $1.1 million and $1.2 million, respectively.

Disaggregation of Revenue

The Company disaggregates its revenues from contracts by service types, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenues by type for the three and six months ended June 30, 2022 and 2021 is as following:

SCHEDULE OF DISAGGREGATION OF REVENUES

The Company’s disaggregation of revenues by product/service is as following:

As of June 30, 2022 and 2021, and for the period then ended, all long-lived assets and the predominant portion of the revenue generated are attributed to the Company’s operation in Japan.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist primarily of accounts and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of the financial condition and payment practices of its customers to minimize collection risk on accounts receivable.

For the six months ended June 30, 2022, customer A and B represents 12.9% and 10.4%, respectively, of the Company’s total revenues. For the six months ended June 30, 2021, customer B and C represents 11.5% and 12.7%, respectively, of the Company’s total revenues.

For the six months ended June 30, 2022, vendor A and B represents 44.5% and 29.8%, respectively, of the Company’s total purchases. For the six months ended June 30, 2021, vendor A, B, and C represents 40.2%, 36.3%, and 14.1%, respectively, of the Company’s total purchases.

Share-based Compensation

The Company accounts for share-based compensation awards in accordance with ASC 718, “Compensation – Stock Compensation”. The cost of services received from employees and non-employees in exchange for awards of equity instruments is recognized in the consolidated statements of operations based on the estimated fair value of those awards on the grant date and amortized on a straight-line basis over the requisite service period or vesting period. The Company records forfeitures as they occur.

NOTE 3 — ACCOUNTS RECEIVABLE, NET

Accounts receivable consists of the following:

SCHEDULE OF ACCOUNTS RECEIVABLE NET

NOTE 4 — PREPAID EXPENSES

Prepaid expenses consist of the following:

SCHEDULE OF PREPAID EXPENSES

Deferred offering expenses, consisting of legal fees and road show expenses relating to the Company’s planned initial public offering, are capitalized and recorded on the balance sheet. The deferred offering expenses were reclassified to shareholders’ equity and recorded against the proceeds received upon the closing of our initial public offering on February 14, 2022.

NOTE 5 — RELATED PARTY TRANSACTIONS

As of June 30, 2022 and December 31, 2021, the Company has a due to related party balance of $5,885 and $1,110, respectively, from Sumitaka Yamamoto, the CEO and major shareholder of the Company. The balance is unsecured, non-interest bearing and due on demand. During the six months ended June 30, 2022, the related party paid operating expenses on behalf of the Company and received the payments in a net amount of $5,448. During the six months ended June 30, 2021, the Company advanced $26,603 to this related party, and the related party paid expenses of $25,482 on behalf of the Company.

As of June 30, 2022 and December 31, 2021, the Company has a loan receivable balance of $307,231 and $386,315, respectively, from Heartcore Technology Inc., a company controlled by the CEO of the Company. The loan was made to the related party to support its operation. The balance is unsecured, bears an annual interest of 1.475%, and requires repayments in installments starting from February 2022. During the six months ended June 30, 2022 and 2021, the Company loaned nil and $57,195, respectively, to this related party, and the related party paid expenses of nil and $14,197, respectively, on behalf of the Company. During the six months ended June 30, 2022 and 2021, the Company received repayments of $21,508 and nil, respectively, from this related party.

In June 2020, Suzuyo Shinwart Corporation became an over 10% shareholder of the Company. During the six months ended June 30, 2021, the Company has revenue from this related party of $146,083 from software sales and incurred cost with this related party of $338,029 for software development services provided. As of June 30, 2021, the Company has deferred revenue with this related party of $57,593. In July 2021, Suzuyo Shinwart Corporation sold all its shares of the Company to the Company’s CEO and ceased to be the Company’s related party.

During the period from January 1, 2022 through January 13, 2022, the Company completed a private placement, in which, it issued 30,000 shares of common shares at a purchase price of $2.50 per share to the officers of the Company for an aggregate amount of $75,000.

NOTE 6 — PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following:

SCHEDULE OF PROPERTY AND EQUIPMENT NET

Depreciation expense was $46,688 and $55,458 for the six months ended June 30, 2022 and 2021, respectively.

NOTE 7 — LEASES

The Company has entered into two leases for its office space, which were classified as operating leases. It has also entered into two leases for office equipment, one of which was terminated in June 2022, and a lease for a vehicle, and these leases were classified as finance leases. Right-of-use assets of these finance leases in the amount of $28,487 and $57,167 are included in property and equipment as of June 30, 2022 and December 31, 2021, respectively.

The components of lease costs are as follows:

SCHEDULE OF LEASE COSTS

The following table presents supplemental information related to the Company’s leases:

SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO THE COMPANY'S LEASES

As of June 30, 2022, the future maturity of lease liabilities is as follows:

SCHEDULE OF FINANCE LEASE AND OPERATING LEASE FUTURE MATURITY OF LEASE LIABILITIES

Pursuant to the operating lease agreements, the Company made security deposits to the lessors. The security deposits amounted to $235,274 and $278,237 as of June 30, 2022 and December 31, 2021, respectively.

NOTE 8 — LONG-TERM DEBTS

The Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions, which consist of the following:

SCHEDULE OF LONG-TERM DEBTS

In March 2022, the Company entered into a loan agreement with Higashi-Nippon Bank with a term of three years payable monthly. The loan is guaranteed by Sumitaka Yamamoto, the Company’s CEO and major shareholder.

Interest expense for long-term debts was $14,676 and $23,232 for the six months ended June 30, 2022 and 2021, respectively.

As of June 30, 2022, future minimum loan payments are as follows:

SCHEDULE OF FUTURE MINIMUM LOAN PAYMENTS

NOTE 9 — INSURANCE PREMIUM FINANCING

In February 2022, the Company entered into an insurance premium financing agreement with BankDirect Capital Finance for $388,538 at an annual interest rate of 12.80% for nine months from February 1, 2022, payable in nine monthly installments of principal and interest. As of June 30, 2022, the balance of the insurance premium financing was $220,583. During the six months ended June 30, 2022, the interest incurred was $14,185.

NOTE 10 — INCOME TAXES

United States (U.S.)

HeartCore USA is a holding company registered in the State of Delaware incorporated in May 2021. The U.S. federal income tax rate is 21%. No provision for income taxes in the U.S. has been made as the Company has no U.S. taxable income for the six months ended June 30, 2022 and 2021.

Japan

The Company conducts its major businesses in Japan and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the local tax authority. Income taxes in Japan applicable to the Company are imposed by the national, prefectural, and municipal governments and in the aggregate resulted in an effective statutory rate of approximately 30.62% for the six months ended June 30, 2022 and 2021.

For the six months ended June 30, 2022 and 2021, the Company’s income tax expenses are as follows:

SCHEDULE OF INCOME TAX EXPENSES

The effective tax rate was (0.25)% and 27.30% for the six months ended June 30, 2022 and 2021, respectively.

NOTE 11 – STOCK BASED COMPENSATION

Options

In May 2016, the Company granted 507 units stock options to its employees each to acquire one share of common shares of HeartCore Japan (an equivalent of approximately 1,494 shares of common shares of HeartCore USA) at JPY10 each (approximately $0.09). All options are exercisable upon issuance with a repurchase provision before the completion of the Company’s initial public offering, which serves as a vesting condition. All employees that were granted these stock options had early exercised their stock options in 2016 prior to the vesting of the related stock options. As of June 30, 2021, 324 units of the options were forfeited, and the CEO of the Company has repurchased and held the shares issued related to the early exercise of such stock options on behalf of the Company. On November 3, 2021, the Company redeemed 484,056 shares (equivalent to 324 shares of common shares of HeartCore Japan) from the CEO of the Company.

The consideration received for the remaining early exercised options were recorded by the Company as a share repurchase liability included in other current liabilities in the consolidated balance sheets with JPY1,830 (approximately $16) as of December 31, 2021. The shares issued related to the early exercise of the above-mentioned stock options were not considered outstanding as of December 31, 2021. On February 14, 2022, the 183 units of stock options were vested upon the completion of the Company’s initial public offering and the Company recognized share-based compensation of $11,005 during the six months ended June 30, 2022. In the same period, the share repurchase liability of $16 was settled by issuance of 273,489 shares of common shares (equivalent to 183 shares of common shares of HeartCore Japan) from exercise of stock options.

The following summarized the Company’s stock options activity for the stock option issued in 2016 for the six months ended June 30, 2022 and 2021:

SCHEDULE OF UNVESTED STOCK OPTION

On December 25, 2021, the Company awarded options to purchase 1,534,500 shares of common shares at an exercise price of $2.50 per share to various officers, directors, employees and consultants of the Company. The options vest on each annual anniversary of the date of issuance, in an amount equal to 25% of the applicable shares of common shares, with the expiration date on December 25, 2031.

The following table summarizes the share options activity and related information for the six months ended June 30, 2022:

SCHEDULE OF STOCK OPTION ACTIVITY 

Options granted historically were valued using the binomial model with the assistance of an independent valuation specialist. Significant assumptions used in the valuation include expected volatility, risk-free interest rate, dividend yield and expected exercise term.

For the three and six months ended June 30, 2022, share-based compensation related to the options totaled $284,938 and $577,750, respectively. For the three and six months ended June 30, 2021, share-based compensation related to the options was nil. The outstanding unamortized share-based compensation related to options was $1,608,803 (which will be recognized through December 2025) as of June 30, 2022.

Restricted Stock Units (“RSUs”)

The following table summarizes the RSUs activity for the six months ended June 30, 2022:

SCHEDULE OF RESTRICTED STOCK UNITS 

On February 9, 2022, the Company entered into executive employment agreements with five executives and granted 85,820 RSUs pursuant to the 2021 Equity Incentive Plan. The RSUs vest on each annual anniversary of the date of the employment agreement, in an amount equal to 25% of the applicable shares of common shares. The fair value of the RSUs at grant date was $424,809.

On February 25, 2022, the Company entered into a service agreement with a marketing company to purchase 6-month marketing services and granted 83,333 RSUs. The RSUs were issued and vested on May 15, 2022. The fair value of the RSUs at grant date was $224,999.

For the three and six months ended June 30, 2022, the Company recognized RSU-related share-based compensation of $181,724 and $311,076, respectively. The outstanding unamortized share-based compensation related to RSUs was $338,732 (which will through February 2026) as of June 30, 2022.

NOTE 12 – SHAREHOLDERS’ EQUITY (DEFICIT)

The Company was authorized to issue 200,000,000 shares of common shares, par value of $0.0001 per share, and 20,000,000 shares of preferred shares, par value of $0.0001 per share.

During the period from January 1, 2022 through January 13, 2022, the Company issued 96,000 shares of common shares at a purchase price of $2.50 per share for an aggregate net proceeds of $220,572 in a private placement, including 30,000 shares of common shares issued to the officers of the Company.

On February 14, 2022, the Company completed its initial public offering on the NASDAQ Capital Market under the symbol of “HTCR”. The Company offered 3,000,000 common shares at $5.00 per share. Net proceeds raised by the Company from the initial public offering amounted to $13,724,167 after deducting underwriting discounts and commissions and other offering expenses. The Company has deferred costs of $300,460 directly attributed to the offering, among which $178,847 offering costs were paid and deferred as of December 31, 2021. Those costs were also charged against the proceeds from the offering.

On February 14, 2022, 273,489 shares of common shares were issued from exercise of stock options by settling share repurchase liability of $16 (also see NOTE 11).

On May 15, 2022, 83,333 shares of restricted shares were issued to a marketing company as compensation of services received (also see NOTE 11).

Share Repurchase Program

On June 1, 2022, the Board of Directors approved a share repurchase program (“2022 Share Repurchase Program”), pursuant to which the Company is authorized to repurchase up to $3.5 million of its outstanding common shares. The timing and amount of repurchases under the program are determined by the Company’s management based on its evaluation of market conditions and other factors. This program has no set termination date and may be suspended or discontinued by at any time.

During the period from June 1, 2022 through June 30, 2022, the Company repurchased 558,809 shares of common shares at an average price of $2.39 per share totaling approximately $1.3 million (including commissions) under the 2022 Share Repurchase Program. As of June 30, 2022, approximately $2.2 million remained available under the 2022 Share Repurchase Program.

As of June 30, 2022 and December 31, 2021, there were 18,999,276 and 15,819,943 shares, respectively, of common shares issued; and 18,440,467 and 15,546,454 shares, respectively, of common shares outstanding.

No preferred shares were issued and outstanding as of June 30, 2022 and December 31, 2021.

NOTE 13 – MANDATORILY REDEEMABLE FINANCIAL INTEREST

On August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”), a non-controlling shareholder of HeartCore Japan, entered into a stock purchase agreement, pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Japan held by Dentsu Digital in accordance with certain terms and conditions in the stock purchase agreement for JPY50,040,000 on the earlier of the (i) the date the SEC declares effective a registration statement on Form S-1, for a firm commitment underwritten initial public offering of common shares, filed by the Company with the SEC or (ii) December 20, 2022. The Company has determined such shares to be a mandatorily redeemable financial instrument and is recorded as a liability of JPY50,040,000 (approximately $448,000) in the consolidated balance sheet as of December 31, 2021. On February 24, 2022, the Company purchased the 278 shares of HeartCore Japan from Dentsu Digital for JPY50,040,000 (approximately $430,000). As a result, HeartCore Japan became a wholly-owned subsidiary of the Company.

NOTE 14 – EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is calculated on the basis of weighted-average outstanding common shares. Diluted earnings (loss) per share is computed on the basis of basic weighted-average outstanding common shares adjusted for the dilutive effect of stock options, restricted stock unit awards and other dilutive securities.

The computation of basic and diluted earnings (loss) per share for the three and six months ended June 30, 2022 and 2021 is as follows:

SCHEDULE OF COMPUTATION OF BASIC AND DILUTED EARNINGS (LOSS) PER SHARE

For the three and six months ended June 30, 2022, the weighted average shares outstanding are the same for basic and diluted loss per share calculations, as the inclusion of common shares equivalents of 1,620,320 would have an anti-dilutive effect.

NOTE 15 - SUBSEQUENT EVENTS

During the period from July 1, 2022 through August 9, 2022, the Company paid approximately $1.9 million (including commissions) in connection with the repurchase of 651,251 shares of its common shares under the 2022 Share Repurchase Program. As of the filing date of this report, approximately $0.3 million remained available under the 2022 Share Repurchase Program.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provide a safe harbor for forward-looking statements made by or on behalf of HeartCore Enterprises, Inc. (the “Company”). The Company and its representatives may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange Commission (“SEC”) and in our reports and presentations to stockholders or potential stockholders. In some cases, forward-looking statements can be identified by words such as “believe,” “expect,” “anticipate,” “plan,” “potential,” “continue” or similar expressions. Such forward-looking statements include risks and uncertainties and there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors, risks and uncertainties can be found in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, 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 report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

Business Overview

We are a leading software development company based in Tokyo, Japan. We provide software through two business units. The first business unit includes a customer experience management business that has been in existence for 12 years. Our customer experience management platform (the “CXM Platform”) includes marketing, sales, service and content management systems, as well as other tools and integrations, that enable companies to attract and engage customers throughout the customer experience. We also provide education, services and support to help customers be successful with our CXM Platform.

The second business unit is a digital transformation business which provides customers with robotics process automation, process mining and task mining to accelerate the digital transformation of enterprises. We also have an ongoing technology innovation team to develop software that supports the narrow needs of large enterprise customers.

We have made significant investments in our sales and marketing efforts globally. As of June 30, 2022, our sales and marketing organization was comprised of 16 employees including our field sales organization, which maintains a physical sales presence in the Japanese software market. Using our go-to-market strategy, we believe we have made significant contributions in Japan and have established a diversified revenue and customer base. As of June 30, 2022, our combined business units (customer experience management business unit and digital transformation business unit) had a total of 877 customers in Japan.

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., a Japanese corporation (“HeartCore Co”), which was established in Japan by Mr. Sumitaka Yamamoto, our CEO, in 2009. We acquired 97.5% of the equity interest of HeartCore Co in July 2021 and acquired the remaining interest in February 2022. HeartCore Co started out with helping companies effectively managing content with its powerful content management system. Since then, HeartCore Co has expanded offerings to help companies manage all forms of business processes.

The acquisition of HeartCore Co in July 2021 was accounted for as a recapitalization among entities under common control since the same controlling shareholders controlled all these entities before and after the transaction. The consolidation of the Company and its subsidiary has been accounted for at historical cost and prepared on the basis as if the transaction had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements.

Recent Developments

A.L.I. Consulting Agreement

On April 13, 2022, the Company entered into a Consulting and Services Agreement (the “ALI Consulting Agreement”) by and between the Company and A.L.I. Technologies Inc. (“ALI”). Pursuant to the terms of the ALI Consulting Agreement, the Company agreed to provide certain consulting services, including the following (collectively, the “Services”):

In providing the Services, the Company will not perform accounting services, and will not act as an investment advisor or broker/dealer. Pursuant to the terms of the ALI Consulting Agreement, the parties agreed that the Company will not provide the following services, among others: negotiation of the sale of ALI’s securities; participation in discussions between ALI and potential investors; assisting in structuring any transactions involving the sale of ALI’s securities; pre-screening of potential investors; due diligence activities; nor providing advice relating to valuation of or financial advisability of any investments in ALI.

Pursuant to the terms of the ALI Consulting Agreement, ALI agreed to compensate the Company as follows in return for the provision of Services:

The ALI Consulting Agreement has a term of six months, which shall expire unless renewed upon mutual written agreement of the parties. For any services performed by the Company beyond the initial term, ALI will compensate the Company for Services at the rate of $150 per hour.

As provided in the ALI Consulting Agreement, on April 13, 2022, ALI issued to the Company the warrant. Pursuant to the terms of the warrant, the Company may, at any time on or after the date that ALI completes its first initial public offering of stock in the United States resulting in any class of ALI’s stock being listed for trading on any tier of the Nasdaq Stock Market, the New York Stock Exchange or the NYSE American (the “IPO Date”) and on or prior to the close of business on the tenth anniversary of the IPO Date, exercise the warrant to purchase 1% of the fully diluted share capital of ALI as of April 13, 2022 for an exercise price per share of $0.01, subject to adjustment as provided in the warrant. The number of shares for which the warrant will be exercisable will be automatically adjusted on the IPO Date to be 1% of the fully diluted number and class of shares of capital stock of ALI as of the IPO Date that are listed for trading. The warrant contains a 9.99% equity blocker.

SYLA Consulting Agreement

On May 13, 2022, the Company entered into a Consulting and Services Agreement (the “SYLA Consulting Agreement”) by and between the Company and SYLA Holdings Co. Ltd. (“SYLA”). Pursuant to the terms of the SYLA Consulting Agreement, the Company agreed to provide SYLA certain services, including the Services.

In providing the Services, the Company will not perform accounting services, and will not act as an investment advisor or broker/dealer. Pursuant to the terms of the SYLA Consulting Agreement, the parties agreed that the Company will not provide the following services, among others: negotiation of the sale of SYLA’s securities; participation in discussions between SYLA and potential investors; assisting in structuring any transactions involving the sale of SYLA’s securities; pre-screening of potential investors; due diligence activities; nor providing advice relating to valuation of or financial advisability of any investments in SYLA.

Pursuant to the terms of the SYLA Consulting Agreement, SYLA agreed to compensate the Company as follows in return for the provision of Services:

The SYLA Consulting Agreement’s initial term of six months will expire unless renewed upon mutual written agreement of the parties. For any services performed by the Company beyond the initial term, SYLA will compensate the Company for Services at the rate of $150 per hour, based on the hours spent by personnel of the Company.

As provided in the SYLA Consulting Agreement, on the Effective Date, SYLA issued the warrant to the Company. Pursuant to the terms of the warrant, the Company may, at any time on or after the date the IPO Date and on or prior to the close of business on the tenth anniversary of the IPO Date, exercise the warrant to purchase 2% of the fully diluted share capital of SYLA as of the effective date of the SYLA Consulting Agreement for an exercise price per share of $0.01, subject to adjustment as provided in the warrant. The number of shares for which the warrant will be exercisable will be automatically adjusted on the IPO Date to be 2% of the fully diluted number and class of shares of capital stock of SYLA as of the IPO Date that are listed for trading. The warrant contains a 9.99% equity blocker.

Going forward, we expect that we will offer services substantially similar to the Services to other third parties, as well.

Stock Repurchase Program

The Company’s Board of Directors (the “Board”) authorized a share repurchase program, pursuant to which the Company may repurchase up to $3.5 million of its outstanding shares of common stock. The Board authorized the Company to purchase its common stock from time to time on a discretionary basis through open market purchases, privately negotiated transactions or other means, including trading plans intended to qualify under Rule 10b5-1 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in accordance with applicable federal securities laws and other applicable legal requirements. The Company expects to fund these repurchases through existing cash balances. Decisions regarding the amount and the timing of purchases under the program will be influenced by the Company’s cash on hand, cash flows from operations, general market conditions and other factors. HeartCore is not obligated to acquire any particular amount of its common stock. This program has no set termination date and may be suspended or discontinued by the Board at any time.

Financial Overview

For the three months ended June 30, 2022 and 2021, we generated revenues of $2,670,297 and $2,865,192, respectively, and reported net losses of $1,703,641 and net income of $411,714, respectively. For the six months ended June 30, 2022 and 2021, we generated revenues of $4,946,298 and $4,975,501, respectively, and reported net losses of $3,282,092 and net income of $223,477, respectively, and cash out flow used in operating activities of $2,093,867 and cash in flow provided by operating activities of $347,683, respectively. As noted in our unaudited consolidated financial statements, as of June 30, 2022, we had an accumulated deficit of $7,178,205.

Results of Operations

Comparison of Results of Operations for the Three Months ended June 30, 2022 and 2021

The following table summarizes our operating results as reflected in our statements of income during the three months ended June 30, 2022 and 2021, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods.

Revenues

Our total revenues decreased by $194,895, or 6.8%, to $2,670,297 for the three months ended June 30, 2022 from $2,865,192 for the three months ended June 30, 2021. The decrease in our revenues was attributable to the following reasons:

Cost of Revenues

Our total costs of revenues increased by $161,909, or 13.8%, to $1,337,296 for the three months ended June 30, 2022 from $1,175,387 for the three months ended June 30, 2021. The increase in our costs was attributable to the following reasons:

Gross Profit

Our total gross profit decreased by $356,804, or 21.1%, to $1,333,001 for the three months ended June 30, 2022 from $1,689,805 for the three months ended June 30, 2021. Our overall gross profit margin decreased by 9.1% to 49.9% in the three months ended June 30, 2022 from 59.0% in the three months ended June 30, 2021.

Operating Expenses

Our operating expenses primarily include selling expenses, general and administrative expenses, and research and development expenses.

Selling Expenses

Our selling expenses primarily include advertising expenses, sale commissions, and sales promotion expenses.

Our selling expenses increased by $627,712, or 620.7%, to $728,836 in the three months ended June 30, 2022 from $101,124 in the three months ended June 30, 2021, primarily attributable to an increase in advertising expenses by $650,690, or 1,428.1%, to $696,252 in the three months ended June 30, 2022 from $45,562 in the three months ended June 30, 2021. The U.S. parent company launched advertising activities to increase its visibility in the U.S. after the Company going public in the U.S. In addition, the Company increased advertising expenses for its newly established consulting services in Japan.

As a percentage of revenues, our selling expenses accounted for 27.3% and 3.5% of our total revenue for the three months ended June 30, 2022 and 2021, respectively.

General and Administrative Expenses

Our general and administrative expenses primarily consist of employee salaries and welfare, consulting and professional service fees incurred for maintaining the Company as a public company, depreciation and amortization expenses, rental expenses, office, utility and other expenses, listing-related expenses, travel and entertainment expenses, and share-based compensation expense.

Our general and administrative expenses increased by $829,473 or 81.3%, to $1,850,315 in the three months ended June 30, 2022 from $1,020,842 in the three months ended June 30, 2021, primarily attributable to: