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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2022

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

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)

 

Delaware   87-0913420
(State or Other Jurisdiction of
Incorporation or Organization)
 

(I.R.S. Employer

Identification Number)

 

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:

 

Title of each class   Trading Symbol(s)   Name of each Exchange on which Registered
Common Stock   HTCR   The Nasdaq Capital Market

 

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.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company    

 

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

 

  Page
PART I – FINANCIAL INFORMATION
     
Item 1. Financial Statements 3
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
     
Item 4. Controls and Procedures 36
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 36
     
Item 1A. Risk Factors 36
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
     
Item 3. Defaults Upon Senior Securities 36
     
Item 4. Mine Safety Disclosures 36
     
Item 5. Other Information 36
     
Item 6. Exhibits 37
     
Signatures 38

 

2

 

 

Item 1. Financial Statements.

 

HEARTCORE ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

 

    June 30,     December 31,  
    2022     2021  
    (unaudited)        
ASSETS                
Current assets:                
Cash and cash equivalents   $ 12,463,179     $ 3,136,839  
Accounts receivable, net     1,119,990       960,964  
Prepaid expenses     852,270       444,405  
Due from related party     46,639       50,559  
Loan receivable from employee     -       8,341  
Other current assets     23,304       15,654  
Total current assets     14,505,382       4,616,762  
                 
Non-current assets:                
Property and equipment, net     211,180       261,414  
Operating lease right-of-use assets     2,677,171       3,319,749  
Deferred tax assets     239,176       297,990  
Security deposits     235,274       278,237  
Long-term loan receivable from related party     260,592       335,756  
Loan receivable from employee, non-current     -       4,518  
Other non-current assets     4,012       8,737  
Total non-current assets     3,627,405       4,506,401  
                 
Total assets   $ 18,132,787     $ 9,123,163  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)                
                 
Current liabilities:                
Accounts payable and accrued expenses   $ 818,222     $ 646,425  
Accrued payroll and other employee costs     364,123       255,082  
Due to related party     5,857       1,110  
Current portion of long-term debts     733,235       849,995  
Insurance premium financing     220,583       -  
Operating lease liabilities, current     280,789       332,277  
Finance lease liabilities, current     20,717       37,459  
Income tax payables     1,322       10,919  
Deferred revenue     1,991,090       1,690,917  
Mandatorily redeemable financial interest     -       447,986  
Other current liabilities     65,547       281,673  
Total current liabilities     4,501,485       4,553,843  
                 
Non-current liabilities:                
Long-term debts     1,367,101       1,871,580  
Operating lease liabilities, non-current     2,467,546       3,076,204  
Finance lease liabilities, non-current     9,279       23,861  
Other non-current liabilities     132,648       156,627  
Total non-current liabilities     3,976,574       5,128,272  
                 
Total liabilities:     8,478,059       9,682,115  
                 
Shareholders’ equity (deficit):                
Preferred shares ($0.0001 par value, 20,000,000 shares authorized, no shares issued and outstanding as of June 30, 2022 and December 31, 2021)     -       -  
Common shares ($0.0001 par value, 200,000,000 shares authorized; 18,999,276 and 15,819,943 shares issued; 18,440,467 and 15,546,454 shares outstanding as of June 30, 2022 and December 31, 2021, respectively)     1,899       1,554  
Additional paid-in capital     17,883,555       3,350,779  
Treasury shares, at cost (558,809 and 0 shares as of June 30, 2022 and December 31, 2021, respectively)     (1,336,762 )     -  
Accumulated deficit     (7,178,205 )     (3,896,113 )
Accumulated other comprehensive income (loss)     284,241       (15,172 )
Total shareholders’ equity (deficit)     9,654,728       (558,952 )
                 
Total liabilities and shareholders’ equity (deficit)   $ 18,132,787     $ 9,123,163  

 

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

 

3

 

 

HEARTCORE ENTERPRISES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 

    2022     2021     2022     2021  
   

For the Three Months

Ended
June 30,

   

For the Six Months

Ended
June 30,

 
    2022     2021     2022     2021  
Revenues   $ 2,670,297     $ 2,865,192     $ 4,946,298     $ 4,975,501  
                                 
Cost of revenues     1,337,296       1,175,387       2,392,652       2,583,019  
                                 
Gross profit     1,333,001       1,689,805       2,553,646       2,392,482  
                                 
Operating expenses:                                
Selling expenses     728,836       101,124       934,754       147,465  
General and administrative expenses     1,850,315       1,020,842       4,319,248       1,783,590  
Research and development expenses     417,228       80,025       525,487       132,171  
                                 
Total operating expenses     2,996,379       1,201,991       5,779,489       2,063,226  
                                 
Income (loss) from operations     (1,663,378 )     487,814       (3,225,843 )     329,256  
                                 
Other income (expenses):                                
Interest income     9,091       3,726       10,549       3,848  
Interest expense     (17,590 )     (12,404 )     (28,861 )     (23,232 )
Other income     8,777       14,207       25,450       15,195  
Other expenses     (31,562 )     (5,403 )     (55,224 )     (17,675 )
Total other income (expenses)     (31,284 )     126       (48,086 )     (21,864 )
                                 
Income (loss) before income tax provision     (1,694,662 )     487,940       (3,273,929 )     307,392  
                                 
Income tax expense     8,979       76,226       8,163       83,915  
                                 
Net income (loss)     (1,703,641 )     411,714       (3,282,092 )     223,477  
                                 
Less: net income attributable to non-controlling interest     -       10,924       -       5,936  
                                 
Net income (loss) attributable to HeartCore Enterprises, Inc.   $ (1,703,641 )   $ 400,790     $ (3,282,092 )   $ 217,541  
                                 
Other comprehensive income (loss):                                
Foreign currency translation adjustment     219,360       (13,848 )     299,413       83,674  
                                 
Total comprehensive income (loss)     (1,484,281 )     397,866       (2,982,679 )     307,151  
Less: comprehensive income attributable to non-controlling interest     -       10,557       -       8,153  
Comprehensive income (loss) attributable to HeartCore Enterprises, Inc.   $ (1,484,281 )   $ 387,309     $ (2,982,679 )   $ 298,998  
                                 
Net earnings (loss) per common share attributable to HeartCore Enterprises, Inc.*                                
Basic * $ (0.09 )   $ 0.03     $ (0.18 )   $ 0.01  
Diluted * $ (0.09 )   $ 0.03     $ (0.18 )   $ 0.01  
Weighted average common shares outstanding*                                
Basic *   18,936,829       15,242,454       18,105,698       15,242,454  
Diluted *   18,936,829       15,515,943       18,105,698       15,515,943  

 

* Retrospectively restated for effect of share issuances on July 16, 2021.

  

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

 

4

 

 

HEARTCORE ENTERPRISES, INC.

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

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

 

                                                                 
    Common shares*     Additional           Accumulated other     Total HeartCore
Enterprises, Inc.
    Non-     Total  
    Number of
shares
    Amount     paid-in
capital*
    Accumulated
deficit
    comprehensive
loss
    shareholders’
deficit
    controlling
interest
    shareholders’
deficit
 
Balance, December 31, 2020*     15,242,454     $ 1,524     $ 2,735,315   - $ (3,557,957 )   $ (136,890 )   $ (958,008 )   $ 353,825     $ (604,183 )
Net loss     -       -       -   -   (183,249 )     -       (183,249 )     (4,988 )     (188,237 )
Foreign currency translation adjustment     -       -       -     -       94,938       94,938       2,584       97,522  
Balance, March 31, 2021*     15,242,454       1,524       2,735,315   -   (3,741,206 )     (41,952 )     (1,046,319 )     351,421       (694,898 )
Net income     -       -       -       400,790       -       400,790       10,924       411,714  
Foreign currency translation adjustment     -       -       -   -   -       (13,481 )     (13,481 )     (367 )     (13,848 )
Balance, June 30, 2021*     15,242,454     $ 1,524     $ 2,735,315   - $ (3,340,416 )   $ (55,433 )   $ (659,010 )   $ 361,978     $ (297,032 )

 

* Retrospectively restated for effect of share issuances on July 16, 2021.

 

    Number of
shares
    Amount     paid-in
capital
    Number of shares     Amount     Accumulated
deficit
    comprehensive
income (loss)
    equity (deficit)  
    Common shares     Additional     Treasury shares           Accumulated other     Total
shareholders’
 
    Number of
shares
    Amount     paid-in
capital
    Number of shares     Amount     Accumulated
deficit
    comprehensive
income (loss)
    equity (deficit)  
Balance, December 31, 2021     15,546,454     $ 1,554     $ 3,350,779       -     $ -     $ (3,896,113 )   $ (15,172 )   $ (558,952 )
Net loss     -       -       -       -       -       (1,578,451 )     -       (1,578,451 )
Foreign currency translation adjustment     -       -       -       -       -       -       80,053       80,053  
Issuance of common shares for cash     3,096,000       310       13,643,969       -       -       -       -       13,644,279  
Issuance of common shares from exercise of share options     273,489       27       (11 )     -       -       -       -       16  
Share-based compensation     -       -       422,164       -       -       -       -       422,164  
Balance, March 31, 2022     18,915,943       1,891       17,416,901       -       -       (5,474,564 )     64,881       12,009,109  
Net loss     -       -       -       -       -       (1,703,641 )     -       (1,703,641 )
Foreign currency translation adjustment     -       -       -       -       -       -       219,360       219,360  
Share-based compensation     83,333       8       466,654       -       -       -       -       466,662  
Repurchase of common shares     -       -       -       (558,809 )     (1,336,762 )     -       -       (1,336,762 )
Balance, June 30, 2022     18,999,276     $ 1,899     $ 17,883,555     $ (558,809 )   $ (1,336,762 )   $ (7,178,205 )   $ 284,241     $ 9,654,728  

 

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

 

5

 

 

HEARTCORE ENTERPRISES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    2022     2021  
    For the Six Months Ended
June 30,
 
    2022     2021  
Cash flows from operating activities:                
Net income (loss)   $ (3,282,092 )   $ 223,477  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                
Depreciation expenses     46,688       55,458  
Amortization of debt issuance costs     2,768       3,923  
Non-cash lease expense     143,845       171,935  
Deferred income taxes     14,167       96,517  
Share-based compensation     888,826       -  
                 
Changes in assets and liabilities:                
Accounts receivable, net     (344,779 )     (570,886 )
Prepaid expenses     (266,030 )     (282,508 )
Other assets     (5,516 )     (46,074 )
Accounts payable and accrued expenses     281,567       128,308  
Accrued payroll and other employee costs     175,246       105,120  
Due to related party     5,448       -  
Operating lease liabilities     (148,125 )     (176,913 )
Finance lease liabilities     (288 )     (689 )
Income tax payables     (8,756 )     5,487  
Deferred revenue     596,762       621,707  
Other liabilities     (193,598 )     13,049  
                 
Net cash flows provided by (used in) operating activities     (2,093,867 )     347,911  
                 
Cash flows from investing activities:                
Purchases of property and equipment     (30,963 )     (19,894 )
Advance and loan provided to related parties     -       (83,798 )
Repayment of loan provided to related party     21,508       -  
                 
Net cash flows used in investing activities     (9,455 )     (103,692 )
                 
Cash flows from financing activities:                
Proceeds from initial public offering, net of issuance cost     13,602,554       -  
Proceeds from issuance of common shares prior to initial public offering     220,572       -  
Repurchase of common shares     (1,336,762 )     -  
Payments for finance leases     (24,189 )     (29,561 )
Proceeds from long-term debt     258,087       -  
Repayment of long-term debts     (469,166 )     (503,230 )
Repayment of insurance premium financing     (167,955 )     -  
Payments for debt issuance costs     (1,030 )     (1,420 )
Payment for mandatorily redeemable financial interest     (430,489 )     -  
                 
Net cash flows provided by (used in) financing activities     11,651,622       (534,211 )
                 
Effect of exchange rate changes     (221,960 )     (149,784 )
                 
Net change in cash and cash equivalents     9,326,340       (439,776 )
                 
Cash and cash equivalents - beginning of the period     3,136,839       3,058,175  
                 
Cash and cash equivalents - end of the period   $ 12,463,179     $ 2,618,399  
                 
Supplemental cash flow disclosure:                
Interest paid   $ 28,025     $ 20,635  
Income taxes paid   $ 3,013     $ 9,047  
                 
Non-cash investing and financing transactions                
                 
Payroll withheld as repayment of loan receivable from employees   $ 12,034     $ 7,240  
Expense paid by related party on behalf of the Company   $ -     $ 39,679  
Liabilities assumed in connection with purchase of property and equipment   $ 9,676     $ -  
Share repurchase liability settled by issuance of common shares   $ 16     $ -  
Deferred offering costs recognized against the proceeds from the offering   $ 178,847     $ -  
Insurance premium financing   $ 388,538     $ -  

 

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

 

6

 

 

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.

 

7

 

 

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:

 

    June 30,     December 31,  
    2022     2021  
Beginning balance   $ 155,666     $ 173,043  
Accretion expense     242       730  
Foreign currency translation adjustment     (23,260 )     (18,107 )
Ending balance   $ 132,648     $ 155,666  

 

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.

 

8

 

 

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:

 

    June 30,
2022
    June 30,
2021
 
Current JPY: US$1 exchange rate     136.11       110.74  
Average JPY: US$1 exchange rate     122.98       107.74  

 

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.

 

9

 

 

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.

 

10

 

 

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:

 

    2022     2021     2022     2021  
   

For the Three Months

Ended

   

For the Six Months

Ended

 
    June 30,     June 30,  
    2022     2021     2022     2021  
Revenue from On-Premise Software   $ 716,532     $ 1,132,608     $ 1,518,133     $ 1,382,216  
Revenue from Maintenance and Support Service     727,277       890,552       1,572,616       1,832,767  
Revenue from Software as a Service (“SaaS”)     103,250       139,712       229,904       291,520  
Revenue from Software Development and other Miscellaneous Services     674,883       702,320       1,177,290       1,468,998  
Revenue from Consulting Service     448,355       -       448,355       -  
Total Revenue   $ 2,670,297     $ 2,865,192     $ 4,946,298     $ 4,975,501  

 

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

 

   

For the Three Months

Ended

   

For the Six Months

Ended

 
    June 30,     June 30,  
    2022     2021     2022     2021  
Revenue from Customer Experience Management Platform   $ 1,831,166     $ 2,397,068     $ 3,586,219     $ 4,011,424  
Revenue from Process Mining     118,320       148,894       384,808       405,678  
Revenue from Robotic Process Automation     149,031       192,569       247,417       299,248  
Revenue from Task Mining     98,558       76,807       185,435       132,606  
Revenue from Consulting Service     448,355       -       448,355       -  
Revenue from Others     24,867       49,854       94,064       126,545  
Total Revenue   $ 2,670,297     $ 2,865,192     $ 4,946,298     $ 4,975,501  

 

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.

 

11

 

 

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:

    June 30,     December 31,  
    2022     2021  
Accounts receivable   $ 1,119,990     $ 960,964  
Less: allowance for doubtful accounts     -       -  
Accounts receivable, net   $ 1,119,990     $ 960,964  

 

NOTE 4 — PREPAID EXPENSES

 

Prepaid expenses consist of the following:

    June 30,     December 31,  
    2022     2021  
Prepayments to software vendors   $ 151,852     $ 157,060  
Prepaid selling expenses     262,417       -  
Prepaid subscription fees     48,077       53,413  
Deferred offering expenses     -       180,630  
Prepaid insurance premium     329,709       18,252  
Others     60,215       35,050  
Total   $ 852,270     $ 444,405  

 

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.

 

12

 

 

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:

 

    June 30,     December 31,  
    2022     2021  
Leasehold improvement   $ 279,549     $ 320,257  
Machinery and equipment     290,884       316,126  
Vehicle     102,515       121,235  
Software     156,964       185,627  
Subtotal     829,912       943,245  
Accumulated depreciation     (618,732 )     (681,831 )
Property and equipment, net   $ 211,180     $ 261,414  

 

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.

 

13

 

 

The components of lease costs are as follows:

 

    2022     2021  
    For the Six Months Ended  
    June 30,  
    2022     2021  
Finance lease costs                
Amortization of right-of-use assets   $ 21,972     $ 26,883  
Interest on lease liabilities     288       689  
Total finance lease costs     22,260       27,572  
Operating lease costs     164,513       199,318  
Total lease costs   $ 186,773     $ 226,890  

 

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

 

    2022     2021  
    For the Six Months Ended  
    June 30,  
    2022     2021  
Cash paid for amounts included in the measurement of lease liabilities:                
Operating cash flows from finance leases   $ 288     $ 689  
Operating cash flows from operating leases     168,793       204,296  
Financing cash flows from finance leases     24,189       29,561  
                 
Weighted average remaining lease term (years)                
Finance leases     1.3       1.9  
Operating leases     9.6       10.6  
                 
Weighted-average discount rate: (per annum)                
Finance leases     1.32 %     1.32 %
Operating leases     1.32 %     1.32 %

 

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

 

Year ending December 31,  

Finance

leases

   

Operating

leases

 
Remaining of 2022   $ 11,140     $ 152,511  
2023     18,750       305,021  
2024     276       305,021  
2025     -       305,021  
2026     -       305,021  
Thereafter     -       1,560,912  
Total lease payments     30,166       2,933,507  
Less: imputed interest     (170 )     (185,172 )
Total lease liabilities     29,996       2,748,335  
Less: current portion     20,717       280,789  
Non-current lease liabilities   $ 9,279     $ 2,467,546  

 

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.

 

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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:

 

Name of Financial Institutions   Original Amount Borrowed (JPY)     Loan
Duration
  Annual
Interest Rate
    Balance
as of
June 30,
2022
    Balance
as of
December 31, 2021
 
Bond payable                                    
Corporate bond issued through Resona Bank     100,000,000 (a)(b)   1/10/2019—1/10/2024     0.430 %   $ 293,880     $ 434,431  
Loans with banks and other financial institutions                                    
Resona Bank, Limited.     30,000,000 (a)   12/29/2017—12/30/2022     1.475 %     22,041       56,476  
Resona Bank, Limited.     50,000,000 (a)(b)   12/29/2017—12/29/2024     0.675 %     131,291       191,454  
Resona Bank, Limited.     10,000,000 (a)(b)   9/30/2020—9/30/2027     0.000 %     55,110       72,411  
Resona Bank, Limited.     40,000,000 (a)(b)   9/30//2020—9/30/2027     0.000 %     220,439       289,644  
Resona Bank, Limited.     20,000,000 (a)(b)   11/13/2020—10/31/2027     1.600 %     111,968       146,890  
Sumitomo Mitsui Banking Corporation     100,000,000     12/28/2018—12/28/2023     1.475 %     220,307       361,925  
Sumitomo Mitsui Banking Corporation     10,000,000 (b)   12/30/2019—12/30/2026     1.975 %     47,241       63,105  
The Shoko Chukin Bank, Ltd.     30,000,000     9/28/2018—8/31/2023     1.200 %     51,796       92,273  
The Shoko Chukin Bank, Ltd.     50,000,000     7/27/2020—6/30/2027     1.290 %     265,961       351,020  
Japan Finance Corporation     40,000,000     12/15/2017—11/30/2022     0.300 %     28,066       73,940  
Japan Finance Corporation     80,000,000     11/17/2020—11/30/2027     0.210 %     460,804       603,339  
Higashi-Nippon Bank     30,000,000 (a)   3/31/2022—3/31/2025     1.400 %     201,896       -  
Aggregate outstanding principal balances                         2,110,800       2,736,908  
Less: unamortized debt issuance costs                         (10,464 )     (15,333 )
Less: current portion                         (733,235 )     (849,995 )
Non-current portion                       $ 1,367,101     $ 1,871,580  

 

  (a) These debts are guaranteed by Sumitaka Yamamoto, the Company’s CEO and major shareholder.
  (b) These debts are guaranteed by Tokyo Credit Guarantee Association, and the Company has paid guarantee expenses for these 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.

 

15

 

 

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

 

Year ending December 31,   Loan  
    Payment  
Remaining of 2022   $ 348,542  
2023     687,055  
2024     425,972  
2025     244,391  
2026     222,372  
Thereafter     182,468  
Total   $ 2,110,800  

 

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:

 

    2022     2021  
    For the Six Months Ended  
    June 30,  
    2022     2021  
Current   $ (1,464 )   $ (7,117 )
Deferred     9,627       91,032  
Income tax expense   $ 8,163     $ 83,915  

 

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

 

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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:

 

         
    Number of
stock options
 
Issued and unvested as of January 1, 2021     194  
Forfeited     11  
Issued and unvested as of June 30, 2021     183  
         
Issued and unvested as of January 1, 2022     183  
Vested and exercised     183  
Exercisable as of June 30, 2022     -  

 

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:

 

 

    Number of
Options/
Warrants
    Weighted
Average
Exercise
Price
    Weighted
Average
Remaining
Term
(Years)
    Intrinsic
Value
 
As of January 1, 2022     1,534,500     $ 2.5       9.99     $     -  
Granted     -       -       -       -  
Exercised     -              -       -       -  
Forfeited     -       -       -       -  
As of June 30, 2022     1,534,500     $ 2.5       9.49     $ -  
Vested and exercisable as of June 30, 2022     -       -       -       -  

 

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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:

 

    Number of RSUs     Weighted Average
Grant Date Fair
Value per Share
 
Unvested as of January 1, 2022     -     $ -  
Granted     169,153       3.84  
Vested     (83,333 )     2.70  
Forfeited     -       -  
Unvested as of June 30, 2022     85,820     $ 4.95  

 

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.

 

18

 

 

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.

 

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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:

 

                                 
   

For the Three Months

Ended

   

For the Six Months

Ended

 
    June 30,     June 30,  
    2022     2021     2022     2021  
Earnings (loss) per share – basic Numerator:                                
Allocation of net income (loss) attributable to HeartCore Enterprises, Inc.’s common shareholders used in calculating earnings (loss) per common share — basic   $ (1,703,641 )   $ 400,790     $ (3,282,092 )   $ 217,541  
Net income (loss) attributable to common shareholders     (1,703,641 )     400,790     $ (3,282,092 )   $ 217,541  
Denominator:                                
Weighted average number of common shares outstanding used in calculating basic earnings (loss) per share     18,936,829       15,242,454       18,105,698       15,242,454  
Denominator used for earnings (loss) per share     18,936,829       15,242,454       18,105,698       15,242,454  
Earnings (loss) per share — basic   $ (0.09 )   $ 0.03     $ (0.18 )   $ 0.01  

 

20

 

 

   

For the Three Months

Ended

   

For the Six Months

Ended

 
    June 30,     June 30,  
    2022     2021     2022     2021  
Earnings (loss) per share – diluted Numerator:                                
Allocation of net income (loss) attributable to HeartCore Enterprises, Inc.’s common shareholders used in calculating earnings (loss) per common share — diluted   $ (1,703,641 )   $ 400,790     $ (3,282,092 )   $ 217,541  
Net income (loss) attributable to common shareholders     (1,703,641 )     400,790       (3,282,092 )     217,541  
Denominator:                                
Weighted average number of common shares outstanding used in calculating diluted earnings (loss) per share     18,936,829       15,242,454       18,105,698       15,242,454  
Conversion of share repurchase liability to common shares*     -       273,489       -       273,489  
Denominator used for earnings (loss) per share     18,936,829       15,515,943       18,105,698       15,515,943  
Earnings (loss) per share — diluted   $ (0.09 )   $ 0.03     $ (0.18 )   $ 0.01  

 

* The share repurchase liability is related to the early exercised stock options that are issued and unvested as of June 30, 2021, see NOTE 11. Each option is convertible into one share of common stock of HeartCore Japan, which is an equivalent of approximately 1,494 shares of common shares of the Company.

 

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.

 

21

 

 

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.

 

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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”):

 

  (i) Assistance with the selection and negotiation of terms for a law firm, underwriter and auditing firm for ALI;
  (ii) Assisting in the preparation of documentation for internal controls required for an initial public offering or de-SPAC by ALI;
  (iii) Providing support services to remove problematic accounting accounts upon listing;
  (iv) Translation of requested documents into English;
  (v) Attend and, if requested by ALI, lead meetings with ALI’s management team and employees;
  (vi) Provide ALI with support services related to ALI’s NASDAQ listing;
  (vii) Conversion of accounting data from Japanese standards to US GAAP;
  (viii) Services to remove problematic accounting accounts upon listing;
  (ix) Support for the ALI’s negotiations with the audit firm;
  (x) Assist in the preparation of S-1 or S-4 filings;
  (xi) Creation of English language website; and
  (xii) Preparing an investor presentation/deck and executive summary of ALI’s business and operations.

 

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:

 

  (a) $400,000, to be paid as follows: (i) $200,000 on April 13, 2022; (ii) $100,000 on the three-month anniversary of April 13, 2022; and (iii) $100,000 on the six-month anniversary of April 13, 2022; and
  (b) Issuance by ALI to the Company of a warrant to acquire a number of shares of capital stock of ALI, to initially be equal to 1% of the fully diluted share capital of ALI as of April 13, 2022, subject to adjustment as set forth in the warrant.

 

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.

 

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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:

 

  (a) $500,000, to be paid as follows: (i) $200,000 on the effective date of the SYLA Consulting Agreement; (ii) $150,000 on the three-month anniversary of the effective date of the SYLA Consulting Agreement; and (iii) $150,000 on the six-month anniversary of the SYLA Consulting Agreement; and
     
  (b) Issuance by SYLA to the Company of a warrant, deemed fully earned and vested as of the effective date of the SYLA Consulting Agreement, to acquire a number of shares of capital stock of SYLA, to initially be equal to 2% of the fully diluted share capital of SYLA as of the effective date of the SYLA Consulting Agreement, subject to adjustment as set forth in the warrant.

 

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.

 

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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.

 

    For the Three Months ended June 30,  
    2022     2021     Variance  
          % of           % of              
    Amount     revenue     Amount     revenue     Amount     % of  
                                     
REVENUES   $ 2,670,297       100.0 %   $ 2,865,192       100.0 %   $ (194,895 )     -6.8 %
COST OF REVENUES     1,337,296       50.1 %     1,175,387       41.0 %     161,909       13.8 %
GROSS PROFIT     1,333,001       49.9 %     1,689,805       59.0 %     (356,804 )     -21.1 %
                                                 
Operating expenses                                                
Selling expenses     728,836       27.3 %     101,124       3.5 %     627,712       620.7 %
General and administrative expenses     1,850,315       69.3 %     1,020,842       35.7 %     829,473       81.3 %
Research and development expenses     417,228       15.6 %     80,025       2.8 %     337,203       421.4 %
Total operating expenses     2,996,379       112.2 %     1,201,991       42.0 %     1,794,388       149.3 %
                                                 
Income (loss) from operations     (1,663,378 )     -62.3 %     487,814       17.0 %     (2,151,192 )     -441.0 %
                                                 
Other income (expenses)     (31,284 )     -1.2 %     126       0.0 %     (31,410 )     -24,928.6 %
                                                 
Income (loss) before income tax provision     (1,694,662 )     -63.5 %     487,940       17.0 %     (2,182,602 )     -447.3 %
                                                 
Income taxes expense     8,979       0.3 %     76,226       2.6 %     (67,247 )     -88.2 %
                                                 
Net income (loss)     (1,703,641 )     -63.8 %     411,714       14.4 %     (2,115,355 )     -513.8 %
                                                 
Less: net income attributable to non-controlling interest     -       -       10,924       0.4 %     (10,924 )     -100.0 %
                                                 
NET INCOME (LOSS) ATTRIBUTABLE TO HEARTCORE ENTERPRISES, INC.   $ (1,703,641 )     -63.8 %   $ 400,790       14.0 %   $ (2,104,431 )     -525.1 %

 

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:

 

(i) the revenues from sales of on-premise software decreased by $416,076, or 36.7%, to $716,532 for the three months ended June 30, 2022 from $1,132,608 for the three months ended June 30, 2021, mainly attributable to the concentration of sales of CMS licenses in May 2021;
(ii) our revenue from maintenance and support services decreased by $163,275, or 18.3%, to $727,277 for the three months ended June 30, 2022 from $890,552 for the three months ended June 30, 2021. In addition to terminations of CMS major maintenance contracts, sales decreased due to the ongoing depreciation of Japanese Yen;
(iii) Offset by our newly generated revenue of $448,355 from consulting services provided to three Japan-based companies, which intend to go public in the US capital markets.

 

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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:

 

(i) the increase of $175,194 in the costs of newly established consulting services;
(ii) the costs of software development and other miscellaneous services increased by $104,541, or 20.4%, to $616,461 for the three months ended June 30, 2022 from $511,920 for the three months ended June 30, 2021. The Company incurred high subcontracting costs for projects and defect handling in the current period;
(iii) offset by the costs of SaaS decreased by $90,343, or 77.6%, to $26,144 for the three months ended June 30, 2022 from $116,487 for the three months ended June 30, 2021. The Company incurred expenses for process mining product menu Japanese language additions and manual maintenance in June 2021;

 

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.

 

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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:

 

(i) our office, utility and other expenses increased by $146,359 or 154.7%, to $240,953 in the three months ended June 30, 2022 from $94,594 in the three months ended June 30, 2021, primarily due to the increase in the U.S. parent company’s office expenses, and D&O indemnity insurance premiums of the parent company;
(ii) our consulting and professional fees increased by $241,548 or 2,850.1%, to $250,023 in the three months ended June 30, 2022 from $8,475 in the three months ended June 30, 2021, primarily due to the increase in consulting and legal fees related to maintaining as a public company and stock promotion;
(iii) an increase in salaries and welfare by $235,262, or 45.2%, to $755,300 in the three months ended June 30, 2022 from $520,038 in the three months ended June 30, 2021, primarily due to the salaries paid to the parent company’s newly hired U.S. employees;
(iv) an increase in share-based compensation of $466,662, or 100.0%, to $466,662 in the three months ended June 30, 2022 from nil in the three months ended June 30, 2021, primarily due to the amortization of fair value of stock options and restricted stock units granted.

 

The overall increase in our general and administrative expenses in three months ended June 30, 2022 as compared to the three months ended June 30, 2021 reflected the above-mentioned factors combined. As a percentage of revenues, general and administrative expenses were 69.3% and 35.6% of our revenue for the three months ended June 30, 2022 and 2021, respectively.

 

Research and Development Expenses

 

Our research and development expenses primarily consist of employee salaries and welfare, and outsourcing expenses.

 

Our research and development expenses increased by $337,203 or 421.4%, to $417,228 in the three months ended June 30, 2022 from $80,025 in the three months ended June 30, 2021, primarily attributable to an increase in outsourcing expenses by $323,308, or 403.5%, to $403,441 in the three months ended June 30, 2022 from $80,133 in the three months ended June 30, 2021, as we outsourced certain development activities for more efficiency and experience, relating to development of a high quality 12K VR camera and related data compression system.

 

The overall increase in our research and development expenses in the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 reflected the above-mentioned factors combined. As a percentage of revenues, research and development expenses were 15.6% and 2.8% of our revenue for the three months ended June 30, 2022 and 2021, respectively.

 

Other Income (Expenses), net

 

Our other income (expenses) primarily includes interest income generated from bank deposits and loan to a related-party, interest expenses for bank loans, bonds, and leases, other incomes, and other expenses. Total other expenses, net, increased by $31,410, from other income, net of $126 in the three months ended June 30, 2021 to other expense, net of $31,284 in the three months ended June 30, 2022.

 

Income Tax Expense

 

Our income taxes expense was $8,979 in the three months ended June 30, 2022, as compared to the income taxes expense of $76,226 in the three months ended June 30, 2021, mainly due to the decrease in deferred tax expense.

 

Net Income (Loss)

 

As a result of the foregoing, we reported a net loss of $1,703,641 for the three months ended June 30, 2022, representing a $2,115,355 or 513.8% increase from a net income of $411,714 for the three months ended June 30, 2021.

 

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Net Income attributable to Non-controlling Interest

 

We own 97.35% of the outstanding shares of the operation subsidiary, HeartCore Co, which located in Japan, as of June 30, 2021. Accordingly, we recorded net income attributable to the non-controlling interest. The net income attributable to non-controlling interest was $10,924 in the three months ended June 30, 2021.

 

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.

 

On February 24, 2022, the Company purchased 278 shares of HeartCore Co from Dentsu Digital for JPY50,040,000 (approximately $435,500 when paid). As a result, HeartCore Co became a wholly owned subsidiary of the Company. Accordingly, we did not record non-controlling interest income in the three months ended June 30, 2022.

 

Net Income (Loss) attributable to HeartCore Enterprises, Inc.

 

As a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $1,703,641 for the three months ended June 30, 2022, representing a $2,104,431 or 525.1% increase from a net income attributable to HeartCore Enterprises, Inc. of $400,790 for the three months ended June 30, 2021.

 

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

 

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

 

    For the Six Months ended June 30,  
    2022     2021     Variance  
          % of           % of              
    Amount     revenue     Amount     revenue     Amount     % of  
                                     
REVENUES   $ 4,946,298       100.0 %   $ 4,975,501       100.0 %   $ (29,203 )     -0.6 %
COST OF REVENUES     2,392,652       48.4 %     2,583,019       51.9 %     (190,367 )     -7.4 %
GROSS PROFIT     2,553,646       51.6 %     2,392,482       48.1 %     161,164       6.7 %
                                                 
Operating expenses                                                
Selling expenses     934,754       18.9 %     147,465       3.0 %     787,289       533.9 %
General and administrative expenses     4,319,248       87.3 %     1,783,590       35.8 %     2,535,658       142.2 %
Research and development expenses     525,487       10.6 %     132,171       2.7 %     393,316       297.6 %
Total operating expenses     5,779,489       116.8 %     2,063,226       41.5 %     3,716,263       180.1 %
                                                 
Income (Loss) from operations     (3,225,843 )     -65.2 %     329,256       6.6 %     (3,555,099 )     -1,079.7 %
                                                 
Other expenses, net     (48,086 )     -1.0 %     (21,864 )     -0.4 %     (26,222 )     119.9 %
                                                 
Income (Loss) before income tax provision     (3,273,929 )     -66.2 %     307,392       6.2 %     (3,581,321 )     -1,165.1 %
                                                 
Income taxes expense     8,163       0.2 %     83,915       1.7 %     (75,752 )     -90.3 %
                                                 
Net income (loss)     (3,282,092 )     -66.4 %     223,477       4.5 %     (3,505,569 )     -1,568.6 %
                                                 
Less: net income attributable to non-controlling interest     -       - %     5,936       0.1 %     (5,936 )     -100.0 %
                                                 
NET INCOME (LOSS) ATTRIBUTABLE TO HEARTCORE ENTERPRISES, INC.   $ (3,282,092 )     -66.4 %   $ 217,541       4.4 %   $ (3,499,633 )     -1,608.7 %

 

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Revenues

 

Our total revenues decreased by $29,203, or 0.6%, to $4,946,298 for the six months ended June 30, 2022 from $4,975,501 for the six months ended June 30, 2021. The decrease in our revenues was attributable to the following reasons:

 

(i) our revenue from maintenance and support services decreased by $260,151, or 14.2%, to $1,572,616 for the six months ended June 30, 2022 from $1,832,767 for the six months ended June 30, 2021. In addition to terminations of CMS major maintenance contracts, sales decreased due to the ongoing depreciation of Japanese yen. The depreciation amounted to approximately 14.1% from $1.00 to 107.74 Yen in the six months ended June 30, 2021 to $1.00 to 122.98 Yen in the six months ended June 30, 2022;
(ii) our revenue from software development and other services decreased by $291,708, or 19.9%, to $1,177,290 for the six months ended June 30, 2022 from $1,468,998 for the six months ended June 30, 2021, because we did not retain new software development clients in the current period, in addition to the ongoing depreciation of Japanese yen;
(iii) Offset by our newly generated revenue of $448,355 from consulting services provided to three Japan-based companies, which intend to go public in the US capital markets.

 

Cost of Revenues

 

Our total costs of revenues decreased by $190,367, or 7.4%, to $2,392,652 for the six months ended June 30, 2022 from $2,583,019 for the six months ended June 30, 2021. The decrease in our costs was attributable to the following reasons:

 

(i) the costs of on-premises software decreased by $95,989, or 20.1%, to $381,552 for the six months ended June 30, 2022 from $477,541 for the six months ended June 30, 2021. In addition to the depreciation of the yen, CMS license costs were fixed monthly and not proportional to sales. On the other hands, the sales deceased in the six months ended June 30, 2022 for process mining products, the costs of which were proportional to sales, resulting in a decrease in cost of sales;
(ii) the costs of SaaS decreased by $134,960, or 58.2%, to $97,068 for the six months ended June 30, 2022 from $232,028 for the six months ended June 30, 2021. There were specialized supporting employees and subcontractors for CXM Cloud (SaaS) in the first two quarters of 2021. As the product entered into a mature phase and operations became stable in 2022, specialized supporting employees and subcontractors were no longer needed, and the costs decreased accordingly;
(iii) the costs of software development and other miscellaneous services decreased by $117,767, or 9.9%, to $1,072,175 for the six months ended June 30, 2022 from $1,189,942 for the six months ended June 30, 2021, in light of the decrease in sales as mentioned above;
(iv) Offset by the increase of $175,194 in the costs of newly established consulting services.

 

Gross Profit

 

Our total gross profit increased by $161,164, or 6.7%, to $2,553,646 for the six months ended June 30, 2022 from $2,392,482 for the six months ended June 30, 2021. Our overall gross profit margin increased by 3.5% to 51.6% in the six months ended June 30, 2022 from 48.1% in the six months ended June 30, 2021.

 

Operating Expenses

 

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

 

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Selling Expenses

 

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

 

Our selling expenses increased by $787,289, or 533.9%, to $934,754 in the six months ended June 30, 2022 from $147,465 in the six months ended June 30, 2021, primarily attributable to an increase in advertising expenses by $807,960, or 1,072.1%, to 883,322 in the six months ended June 30, 2022 from $75,362 in the six 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 18.9% and 3.0% of our total revenue for the six 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 company reorganization and going public, 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 $2,535,658 or 142.2%, to $4,319,248 in the six months ended June 30, 2022 from $1,783,590 in the six months ended June 30, 2021, primarily attributable to:

 

(i) our office, utility and other expenses increased by $267,986 or 152.1%, to $444,210 in the six months ended June 30, 2022 from $176,224 in the six months ended June 30, 2021, primarily due to the increase in the U.S. parent company’s office expenses, and D&O indemnity insurance premiums of the parent company;
(ii) our consulting and professional fees increased by $654,261 or 585.0%, to $766,095 in the six months ended June 30, 2022 from $111,834 in the six months ended June 30, 2021, primarily due to the increase in consulting and legal fees related to going public and stock promotion;
(iii) an increase in salaries and welfare by $619,650, or 61.9%, to $1,621,507 in the six months ended June 30, 2022 from $1,001,857 in the six months ended June 30, 2021, primarily due to the salaries paid to the parent company’s newly hired U.S. employees. In addition, the company paid approximately $150,000 in executive bonuses in the first quarter 2022;
(iv) an increase in share-based compensation of $888,826, or 100%, to $888,826 in the six months ended June 30, 2022 from nil in the six months ended June 30, 2021, primarily due to the amortization of fair value of stock options and restricted stock units granted.

 

The overall increase in our general and administrative expenses in six months ended June 30, 2022 as compared to the six months ended June 30, 2021 reflected the above-mentioned factors combined. As a percentage of revenues, general and administrative expenses were 87.3% and 35.8% of our revenue for the six months ended June 30, 2022 and 2021, respectively.

 

Research and Development Expenses

 

Our research and development expenses primarily consist of employee salaries and welfare, and outsourcing expenses.

 

Our research and development expenses increased by $393,316 or 297.6%, to $525,487 in the six months ended June 30, 2022 from $132,171 in the six months ended June 30, 2021, primarily attributable to an increase in outsourcing expenses by $380,610, or 303.1%, to $506,191 in the six months ended June 30, 2022 from $125,581 in the six months ended June 30, 2021, as we outsourced certain development activities for more efficiency and experience, relating to CMS UI renewal and development of a high quality 12K VR camera and related data compression system in the six months ended June 30, 2022.

 

30

 

 

The overall increase in our research and development expenses in the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 reflected the above-mentioned factors combined. As a percentage of revenues, research and development expenses were 10.6% and 2.7% of our revenue for the six months ended June 30, 2022 and 2021, respectively.

 

Other Expenses, net

 

Our other income (expenses) primarily includes interest income generated from bank deposits and loan to a related-party, interest expenses for bank loans, bonds, and leases, other incomes, and other expenses. Total other expenses, net, increased by $26,222 or 119.9%, from $21,864 in the six months ended June 30, 2021 to $48,086 in the six months ended June 30, 2022.

 

Income Tax Expense

 

Our income taxes expense was $8,163 in the six months ended June 30, 2022, as compared to the income taxes expense of $83,915 in the six months ended June 30, 2021, mainly due to the decrease in deferred tax expense.

 

Net Income (Loss)

 

As a result of the foregoing, we reported a net loss of $3,282,092 for the six months ended June 30, 2022, representing a $3,505,569 or 1,568.6% decrease from a net income of $223,477 for the six months ended June 30, 2021.

 

Net Income attributable to Non-controlling Interest

 

We own 97.35% of the outstanding shares of the operation subsidiary, HeartCore Co, which located in Japan, as of June 30, 2021. Accordingly, we recorded net income attributable to the non-controlling interest. The net income attributable to non-controlling interest was $5,936 in the six months ended June 30, 2021.

 

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.

 

On February 24, 2022, the Company purchased 278 shares of HeartCore Co from Dentsu Digital for JPY50,040,000 (approximately $435,500 when paid). As a result, HeartCore Co became a wholly owned subsidiary of the Company. Accordingly, we did not record non-controlling interest income in the six months ended June 30, 2022.

 

Net Income (Loss) attributable to HeartCore Enterprises, Inc.

 

As a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $3,282,092 for the six months ended June 30, 2022, representing a $3,499,633 or 1,608.7% increase from a net income attributable to HeartCore Enterprises, Inc. of $217,541 for the six months ended June 30, 2021.

 

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Liquidity and Capital Resources

 

As of June 30, 2022, we had $12,463,179 in cash as compared to $3,136,839 as of December 31, 2021. As of June 30, 2022, our working capital was $10,003,897 as compared to $62,919 as of December 31, 2021. We also had $1,119,990 in accounts receivable as of June 30, 2022. Our accounts receivable primarily include balance due from customers for our on-premises software sold and services provided to and accepted by customers.

 

The following table sets forth summary of our cash flows for the periods indicated:

 

    For the Six Months Ended
June 30,
 
    2022     2021  
Net cash provided by (used in) operating activities   $ (2,093,867 )   $ 347,911  
Net cash used in investing activities     (9,455 )     (103,692 )
Net cash provided by (used in) financing activities     11,651,622       (534,211 )
Effect of exchange rate changes     (221,960 )     (149,784 )
Net increase in cash and cash equivalents     9,326,340       (439,776 )
Cash and cash equivalents, beginning of the period     3,136,839       3,058,175  
Cash and cash equivalents, end of the period   $ 12,463,179     $ 2,618,399  

 

Operating Activities

 

Net cash used in operating activities was $2,093,867 for the six months ended June 30, 2022, primarily consisting of the following:

 

Net loss of $3,282,092 for the six months ended June 30, 2022.
An increase in accounts receivable of $344,779. The increase was primarily due to the increase in our sales in the current period. The collected accounts receivable is available cash, which can be used as working capital for our business operation, if necessary.
An increase in prepaid expense of $266,030, primarily due to the increase in the prepayment to an IR provider of $400,000.
Offset by an increase in accounts payable and accrued expenses of $281,567, primarily attributable to the payoff the accrued expenses related to the IPO.
Offset by an increase of deferred revenue of $596,762, primarily due to the completion of software development project.
Offset by share-based compensation of $888,826.

 

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Net cash provided by operating activities was $347,911 for the six months ended June 30, 2021, primarily consisting of the following:

 

Net income of $223,477 for the six months ended June 30, 2021.
An increase of deferred revenue of $621,707, primarily due to the upfront payment received for software development projects.
An increase in accounts payable and accrued expenses of $128,308, primarily attributable to the increase in accrued expenses related to the IPO.
Non-cash lease expense of 171,935.
Offset by an increase in accounts receivable of $570,886. The increase was primarily due to the increase in sales. The collected accounts receivable is available cash, which can be used as working capital for our business operation, if necessary.
Offset by an increase in prepaid expense of $282,508, primarily due to the increase in the prepayments to software venders.

 

Investing Activities

 

Net cash used in investing activities amounted to $9,455 for the six months ended June 30, 2022, primarily included the purchase of fixed assets of $30,963, offset by repayment of loan provided to a related party of $21,508.

 

Net cash used in investing activities amounted to $103,692 for the six months ended June 30, 2021, primarily included the purchase of fixed assets of $19,894 and the loans provided to related parties of $83,798.

 

Financing Activities

 

Net cash provided by financing activities amounted to $11,651,622 for the six months ended June 30, 2022, primarily consisting of total proceeds of $13,823,126 from the initial public offering and issuance of common shares prior to the initial public offering, and offset by payment for mandatorily redeemable financial interest of $430,489, payment for repurchase of common stocks of $1,336,762, and repayment of long-term debts of $469,166.

 

Net cash used in financing activities amounted to $534,211 for the six months ended June 30, 2021, primarily consisting of repayment of long-term debts of $503,230 and payments for finance leases of $29,561.

 

Contractual obligations

 

Lease commitment

 

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.

 

33

 

 

As of June 30, 2022, future minimum lease payments under the non-cancelable lease agreements are as follows:

 

Year ending December 31,   Finance leases     Operating leases  
Remaining of 2022   $ 11,140     $ 152,511  
2023     18,750       305,021  
2024     276       305,021  
2025     -       305,021  
2026     -       305,021  
Thereafter     -       1,560,912  
Total lease payments     30,166       2,933,507  
Less: imputed interest     (170 )     (185,172 )
Total lease liabilities     29,996       2,748,335  
Less: current portion     20,717       280,789  
Non-current lease liabilities   $ 9,279     $ 2,467,546  

 

Long Term Debt

 

The Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions.

 

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

 

  Loan  
Year ending December 31,   Payment  
Remaining of 2022   $ 348,542  
2023     687,055  
2024     425,972  
2025     244,391  
2026     222,372  
Thereafter     182,468  
Total   $ 2,110,800  

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements as of June 30, 2022.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements. These financial statements are prepared in accordance with the generally accepted accounting principles in the United States (“U.S. GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenue and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenue and expenses incurred during the financial reporting period. We continue to evaluate the estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed herein reflect the more significant judgments and estimates used in preparation of our unaudited consolidated financial statements.

 

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Revenue Recognition

 

The Company recognizes revenue under the 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.

 

35

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2022. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2022, the Company’s disclosure controls and procedures were not effective, for the same reason as previously disclosed under Item 9A. “Controls and Procedures” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2021, as filed with the Securities and Exchange Commission on March 31, 2022.

 

Changes in Internal Controls Over Financial Reporting

 

There were no changes in the Company’s internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act that occurred during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we are involved in various claims and legal actions arising in the ordinary course of business. To the knowledge of our management, there are no legal proceedings currently pending against us which we believe would have a material effect on our business, financial position or results of operations and, to the best of our knowledge, there are no such legal proceedings contemplated or threatened. 

 

ITEM 1A. RISK FACTORS

 

As a smaller reporting company, the Company is not required to disclose material changes to the risk factors that were contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as updated from time to time.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following table provides information regarding repurchases of common shares made during the three months ended June 30, 2022:

 

Period  

Total number

of shares

purchased

 

Average

price paid

per share

 

Total number

of shares

purchased as

part of publicly

announced

plans or

Programs (1)

 

Approximate

dollar value of

shares that may yet

be purchased

under plans or programs

April 1, 2022 to April 30, 2022     -     $ -       -     $ -  
May 1, 2022 to May 31, 2022     -       -       -       -  
June 1, 2022 to June 30, 2022     558,809     2.39       558,809     2,163,238  
Total     558,809     $ 2.39       558,809     $ 2,163,238  

 

(1) The stock repurchase program approved by the Board of Directors on June 1, 2022, authorized the repurchase of up to $3.5 million of our outstanding common shares from time to time on the open market or in privately negotiated transactions permitted by securities laws and other legal requirements. This program has no set termination date and may be suspended or discontinued by the Board at any time.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

There have been no defaults in any material payments during the covered period.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

(a) None.

 

(b) There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors since the Company last provided disclosure in response to the requirements of Item 407(c)(3) of Regulation S-K. 

 

36

 

 

ITEM 6. EXHIBITS

 

Exhibit
Number
  Description of Document
     
10.1   Consulting and Services Agreement, dated as of April 13, 2022, by and between the registrant and A.L.I. Technologies Inc. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on May 11, 2022).
     
10.2   Common Stock Purchase Warrant issued by A.L.I. Technologies Inc. to the registrant (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the SEC on May 11, 2022).
     
10.3   Consulting and Services Agreement, dated as of May 13, 2022, by and between the registrant and SYLA Holdings Co. Ltd. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on May 25, 2022).
     
10.4   Common Stock Purchase Warrant issued by SYLA Holdings Co. Ltd. to the registrant (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the SEC on May 25, 2022).
     
31.1*   Rule 13a-14(a) Certification of Principal Executive Officer.
     
31.2*   Rule 13a-14(a) Certification of Principal Financial Officer.
     
32.1**   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Principal Executive Officer and Principal Financial Officer.
     
101.INS*   Inline XBRL Instance Document
     
101.SCH*   Inline XBRL Taxonomy Extension Schema Document
     
101.CAL*   Inline XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF*   Inline XBRL Taxonomy Extension Definition Linkbase
     
101.LAB*   Inline XBRL Taxonomy Extension Labels Linkbase
     
101.PRE*   Inline XBRL Taxonomy Extension Presentation Linkbase
     
104*   Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

* Filed herewith.
** Furnished herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

 

  HEARTCORE ENTERPRISES, INC.
     
Dated: August 12, 2022 By: /s/ Sumitaka Yamamoto
    Sumitaka Yamamoto
    Chief Executive Officer and President (principal executive officer)
     
Dated: August 12, 2022 By: /s/ Qizhi Gao
    Qizhi Gao
    Chief Financial Officer (principal financial officer and principal accounting officer)

 

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